Once again we are using the $900 level as the swing point. A rebound above $900/903 would signal renewed strength within the range, returning focus to last week's high at 935.30. Look for the yellow metal to continue to take its cues from crude and the dollar.

Crude sold off rather sharply yesterday on profit taking that was triggered in part by increased bluster from US politicians about excessive speculation running up the price. Given the sizable profits already accumulated, some opted not to wait around to see if there might be some sort of intervention to curtail speculative positions.

Of course the markets are operating as they should with speculators betting on expectations of higher prices. Expectations that are based on fundamental facts. Reports earlier this week that the IEA was preparing analysis that would show global demand outstripping supply by as much as 15% by 2030, probably being the most poignant.

Heightened tensions in the Persian Gulf amid swirling rumors of an impending attacks on Iran before the end of the Bush presidency has played a role in driving crude higher as well.

If the speculators are ultimately proven wrong, or if the market determines that prices have overrun the fundamentals, they'll pay the price down the road when prices correct. Speculators on both sides of the market provide much needed liquidity and any move to substantially limit speculation will inhibit the efficient operation of the market.

With constituents feeling the pinch of sharply higher gas prices, rhetoric that implies the politicians are attempting to reign in big oil and big speculators is certainly politically expedient. But the reality is that the constituents themselves are partly to blame increasing allocations to commodity funds and ETFs in their IRAs, 401ks and personal investment accounts.

It all seems so silly when you scratch below the surface and look past all those sound bites.

There was an interesting article at SeekingAlpha a couple days ago entitled Raising Margin Requirements May Spike Oil Prices Higher that nicely illustrates my point about regulation. The author warns governments and regulators that the law of unintended consequences rules the market.

The CFTC announced a series of initiatives yesterday that call for increased transparency of trading in US energy markets. They also will seek to expand international surveillance of energy commodity contracts through information sharing arrangements with the UK's FSA and ICE.

That more stringent regulation was not forthcoming, such as increased margin requirements, has caused oil to recover somewhat today and gold is following.

A firmer dollar has also contributed to gold's softer tone this week. With 2-year note yields at their highest level since early January, dollar demand has increased.

There is a growing expectation that the Fed will be moving to check surging inflation with an interest rate hike. Fed funds future show about a 68% chance of a 25bp tightening to 2.25% by year-end.

Yesterday's upward revision in preliminary Q1 GDP from +0.6% to +0.9% paints a slightly brighter picture for the US economy, which would indeed make it easier for the Fed to tighten. The question is: Is the uptick in optimism sustainable?

There is also increasing evidence that the credit crisis beast may be on the verge of raising its ugly head once again. Prices of credit default swaps (CDS) have spiked in recent weeks, suggestive of increasing default risks.

An article in the Telegraph yesterday cited a rise of 90% in CDSs on Lehman Brothers debt since Apr. In Q1 Lehman only wrote-down $200 mln of its reported $6.5 bln subprime portfolio. A full quarter of that portfolio is thought to carry a 'junk' rating.

Similar gains were noted for CDSs on the debt of Merrill Lynch and other big banks and brokerages.

The banks are starting to experience a surge in defaults on credit cards, auto loans and corporate loans. When the Fed started taking such receivables as collateral at its various liquidity facilities several weeks ago, we warned that another shoe might be poised to drop.

If the banks are forced to take more writedowns the stock market is going to come under renewed pressure, led lower by the financials. At that point, premiums associated with anticipated Fed hikes are going to come out of the markets and the dollar will be back under pressure as well.

That, along with the heightened systemic risks, would send gold back toward the high end of its range. Gold purchases near $900 will likely seem like a real bargain later in the year.

Gold Market Movers:

US personal income for Apr +0.2%, as expected, versus a revised figure of +0.4% in Mar. PCE for Apr +0.2%.

US Chicago PMI for May rebounded to 49.1, versus 48.3 in Apr

Canada GDP for Q1 -0.3%, well below expectations. GDP for Mar -0.2%, also below expectations.

Eurozone unemployment for Apr steady at 7.1%.

Eurozone HICP inflation for May rose to 3.6%.

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