Look for gold to continue to edge back toward $900 as short-term Fed rate hike expectations continue to erode. This should result in substantial retracement of the recent dollar gains and treasury losses, which will be supportive to gold.

We have maintained the position that the Fed was unlikely to initiate a tightening cycle this summer due to the still considerable risks to growth. That position is now being echoed in the broader financial press, including a Robert Novak column in the Washington Post that plainly states in the very first sentence, "Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong."

Once again, the contradictory signals being sent by various unnamed Fed officials in this spate of articles could very well be intentional, designed to keep the market guessing as to the Fed's true intentions. The goal being to keep the market from placing significant longer-term bets in either direction.

Despite all of the recent tough talk on inflation and the weak dollar it just seemed from the beginning that the Fed was unlikely to start hiking rates and risk destabilizing the already fragile credit markets. Driving up the cost of borrowing also has a negative impact on the housing market and the present economic crisis ultimately comes back around to housing.

Inflation is certainly a significant concern as well, as evidenced by this morning's announcement that PPI surged 1.4% in May. This headline number is not going to inspire traders to completely unwind recent long dollar and short treasury positions just yet.

The market was looking for PPI to come in around +0.7% to +1.0%. Seems the market is trying to reasonably anchor their inflation expectations, as is Fed Chairman Bernanke's goal, but the data just aren't cooperating.

As inflation continues to spiral higher, gold will continue to be underpinned as a result of the yellow metals role as the classic hedge against inflation.

If the Fed truly believes that risks to growth are the greater threat and opts to keep Fed funds at 2.0% until late in the year, the dollar index is likely to fall back below 72.00. Since gold is also the classic hedge against a falling dollar, look for the yellow metal to benefit in this scenario as well.

Of course a falling dollar also results in inflation...did I mention that gold is a hedge against that too?

The dollar bearish scenario will gain some credence upon a break of chart/Fibonacci/20-day moving average support in the DX at 73.09/00.

Oil remains generally well bid despite the recent agreed upon Saudi hike in output slated for next month. Presumed Republican Presidential candidate John McCain is also calling for the federal moratorium on offshore oil and gas drilling to be lifted.

I agree that we should be making every effort to tap our own oil reserves, along with conservation, improved efficiency standards and alternative energy research. However, these are far from being short-term solutions. In fact, one might argue that such steps should have been taken in the wake of the last oil crisis. If that had been the case, we just might have averted the present crisis.

It is therefore likely that oil prices will continue to rise. A retest of the 140 level is likely, with short-term potential toward $150. Further out, arguably $200 remains a valid objective.

This is the scenario that apparently has Mr. Bernanke the most worried. If oil prices do indeed continue to push higher, the risks to the economy are substantial and these risks would be amplified by tighter monetary policy. Letting inflation run for several more months in the hopes that higher energy prices will slow the economy gradually, checking inflation in the process, just seems the most logical tact for the Fed.

Gold Market Movers:

US industrial production for May -0.2%, below expectations. Cap ut drops to 79.4%.

US PPI for May surged 1.4%, well above market expectations. Core +0.2%. Energy prices were +4.9% with gasoline +9.3%.

U.S. housing starts for May fell 3.3% to 975k, versus a revised 1008k starts in Apr.

US Q1 current account gap widened to $176.4 bln, versus $167.2 in Q4-07.

German ZEW survey for Jun -52.4, weaker than expected.

UK CPI for May +0.6% m/m, +3.3% y/y.

Morgan Stanley wants of 'catastrophic event' as ECB fights Federal Reserve

Robert Novak: The Fed's Rates Dilemma

WSJ: Fed mood tilts away from rate hike bets

Market 'expects too many Fed rate rises'

Why mining & metal investments could shine in the coming years

Goldman close to $7bn SIV bail-out