Look for the dollar to continue retracing recent gains on eroding expectations of a Fed rate hike this summer. Odds of a 25bp rate hike in Aug have dropped to 45% from a 75% chance early in the week. A retreat in the dollar index below 73.00 would probably be sufficient to get gold trading with a $900 handle once again.

Oil continues to trade several dollars off the recent record highs. However, crude is showing good resiliency in the face of an expected production increase from Saudi Arabia and ongoing speculation about demand kill. Upside potential for oil remains, which is going to continue to be supportive to the gold market.

UBS metals analyst John Reade believes a large move in gold within the next month or two is likely. With gold trading above the 200-day moving average he is cautiously leaning toward the upside.

This view is consistent with our research that shows the months of June and July have provided excellent cyclical buying opportunities in gold. Over the past seven years, purchases of the yellow metal during the early-summer months have consistently been below what is ultimately determined to be the annual average price.

Expectations of higher gold prices later in the year are also consistent with growing concerns about a military strike against Iran. Since Iran is the world's fourth largest exporter of oil, such an event could be the catalyst that drives crude prices to the much talked about $200 level.

If that were to happen, safe-haven flows into the yellow metal would very likely result in a move back above $1,000. Even if the gold/oil ratio remained at the current suppressed level of 6.6, a move to $200 in crude would equate to a gold price of $1,320.

The Iranians themselves seem to have some worries about what the next several months will bring as well. Iran recently liquidated $75 bln in euro-based assets and reportedly converted them to stocks, Asian currency based assets and gold.

Iran's deputy foreign minister of economic affairs was quoted in a Reuters article as saying, "Part of Iran's assets in European banks have been converted to gold and shares and another part has been transferred to Asian banks."

Presumably this was a move to prevent these assets from being seized under proposed tough new sanctions aimed at getting Iran to halt their uranium enrichment program. The fact that Iran moved to protect these assets suggests they are planning to reject the latest offer of carrots and sticks.

There is a growing sense in Israel that sanctions simply will not work with Iran, making the military option increasingly likely. It is also widely believed that any military action on the part of Israel, or the US for that matter, must happen before the US elections in Nov.

There is a strong and growing consensus in Israel that they simply cannot allow Iran to develop a nuclear weapon. Israel is apparently viewing the next couple months as their last best chance to strike at Iran before they have a nuclear capability.

The US has also been building-up naval and air power in the region over the past several months. Are we simply applying pressure to Iran or are these moves a harbinger of more decisive action?

Does this build-up portend a US strike, as has also been rumored, or are our military assets being put in place to support an Israeli strike? Our substantial military presence in the region will certainly give Iranian President Ahmadinejad pause if Israel does strike and he ponders a counter-attack.

Look for gold to continue ratcheting higher within the range as the level of saber rattling intensifies on the months preceding the US election.

Gold Market Movers:

EIA crude oil stocks at 10:30ET. The market is expecting a fifth consecutive weekly draw.

US MBA mortgage market index for the week ended 13-Jun -8.7%; purchases -4.3%, refis -15.0%.

UK CBI manufacturing orders index for June surged to +1 from -10 in May. The market was looking for another drop.

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