Iran has ramped up its saber rattling, just days after giving a "constructive" response to the latest offer of incentives aimed at encouraging the nation to halt its uranium enrichment program.

An aide to Iran's supreme leader was quoted as saying that Iran will hit Tel Aviv, U.S. shipping in the Persian Gulf and American interests around the world if they are attacked.

Additionally, in a written response to the aforementioned latest offer, Iran makes no mention of halting nuclear activities. The mixed signals from Iran have increased fears that a showdown with Israel, the US, or both is still possible before the end of the Bush administration.

Risk aversion plays that had been unwound to some degree yesterday on reports of Iran's more conciliatory tone have been put back on today. Flows into safe-haven currencies like the yen and Swiss franc have weighed on the dollar, which is helping to underpin gold.

However, the initial intraday gains in oil could not be sustained and Brent spot crude has fallen back below 140.00 bbl. Since the US is the world's largest consumer of oil, a great deal of emphasis has been placed on finding the price at which US demand begins to decline.

Along the way, we may have stumbled across the point where we have begun to see demand kill elsewhere in the world. With the economies of Europe, the UK and Japan slowing, demand for energy in these markets is likely to wane.

Nonetheless, it doesn't seem likely that oil has any great downside potential as long as geopolitical tensions remain high in the Middle East. Most of the sharp gains in oil this year can be attributed to the weak dollar, increased demand in developing nations and concerns over a potential military conflict with Iran.

The weak dollar and growing demand are unlikely to change any time soon, so it will take some sort of resolution of the Iranian nuclear issue to generate any sort of sustained correction in oil. Perhaps as the remaining months of the Bush administration grow shorter and shorter, Iran will be forced to take a more serious look at the incentives they have been offered to suspend their uranium enrichment program. Even so, it is likely that $100-plus crude is here to stay.

Meanwhile the G8 is calling for increased production and refining capacity, as well as heightened efforts to boost oil industry investment as a means of drive prices lower.

If oil does pull back into the range or goes through a protracted period of consolidation, that is the point where we might look for the long-awaited rebound in the gold/oil ratio. This would be consistent with our research that has identified the months of June and July as providing cyclical buying opportunities in gold.

Extraordinary gains in crude over the past quarter have certainly been a distraction for the market. This focus on crude has driven the gold/oil ratio to historic lows. Presently the ratio is trading around 6.6, while historic norms are closer to 15.

As the peak summer demand season for oil in the US winds down, that is also the time that cyclical demand for gold is on the rise. In fact, over the past 35 years, over two-thirds of average annual gains in the gold market have been registered between August and December. We could see gold come back into favor if oil corrects.

Even if oil were to retreat to the 125.00 bbl level over the next several months, gold could regain the $1,000 level if the ratio were simply to rebound to about 8. That would leave the ratio still well below what would be considered the low end of the normal range.

Fed chairman Bernanke said this morning that the central bank would consider extending emergency loans to banks as the credit crisis continues. Shares in Fannie Mae and Freddie Mac plunged on Monday after a Lehman Brothers' analyst suggested the two largest mortgage lenders might have to raise an additional $75 bln in capital.

IndyMac Bancorp, another large mortgage financier, announced on Monday that it would lay off more than half of its work force and halt most of its new loan origination business. This comes after regulators expressed concerns about the bank's capitalization.

With the credit/liquidity crisis ongoing, heightened concerns about systemic risks to the banking system have been supportive to gold. These worries are offsetting pressure on gold associated with the pullback in oil and tie in nicely with the scenario that calls for a rebound in the gold/oil ratio, which has edged higher to 6.73 in recent trading.

Gold Market Movers:

US wholesale inventories for May +0.8%.

US NAR pending home sale index tumbled 4.7% in May to 84.7, versus 88.9 in Apr.

US consumer credit surges to $10 bln in Jun, well above market expectations, versus $8.9 bln in May.

Fed may extend emergency lending to Wall Street

Bernanke steps around the elephant in the room

Iran to "hit Tel Aviv, U.S. ships" if attacked

Iran has resumed A-bomb project, says West

Dollar is driving Fed's decisions, not the sate of the economy

IndyMac stops new loans, to cut work force by half