Rising geopolitical tensions in the Middle East have pushed oil prices higher as well, which is also helping to underpin gold. A military conflict with Iran would likely result in disrupted supplies in the region.

The geopolitical risks for oil have been offset to some degree this week by expectations of slackening demand as the global economy continues to slow. This may provide gold with an opportunity to play a little catch-up.

When gold traded above $1,000 back in March, the gold/oil ratio was around 10. Since then, the ratio has dropped below 7. The ratio traded as low as 6.4 last week. If demand is indeed shown to be waning, funds may begin shifting their attention away from oil and back into gold.

While the initial reaction of gold to a sustained pullback in oil is likely to be negative, the yellow metal is certainly capable of rallying when crude is on the decline. A rebound in the gold/oil ratio to just 8 would mean that gold could regain the $1,000 level even if oil were to drop as low as $125 bbl.

The market is also awaiting EIA oil inventory data for the week ended 04-Jul, slated for release at 10:35 ET. Drawdowns in crude and gasoline stocks are anticipated. A modest build in distillates is expected.

A slightly weaker tone in the dollar is attributed to the G8's failure to generate a unified stance on FX rates. In fact, exchange rates -- and the dollar specifically -- apparently didn't warrant much of a mention at all in the G8 communiqué.

The G8 only noted that is was crucial for the exchange rates of some emerging economies to move in order to adjust for growing current account surpluses. The G8 chose to focus their attention on inflation, but refusing to acknowledge the role a declining dollar plays in rising prices.

The lack of resolve on the dollar is likely to embolden the bears. The temptation is going to be to find the point where the declining dollar at least generates some sort of official comment. It will be interesting to see where the greenback is trading when the G7 meets in Sep.

The dollar index is maintaining a corrective/consolidative tone and has been tracking the downtrending 20-day moving average over the past several sessions. The DX achieved a corrective high of 73.81 on 13-Jun, just 4.4% off the all-time low at 70.70 from 14-Mar. The long-term trend for the dollar remains decisively bearish. A short-term retreat below 72.00/71.82 would leave the record low vulnerable to a retest.

The EUR-USD rate is firmer today, having regained the 1.5700 level after the convergence of the 20, 50 and 100-day moving averages provided support earlier in the week. A breach of Monday's high at 1.5754 would bode well for renewed tests above 1.5800. Further out, the 1.6020 all-time high is still considered to be within striking distance.

Safe-haven flows into the yen and Swiss franc on the latest uptick in Middle East tensions are weighing on the dollar as well. USD-CHF has traded back below 1.0300, but a close back below the 100-day moving average at 1.0276 is needed to call for further retracement back toward last week's low at 1.0112.

Recent gains in the USD-JPY rate faltered ahead of the 108.00 level, leaving the mid-June high at 108.58 well protected. A close below 107.00 today would return attention to the 106.25/105.92, where yesterday's low corresponds closely with the rising 50-day moving average.

South Korea intervened in the FX market to the tune of about $5 bln in support of the wan. Central bank officials made a strong statement that they would not allow the KRW to fall below 1,000 versus the dollar. The wan has fallen by more than 10% against the dollar this year, contributing to a very high rate of inflation. South Korea has accumulated approximately $260 bln in FX reserves, from which they can draw on to defend the wan.

A return of broad-based dollar weakness would encourage gold to head back toward the high end of its recent range. A violation of chart/Fibonacci resistance at 954.70/960.88 would bode well for renewed tests above $1,000 and an eventual resumption of the dominant uptrend.

Gold Market Movers:

EIA crude oil stocks at 10:35 ET.

US MBA mortgage index for the week ended 04-Jul +7.5%; purchases +6.7%, refis +8.7%.

Eurozone Q1 GDP growth revised down to 0.7%, from 0.8% q/q.

Crude rises on Iran missile tests