In a month normally associated with cyclical weakness, gold has extended recent gains to bring the $1,000 level back within striking distance. Last week's upside breakout of the range within the broader range bodes well for a retest of the all-time high at $1,032.20 (17-Mar).

Mounting concerns about the health of the US banking system have sparked a global exodus from financial shares. Stock losses have a negative impact on capitalization, which is putting additional strain on the already shaky balance sheets of banks and other financial institutions. Once bank customers start withdrawing deposits, the balance sheet deterioration accelerates.

Government led efforts over the weekend to shore up mortgage giants Fannie Mae and Freddie Mac have failed to generate any market confidence. There seems to be a growing sense that additional government action is going to be needed as more financial institutions are forced to the brink.

Last week's collapse of Indymac Bancorp is being viewed as an ominous harbinger of things to come. With assets in excess of $32 bln, Indymac is one of the largest bank failures in US history. There are undoubtedly plenty of other banks out there struggling for survival. With an as yet unclear picture of which banks will be viewed by the government as being 'too-big-to-fail,' the market is attempting to get out in front of the next failure by selling shares -- which could then precipitate that next failure.

Fannie Mae and Freddie Mac either own or guarantee nearly half of the $12 trillion US mortgage market. With the Fed's emergency discount window now open to them and Treasury Secretary Paulson seeking Congressional approval to buy their shares, the potential scope of the rescue in dollar terms is enormous.

Factor in the failure of Indymac, and the likelihood that we'll see additional bank failures before all is said and done, and the government is faced with onerous task of restoring confidence in the banking sector. There doesn't seem to be much doubt that the government will once again turn to money creation on a massive scale to backstop the banks.

It is this expectation that has driven the dollar to new all-time lows against the euro. The violation of resistance at 1.6020 (22-Apr peak), returns focus to our long-standing 1.6200 objective. Above the latter, scope is seen for a push to 1.6300 based on a measuring objective.

The dollar index plunged through important support at 71.82 in overseas trading, bringing the next tier of support at 71.18/00 within reach. An eventual violation of the all-time low at 70.70 would reestablish the long-term downtrend in the greenback. Such a move would target 69.32 initially, but potential would be as low as 67.09.

Of course the anticipated decline in the dollar translates in to expectations for further inflation. US PPI for June came out at 1.8% this morning. The 9.2% y/y pace is the highest since 1981, up from 7.2% y/y in May.

A sizable surge in US CPI for June is also expected when data are released tomorrow. Forecasters see CPI nearing 5% y/y, from 4.2% in May. We believe that CPI grossly understates inflation. Some private forecasters estimate that inflation is already running closer to 12% y/y.

In these uncertain economic times, investors are increasingly turning to physical gold as a safe-haven asset. As the USAGOLD Survey of Investments clearly shows, gold has been one of the best performing assets over the past year.

Gold offers non-correlated diversification against the more traditional asset classes such as stocks and bonds. We therefore look for gold to continue to benefit from diversification flows out of stocks.

Physical gold in your possession is an asset that is not simultaneously someone else's liability; it offers a safe and liquid way to store wealth during times of systemic risk. Gold is also the classic hedge against a declining dollar and the resulting inflation.

Gold Market Movers:

ABC consumer comfort index for the week ended 13-Jul at 17:00ET.

US business inventories for May at 0.3%, worse than the market expectations.

BoC leaves policy rate unchanged, in line with expectations.

US retail sales +0.1%, worse than the market expectations.

US PPI surges 1.8% in Jun, above expectations. The 9.2% y/y pace is the highest since 1981.

US Empire State Index for Jul improved to -4.92, better than market expectations, versus -8.68 in Jun.

German ZEW economic sentiment for Jul tumbled to -63.9, well below market expectations, versus -52.4 in Jun.

UK CPI for June surged to 3.8% y/y, above market expectations.

BoJ leaves policy rate unchanged and downgrades economic outlook.

Ailing sentiment hits dollar and global stocks

After IndyMac's failure, which bank could be next?

Investors seek solace in gold

UBS forecasts $1000 average gold price next month and $1050 next three months.