Once again, gold continues to show great resilience in the face of the sizable correction in crude. Gold is down about $10 from last Friday's close, while Brent spot crude is off about $12 in the past week. That's a 1% decline, versus an 8% decline.

The gold/oil ratio continues to hold above 7 and I think the ratio could improve to around 8 in the short-term. Brent spot crude shows good support down to above 130.55 (10-Jun low). Assuming this level holds and based on a gold/oil ratio objective of 8, gold could still reach $1044.40. Even if crude retreated as low as $125, a ratio of 8 would still equate with $1,000 for the yellow metal.

The stock market has gotten a boost in recent sessions, both from weaker oil and better than expected earnings data. Even some of the banks, most notably Wells Fargo, posted better than expected earnings for Q2. However, the earnings news has turned a little bleaker today.

While the improvement in stocks may be tempering demand for gold to some degree, our client base remains extremely concerned about the US economy, the outlook for stocks and the implications of the Fannie Mae/Freddie Mac rescue. We anticipate ongoing safe-haven demand for gold as these various storylines play out.

The dollar has gotten a little bit of a reprieve as well after tumbling to a new record low against the euro earlier in the week. There was a pretty spirited defense of the previous all-time high in EUR-USD at 1.6020 on Tuesday and the rate has retreated modestly in subsequent trading.

Nonetheless, the overall outlook for the dollar remains quite negative. A definitive move in the euro back above 1.5900 would bode well for further attacks on the 1.6020/39 highs. Above the latter, focus would shift to 1.6200 initially, but potential would be toward 1.6300.

Losses in the USD-CHF rate earlier in the week were associated with risk aversion interest in the Swiss franc. While dollar losses stalled just ahead of parity and there has been significant retracement in the latter half of the week, the longer-term outlook remains quite negative. A near-term dip below 1.0000 would return focus to the .9636 record low from 17-Mar.

Similarly, safe-haven flows into the yen drove the USD-JPY rate back below 104.00 earlier in the week as the market digested the Fannie/Freddie bailout and the collapse of Indymac. Much of those losses have now been retraced, but upside potential from here is thought to be limited. Tests back above 108.00 to challenge the Jun highs are unlikely, while a failure to sustain gains above 106.00 would call for a retreat below 105.00.

The dollar index is hovering around the pivotal 72.00 level. Tests of resistance defined by the downtrending 20-day moving average have proven unsuccessful thus far. A break of nearby support at 71.82 would call for a retest of Tuesday's low at 71.31. Below the latter, we are still expecting a challenge of the 70.70 all-time low from 17-Mar.

Our bearish outlook for the greenback is based on expectations that the ongoing credit/liquidity crisis is going to lead to substantial expansion of the money supply. At the same time, significant risks to growth will make the Fed reluctant to raise interest rates this year.

Fed fund futures for Sep show an implied yield of 2.0450%, suggesting that odds of a 25bp rate hike by the end of Q3 are just under 25%. You may recall that such a hike was fully priced in just several weeks ago, following rather hawkish comments by Fed Chairman Bernanke.

The implied yield for Dec is 2.195%, showing that the odds for a quarter point hike by year-end are still nearly 80%. Obviously inflation remains a major concern for the Fed as well, given that both PPI and CPI for Jun came out this week at levels not seen since the early-1980s.

Nonetheless, I am fairly convinced that growth risks will continue to be viewed by the Fed as the greater risk. Therefore, the Fed will hold steady on rates through year-end. Comparatively low interest rates will keep the dollar out of favor against the euro (4.25%), Sterling (5.0%), Swiss franc (2.75%), C$ (3.0%), A$ (7.25%), NZ$ (8.25%) and a host of other currencies. Factor in the likely money supply growth needed to continue shoring up the banking sector and it will be difficult to keep the greenback from sliding further.

Gold is the best hedge against a declining dollar and the inflation that results. Gains recorded earlier in the week bode well for renewed tests above $1,000. An eventual move to new record highs above $1032.20 would return focus to the $1200 objective.

Gold Market Movers:

Canada wholesale trade for May +1.6%, well above market expectations, versus +1.5% in Apr.

Canada leading indicators for Jun were unchanged, worse than the market was expecting, versus +0.2% in May.

German PPI for Jun surged to 6.7% y/y. Highest since 1982.

Eurozone sa trade balance for May -€1.5.

Citi's $2.5bn loss less than feared

Merrill Lynch hit by $9.4bn writedown

Barclays investors snub £4.5bn fundraising

Freddie Mac mulls $10 billion share sale, WSJ says

Soros rumored "long gold, short oil"

Gold and oil for Soros; Illiquidity at Merrill