Oil is rebounding from last week's sharp losses, bolstered by heightened tensions in the Middle East. Talks over the weekend in Geneva between Iran, the EU, the UN and the US apparently did not go well. The US has threatened Iran with "further isolation" if they do not move to halt uranium enrichment within the next two weeks.

Reports that a senior US diplomat would participate in talks with Iran over their disputed nuclear program were a contributing factor in last week's sharp sell-off in oil. The fact that the US did not gain concessions from Iran suggests a good portion of last week's oil losses could be reversed out.

In addition, Tropical Storm Dolly may develop into a hurricane once it enters the Gulf of Mexico. Any threat to US oil production or refining capacity in the Gulf is going to have a positive impact on oil prices.

Gold is closely correlated with oil, so any rebound in crude prices would drive gold higher as well. We did see a pretty good rebound in the gold/oil ratio last week and we continue to see potential for a rebound toward 8 in the ratio.

However, the greatest concern on most people's minds still seems to be the health of the US banking system. These worries peaked with the government rescue of Fannie Mae and Freddie Mac earlier in the month, along with the collapse of Indymac. An article by Ambrose Evans-Pritchard in Sunday's issue of The Telegraph paints a rather grim picture of the global economy, suggesting we are at the point of "maximum danger."

Evans-Pritchard points out that the seizure of Indymac bank alone will draw-down the FDIC's $53 billion in reserves by 10%. There were 90 banks on the FDIC's 'problem list' as of Q1, with total assets of about $26.3 bln. The FDIC does not release information about the banks on the list for fear of precipitating a bank-run.

The number of banks on the list has been rising since Q3-06 and jumped to the present level from 76 at the end of 2007. On average, 13% of the banks on the list will fail. There have been 5 bank failures so far this year, suggesting that if the historic average holds true, we should see another 6 or 7 banks fail -- although I would argue that the past year has been anything but average.

We are expecting to see continuing safe-haven flows into gold as investors seek to preserve their wealth in these uncertain economic times. When it comes to protecting one's self from systemic risks, there is no greater hedge than physical gold.

Expectations that the US will resort to massive expansion of the money supply in order to shore up the banking system are keeping the dollar under pressure. The dollar index continues to look rather vulnerable after pushing convincingly below 72.00 last week. The DX remains below the 20-day moving average at this point, suggesting potential back toward the all-time low at 70.70.

The EUR-USD rate has found support at its 20-day moving average as well. A convincing move back above 1.5900 would bode well for the anticipated challenge of the record highs at 1.6020/39. Further out, upside potential in the euro is to 1.6200 and 1.6300.

The dollar and gold have a negative correlation. Ongoing weakness in the dollar is going to drive gold back toward its all-time high at $1032.20. Factor in the inflation that is associated with a falling dollar and you have an additional incentive to buy gold -- as if you needed any additional motivation.

Gold Market Movers:

US leading indicators for Jun -0.1%, about what the market was expecting, versus -0.2% in May.

US NABE survey for Q2 more encouraging. Only 10% of economists surveyed see the economy contracting by year-end.

UK Rightmove housing index -2.0% y/y.

The global economy is at the point of maximum danger

Gold may rally as credit-market turmoil spurs demand for haven

Why the mania phase in gold may be upon us

Full steam ahead for gold train [VIDEO]

Oil is a commodity, gold is money - decoupling will happen

US food groups plan hefty price rises