Oil has recaptured the $100 level and gold has already retraced more than half of the losses recorded in the past 24-hours. While further tests of the downside cannot be ruled out, we anticipated there would be a spirited defense of the $100 zone in oil.

OPEC maintains that there is an oversupply of oil. In fact, they believed that supply and demand was in balance when oil surged over $147 earlier in the summer and that it was the weak dollar that was to blame for higher prices. You may recall that OPEC ultimately succumbed to pressure from Washington to increase production. Now they are faced with having to reverse out those increases.

I think a 1,000,000-barrel production cut would have driven OPEC's point home more effectively, but perhaps they're looking for additional support from today's EIA inventory numbers or hurricane Ike. They certainly have the option to scale back production further if declining demand expectations and commodity deleveraging continues to pressure prices.

Viewed from the 147.47 peak from just two months ago, oil is seemingly very cheap. Back in July, oil was seemingly on a one-way track to $200 and beyond based on options activity and what the pundits were saying. The thinking was that we might never see sub-$100 oil again. I point that out only as an indication of just how quickly market expectations can turn around.

With those expectations still relatively fresh in people's memory, I could see an increase in demand for oil at these levels. However, it's not surprising that the futures markets tried to run stops below $100 in oil and below 772.70/65 in gold. If dips below $100 in oil continue to attract buying interest and/or production cuts, look for gold to recover from here.

The gold/oil ratio continues to act positively on this dip. The ratio widened out to 7.8 for a period yesterday and is presently trading just below 7.7. That is a significant recovery from lows around 6.4 a couple months ago. I believe we'll see the ratio expand to 8.0 in the short-term, with potential toward 10.0.

This historic average for the gold/oil ratio is around 15 to 17 over the past 38 years. The ratio traded above 44 in the early-1970s. In other words, gold is extremely cheap in terms of oil.

Gold is also still cheap in terms of inflation-adjusted dollars. The old record high at 850.00 from January 1980 would equate with $2,300 gold in today's dollars. Certainly any county receiving oil revenues in dollars would view the current gold price as a real bargain.

The recovery in the ratio is consistent with our expectations that gold will continue to be viewed as a hedge against broad-based economic uncertainties. More importantly, physical gold has become an integral and permanent part of the modern portfolio. We're seeing fewer and fewer clients looking to sell gold back to the market, adding to the ever tightening supply problem.

Oil has been declining due to fears of 'demand kill' stemming from the belief that the US and global economies are heading into a recession. If we are indeed in, or on the verge of, a recession here in the US, we can expect easier monetary policy from the Fed in an effort to stimulate growth.

Easier monetary policy in the form of even lower interest rates and greater money supply, will ultimately weigh on the value of the dollar. If the dollar eventually resumes its long-term downtrend, the long-term uptrend in gold will start to re-exert itself.

If a global recession is in the cards, there is considerable risk for competitive currency devaluations as counties around the world debase their currencies to support their export markets. In that situation global demand for gold as a means of preserving wealth will surge.

Gold Market Movers:

Canadian Q2 productivity -0.2%.

US MBA mortgage market index +9.5%; purchases +6.4%, refis +15.4%

EU cuts GDP forecast to 1.3% from 1.7%. Increases CPI outlook to 3.6% from 3.1%.

Italian GDP for Q2 confirmed at -0.3% q/q.

UK goods trade deficit for July reduced by £6.67 bln.

OPEC lowers output quotas in wake of price decline

Lehman Brothers loses $3.9bn in third quarter

Britain to 'fall into recession'

Ike gains strength over Gulf