Money and Metals

Bloomberg covers the Fed news. "The dollar rose against the yen and euro after minutes from the Federal Reserve's policy-setting meeting on May 10 showed the central bank may still raise interest rates next month. The dollar climbed to 112.54 yen at 4:02 p.m. in New York, from 112.16 yen late yesterday. It set an eight-month low of 109 yen on May 17. The U.S. currency advanced to $1.2817 per euro from $1.2870 yesterday, and reached a one-year low of $1.2972 per euro this month."

"'The fact that the 50-basis-point increase was on the table at all detracts from the argument that they were leaning toward a pause,' said Naomi Fink, senior currency strategist with BNP Paribas SA."

"Traders also bid up the dollar earlier after a report showed Chicago-area manufacturing rose in May. The National Association of Purchasing Management-Chicago said its regional index climbed to 61.5 this month from 57.2 in April, compared with the 56 reading that was the median forecast of economists surveyed by Bloomberg News. A reading greater than 50 signals expansion."

"Investors on Wednesday continued fleeing emerging markets amid fears that rising U.S. interest rates could lead to a global economic slowdown, market analysts said."

"'An inflation-curbing interest rate hike in the United States could reduce investments, causing an economic slowdown in the United States and as a consequence elsewhere in the world,' said Adauto Lima, an economist of the West LB investment bank. 'Amid these uncertainties, investors seek safer havens for their money.'"

"To calm down the market, the Brazilian government resorted to foreign exchange swaps, Finance Minister Guido Mantega told a congressional commission on Wednesday. 'We took the move to stop panic taking over the market at a delicate moment,' Mantega told the members of the lower house commission."

"Wednesday's swap auction was the second held by the central bank in as many days in an attempt to reduce market volatility. The Brazilian real has fallen almost 12 percent against the dollar since May 5 when the current wave of uncertainties began."

"'I continue thinking this is an adjustment of liquidity,' said Guilherme da Nobrega, economist at the Itau brokerage in Sao Paulo. 'Markets were drunk on liquidity and share prices were rising too fast.'"

"US crude futures ended sharply lower after the United States said it would open talks with Iran, if Tehran suspended its nuclear enrichment. Expectations that the Organization of Petroleum Exporting Countries would leave output unchanged while US gasoline inventories continue to rise also pushed oil prices down, traders said."

"Crude for July delivery settled 74 US cents lower at $US71.29 a barrel on the New York Mercantile Exchange."

"Gold futures fell Wednesday to close with a loss of nearly $12 for the day as well as the month of May, marking a reversal from a three-session climb. Gold for August delivery closed at $649 an ounce on the New York Mercantile Exchange, its lowest level since May 24."

"It ended down $11.50 for the day and down $11.90 for the month despite adding a total of $16.40, or 2.5%, in the past three trading sessions. The move marked the first monthly loss since February, when the price of the front-month contract fell 2%."

"'Gold's failure to find significant upside traction yesterday suggests more consolidation is on the agenda, with $635-$675 set to provide the near-term trading range [and] with interim support pegged $640,' James Moore, an analyst at TheBullionDesk.com, said."

"Contributing to pressure Wednesday, Gold Fields Ltd. CEO Ian Cockerill said gold might well give up another $100 before resuming its eventual course past its former historic highs of $850, according to Jon Nadler, an investment-products analyst at bullion dealers Kitco.com. And 'not helping matters either were recent gold-sales levels as recorded by the Rand Refinery, whose spokesman estimated about a 20% drop in bullion sales to India,' said Nadler."

"All in all, 'when two of the largest names in the business publicly come out with sobering statements about current gold prices and the reluctance of buyers to pay what they perceive are unsustainable (for the short term) values, the market has little choice but to err on the side of caution and give up some of its premium,' he said."

"Still, Cockerill said Wednesday that gold prices could hit $1,000 an ounce over the next few years, in part because of heavy investment demand from oil producers with excess cash, according to a Reuters report. He was clarifying comments he made Tuesday to a strategy presentation, when he said prices could fall to around $500 an ounce, the report said."

"July platinum slumped $44.60, or 3.5%, to end at $1,246.80 an ounce after a three-week low of $1,235.20, but it was still up 7.2% from the end of April.
June palladium shed $8.20 to end at $347.25 an ounce, closing almost $30 below the end of April level."

"July silver dropped 62.5 cents, or 4.7%, to close at $12.455 an ounce, ending at its lowest level since May 24 after finishing Tuesday at a one-week high above $13. The contract had closed at $13.63 on April 28, so its down 8.6% for May."

Bloomberg looks at the changing world of derivatives. "When Mark Kiesel, who manages $50 billion at Pacific Investment Management Co., decided this month that corporate bonds were about to slump, he bought credit default swaps. Louise Herrle, treasurer of mortgage lender Residential Capital Corp., measures investor demand for debt by looking at credit default swap prices before she decides to sell a bond."

"Such derivatives, contracts that insure investors against defaults, are displacing trading of corporate debt as the surest way to gauge a company's health. The market totals $17 trillion, more than three times the amount of U.S. company bonds."

"'The credit default swap market is now the dog as opposed to the tail that wags the dog,' said John Burger, managing director at Merrill Lynch & Co. The change to credit derivatives happened in the last 18 months, he said."

"The Dow Jones CDX North American Investment Grade Index, which tracks the derivatives on 125 company bonds, rose almost 15 percent in the first two weeks of May. The next week, corporate bonds posted their worst performance in a year. 'We strongly believe that today, the credit derivatives market is fast becoming a precursor to the cash market,' said Jayesh Bhansali, head of derivatives strategy and trading at TIAA-CREF. 'This market is a very sensitive barometer.' TIAA-CREF, the largest U.S. manager of retirement funds for university and college employees, manages $380 billion."

"Derivatives related to corporate debt are the fastest- growing part of the $270 trillion market for financial obligations that are based on the performance of assets such as stocks, currencies and commodities, or on the outcome of events including defaults or changes in weather patterns. The credit derivatives market has grown from almost nothing in eight years. It more than doubled in 2005."

"'Credit default swaps are becoming the most important instrument I've seen in decades,' Former Federal Reserve Chairman Alan Greenspan said May 18 at a Bond Market Association conference in New York. 'For decades we used to have monetary crises because banks' would periodically 'freeze up.' Credit default swaps 'lay off all of these loans.'"

"The Dow Jones investment grade index, which shows the average cost of insuring debt sold by borrowers including AT&T Inc. and Wal-Mart Stores Inc., rose almost 5 points to 39 between May 2 and May 12, Bloomberg data show. A level of 39 means it costs an investor $39,000 to insure $10 million of debt for five years. The extra yield investors demand to own investment-grade corporate bonds rather than Treasuries, or spread, didn't widen until the week ending May 19. Then it rose 3 basis points to an average of 90 basis points."

"Though the credit default market has surged, the derivatives haven't been measured in a period of increasing corporate bankruptcies. 'Given that credit derivatives allow for a leveraging of credit risk, a down cycle in credit will surely result in large investor losses,' Merrill's Burger said."

"When Delphi Corp. filed for bankruptcy on Oct. 8, there were $20 billion of credit default swaps related to its $2 billion of bonds. The imbalance drove up prices of the bonds and forced banks to hold an auction to determine a price to settle the derivatives. It took Moody's Investors Service four months to figure out the impact of the Delphi default on the market for credit default swaps and securities that contain the derivatives."

"Securities firms were unprepared to handle the growth of credit default swaps. The Federal Reserve Bank of New York demanded last September that 14 firms, including Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co., improve their handling of credit derivatives after discovering 150,000 unconfirmed or unsigned transactions. Delays in documenting trades meant buyers and sellers may have been unaware of who owed money to whom in the event of a default."

"Investors who want to bet that bond prices and credit quality will decline can use the CDX index more easily than individual bonds. To bet on a drop in the cash market, investors have to borrow bonds and sell them in the hope they can repurchase the securities at a lower cost later. That trade incurs commissions and financing costs."

"With derivatives, they don't have to worry about coming up with the actual bond because dealers and investors can create as many credit default swaps as they want. Trading in credit derivatives doubled in the last two years to $10 billion a day, according to Nishul Saperia, at derivatives data company Markit Group Ltd. By contrast, an average $21.6 billion of company bonds changes hands daily at Wall Street's biggest firms, about the same as two years ago, Fed data show."

The US dollar weakened on Tuesday. "Gold futures closed at their highest levels in a week Tuesday, as weakness in the U.S. dollar steered investment demand toward the precious metals. Calling the dollar 'terminally ill,' Peter Grandich said the currency is headed for a long-term retreat. 'This in turn should be most beneficial to gold's long-term path, up,' he said."

"Gold for June delivery rose $2.90 to close at $653.90 an ounce on the New York Mercantile Exchange after trading as high as $664.50, while August gold, which is trading on higher volume, tacked on $3.10 to close at $660.50 an ounce following a high of $671.50."

"From here, the 'question is whether the entire precious metals complex will settle into a nice consolidation range or will it find a way to rally to new highs,' said Dale Doelling, chief market technician at Trends In Commodities, adding that he's 'betting on a consolidation at this point which could last a couple of weeks.'
'The final outcome will be a breakout to new all-time highs in the gold market, although it may take some time for that to materialize,' he said."

"Taking its cue from gold, July silver added 34 cents to finish the session at $13.07 an ounce, a one-week closing high. June palladium closed up 35 cents at $355.45 an ounce while July platinum ended at $1,291.40 an ounce, down $6.70."

"'After being assured by the president (just last week) that Treasury Secretary John Snow was doing 'a fine job' and that the economy was doing also doing fine thanks to his efforts, the public [was] told today that Mr. Snow is resigning,' said Jon Nadler, an analyst at bullion dealers Kitco.com. 'What little confidence there may have been left in the dollar is now going to be tested again and again,' he said."

From Forex News. "Hank Paulson’s nomination as Treasury Secretary may provide some temporary relief for the sliding dollar owing to Paulson’s prominent status as a former of a top Wall Street firm. But we doubt that Paulson’s role at the Treasury in the next 2 ½ years will alter the current and emerging fundamental challenges to the US currency."

"Just as the Bernanke Fed is conscious of the the dollar repercussions of communicating an explicit conclusion to the 2-year old policy tightening campaign, the US administration has grown conscious of the market realities acting againt the US dollar, leaving it no choice but to resort to a figure of credibility."

"This is not to say that the US Administration will pursue a strong dollar policy in both practice and preach as was under the Clinton-Rubin-Summers years, but will instead aim at pursuing a competitive currency without lacking in confidence."

The Telegraph has this editorial from Ambrose Evans-Pritchard. "Round one to the Bank of Japan, ultimate cause of the violent sell-off in stocks, commodities, and riskier bonds across the world over the past three weeks. Governor Toshihiko Fukui has bled more than $140bn (£75.3bn) from his banking system since March 9 to reduce a menacing overhang of liquidity left from the battle against deflation. He is halfway through."

"No longer buying fistfuls of US Treasuries with printed money to hold down the yen, the Bank of Japan has been the silent force pushing up global bond yields this year by 0.8pc, the jump that really lies behind the market rout."

"Japanese holdings of US Treasuries have fallen by $74.5bn since December. 'We are reaching an inflection point in monetary policy,' said Mr Fukui. Inflection to some, bloodbath to others. The first casualties began to emerge on the fringes of the 'yen carry trade' earlier this spring. Hedge funds that had borrowed for zilch in Tokyo, to lend for a fat premium to overheating Iceland and New Zealand, began rushing for narrow exits."

"'Most people underestimated the effects of monetary tightening in Japan,' said Phillip Poole, an economist at HSBC. 'The liquidity that has driven these markets is being withdrawn.'"

"The next Japanese spanner in the works will be the end of zero interest rates, or zirp as it is known. Bank-watchers have pencilled in July or September for the moment of reckoning. Few investors lose sleep worrying about life after zirp, but our guardians at the Bank of International Settlements view it as the greatest imminent risk to global markets."

"'We are all going to have to look over our shoulder when Japan raises rates because nobody knows what is going to happen when all this money goes back home,' said a BIS official."

"Even so, round two may yet go to the European Central Bank on June 8 as Frankfurt's hawks lose patience with exploding M3 money growth, and a housing bubble threatening the viability of monetary union itself. Housing loans (ex Germany) grew 19.4pc in the year to March, on top of the 17pc surge the year before. Spain is a disaster waiting to happen. In Portugal it has already happened."

"Judging by the apocalyptic tone of the Bundesbank's May report, Europe is on the brink of a monetary shock going far beyond the mincing half-measures trickled out until now by Jean-Claude Trichet, ECB chief and French 'soft euro' inflationist. On the warpath, the Teutonic-bloc is now trying to shame Mr Trichet's doves into doing their monetary duty. 'There is no dispute that a further tightening of monetary policy is needed,' said Austrian governor, Klaus Liebscher."

"Ben Bernanke was back-peddling fast in a letter to Congress last week, pleading that core CPI inflation 'overstates' price rises. 'Monetary policy must be forward-looking,' he said. Has the Fed already gone too far, baking a recession into the pie? Will the delayed effects of past tightening kick in, with mounting ferocity, just as the housing boom plummets into bust?"

"'Housing mayhem seems unavoidable. The US hard landing begins now,' said Charles Dumas, global strategist at Lombard Street Research."

"Mortgage applications are down 17pc in a year. House sales are down 5.7pc, and inventories of unsold new houses are at their highest since 1996. The central prop holding up the US consumer boom is crumbling, leaving behind record household debts equal to 127pc of disposable income."

"'As the hard landing/recession arrives, it is the Asian exporters, the commodity markets and currencies, and especially the base metals that are likely to crash over the next year. The game is up for assets that have gone way too high on the basis of cheap funding and optimistic delusions,' said Mr Dumas."

Bloomberg has some ideas on 'surviving the market slump.' "The best generals are those who perform well in retreat, goes an old military adage. The same can be said of investors seeking to protect profits and limit losses in the current stock-market slump. 'Investors want out of these speculative, overbought markets and want less risk,' said Clark Winter, investment strategist at Citigroup."

"Morgan Stanley Capital International's Emerging Market Index has plunged 13 percent since May 8, when it closed at a record. In developed markets, the Dow Jones Stoxx 600 Index in Europe has tumbled 6 percent since setting a five-year peak May 9, while Japan's Nikkei 225 Stock Average has given up 7.6 percent since its peak for the month."

"U.S. stocks have held up the best, with the Standard & Poor's 500 Index falling 3.4 percent from a five-year high May 5. Among the hardest-hit markets: Turkey, Brazil and India, where benchmark indexes have lost 25 percent, 15 percent and 15 percent, respectively, in dollar terms since the emerging-markets peak. All three had soared 80 percent or more in the year leading up to the high."

"Chen Zhao, head of global strategy at BCA Research in Montreal, said he's recommending defensive strategies. Zhao advises holding on to emerging markets shares while they're slumping. Investors can take advantage of the fact that prices of industrial metals such as copper and nickel track emerging stock markets 'almost perfectly,' yet as a group had risen 25 percent more since Dec. 30, he said. Thus, shorting a basket of metals using futures contracts offers a hedge against further emerging-market declines, he said."

"For investors with a strong stomach for risk, Chen said it might be worth shorting the Australian and Canadian dollars and the Chilean peso on the expectation that metals prices have further to fall."

"While U.S. stocks have held up better than shares in other regions, further declines are ahead, said Michael Belkin, president of a firm that uses quantitative models to predict market moves. His advice is to sell when markets rally. The S&P 500 may fall another 14 percent before the current decline is over, and the Russell 2000 Index of small-capitalization companies might drop another 24 percent, he said."

"His research indicates a 24 percent tumble for the average European stock index and a 29 percent decline for the Nikkei, all over the next three months. 'Markets should be poised for an asset-allocation shift out of equities into government bonds,' said Belkin. 'The current stock-market decline will probably culminate in some sort of violent selling climax,' Belkin predicted. 'Markets aren't there yet.'"

Here is a link to The Street.com's weekend linkfest. "Good holiday weekend! It's been the first positive week in a while, and the action saw the year-to-date performance of the S&P 500 (briefly) join the Nasdaq as negative for the year. (The Nazz is now down slightly YTD.)"

"Why the markets caved this month looks to be more than a mere case of seasonal affective disorder, and we will delve into a variety of possible causes this morn. But since it's the official kickoff to summer, we range far and wide to bring you all manner of sources on all kinds of topics. Bring the laptop with wireless Internet access to the beach and go at it: We got ourselves a monster linkfest!"

A quiet trading day to end a busy week. "The Canadian dollar dropped slightly against the U.S. dollar on Friday, unable to carry momentum from a rebound in commodity prices into a muted session heading into a long U.S. holiday weekend. The loonie closed at C$1.1073 to the U.S. dollar, or 90.31 U.S. cents, down from C$1.1067 to the U.S. dollar, or 90.36 U.S. cents, at Thursday's close."

"'The Canadian dollar managed to hold in today because we saw a further rebound in a lot of the commodity prices and the Toronto Stock Exchange,' said Doug Porter, deputy chief economist at BMO Nesbitt Burns. 'Generally the U.S. dollar was a little bit stronger and that may have been one reason why the Canadian dollar didn't show more strength in the face of a rebound in commodity prices and just overall the markets were a little bit quieter heading into the U.S. long weekend."

"Gold futures climbed Friday in a holiday-shortened trading session as renewed strength in the U.S. dollar lured investors away from the precious-metals market, but prices still ended the week with a loss of more than $6 an ounce. Gold for June delivery rose $2.50 to close at $651 an ounce on the New York Mercantile Exchange after trading as low as $640.50."

"'We cannot expect full-blown participation in the gold-trading pits to show up in terms of commitments to positions either [Friday] or (overseas) on Monday,' said Jon Nadler, an analyst at Kitco.com. 'The current gold-price range may well have $675 as the overhead resistance point that needs to be overcome before traders declare the recent correction as being ready to be archived,' said Nadler."

"On Thursday, gold rallied $11, but prices had dropped more than $36 Wednesday. July silver added 13 cents to finish at $12.73 an ounce, ending 3% above last Friday closing level. June palladium rose $3.10 to close at $355.10 an ounce, up 1.5% from last week's close of $350, while July platinum closed at $1,298.10 an ounce, up $3.10 for the day, but down 0.9% for the week."

"Also Friday, the StreetTracks Gold Trust exchange-traded fund, the first exchange-traded fund to invest in shares of public gold-mining companies, closed higher by 0.6%, or 23 cents, at $38.55."

"Nadler questioned 'how much lighter the correction may have been were the gold ETF products absent from the marketplace. There are some opinions out there that these new vehicles have contributed to the rally (certainly, in terms of offtake), but that they also magnify the intensity and swiftness of the corrective phases of the markets,' he said."

Reuters has the trading news. "Gold rose 1.4 percent on Thursday, with bargain-hunters and physical buyers entering the market on dollar weakness a day after gold tumbled nearly 5 percent, dealers said. Spot gold rose as high as $650.30 an ounce and was at $649.80/650.60 an ounce late in New York, against $639.20/640.00 late on Wednesday."

"Gold got some support from the dollar. The greenback slipped against the euro and yen as data showed U.S. economic growth was slightly slower than expected in the first three months of the year."

"'The dollar slipping was one piece of it,' said Bernard Hunter, a director at ScotiaMocatta in Toronto. 'But it also was a relief-rally' after the cross-commodities sell-off over the last week."

"Barclays Capital said in a note that U.S.-based streetTRACKS fund attracted 1.86 tonnes of gold on Wednesday, marking the first inflow into the exchange-traded fund since late April. Over the past month, about 15 tonnes had been withdrawn from the product, which tracks prices of the metal. Such gold funds, traded on stock exchanges, have accumulated about 480 tonnes of gold since their launch about three years ago."

"Silver rose to $12.66/12.76 an ounce from $12.45/12.55 a day earlier. UBS noted a drop of 2.5 million ounces of silver on Wednesday from Barclays' exchange traded fund (ETF) in the U.S. 'We remain positive about the outlook for the silver ETF because we do not believe that metal prices have peaked. That should happen, we believe, sometime in 2007. But for the ETF to attract new inflows, metals need to stop falling,' UBS said."

"Platinum's fall below $1,300 an ounce sparked buying interest from jewelers in China, which accounts for half of global platinum jewelry demand. Platinum rose to $1,287/1,297 from $1,280/1,290. Last week it hit a record high of $1,336. 'I think the demand is quite steady in China, but there's also a possibility that some jewelers are using old stocks,' said a dealer in Hong Kong. Palladium was at $350/358 an ounce, versus $344/349."

"The Canadian dollar strengthened the most in about a year as commodities including copper, crude oil and gold advanced, boosting demand for the nation's currency. The central bank yesterday lifted its benchmark interest rate a quarter-percentage-point for the seventh straight time since September to 4.25 percent."

"Rising commodity exports have led to record corporate profits, making Canada the lone Group of Seven nation with a balanced budget. That's allowed the country to reduce annual debt sales by 44 percent in the past decade. The yield on Canadian 10-year bonds fell below that of U.S. Treasuries in 2005."

"'It used to be when we saw Canadian bond yields trade lower than U.S. Treasuries, we would see interest dry up,' said Colin Embree, a government bond trader at CIBC. 'This time volume has tripled.' Investors should buy Canadian bonds as they will 'benefit from a strong currency, supported by high oil prices.'"

"U.S. 10-year Treasuries yielded about 78 basis points more than comparable Canadian bonds, the highest since 1989."

"Mexico's fixed exchange rate Thursday was set at 11.2897 pesos per dollar (ppd), reflecting a drop of 7.57 ppd compared to Wednesday's final quote at 11.2854 ppd."

"The US government reported Thursday the country's annual gross domestic product (GDP) growth in the first quarter of this year was revised up from 4.8 to 5.3 percent, which was inferior to analysts expectations of 5.8 percent; news that gave a boost to world currencies against the US dollar."

Precious metals are up in morning trading. "Gold futures edged higher Thursday morning on the heels of the previous session's $36 retreat as a smaller-than-expected revision to U.S. gross domestic product estimates weighed on the dollar, prompting investors to take refuge in the precious metal. The dollar fell against the yen and euro after a revision of U.S. gross domestic product estimates came in short of expectations."

"'When taken together, the GDP numbers and [Wednesday's] plunge in durable-goods orders contributed to the dollar's decline,' said Jon Nadler, at Kitco.com. 'A reasonably good case appears to be shaping up in favor of a pause in interest-rate rises as we head into June,' he said."

"Against this backdrop, gold for June delivery tacked on $6.50 to trade at $644 an ounce on the New York Mercantile Exchange. Meanwhile, adding pressure to the dollar Thursday were upbeat Japanese economic data and figures from several countries, such as Qatar and Sweden, indicating less of a willingness to hold dollars in their reserves and perhaps more gold, such as Russia and China, said Nadler."

"'The U.S. economy could indeed be heading towards a stagflation scenario, as housing shows a cooling trend (consumer spending thus cannot be far behind) and inflation shows a stubborn tendency to keep showing up as the uninvited guest,' he said."

"Meanwhile, July silver lost 2.5 cents to trade at $12.49. July platinum added $4.9 to $1,290 an ounce after Wednesday's 2.8% loss. June palladium shed $7.55 at $347.20 an ounce."

Another wild ride in the markets today. "Gold futures rose as much as 1% in electronic trading Wednesday evening following a loss of more than $36 an ounce in the regular session, when stronger-than-expected new-home sales fueled a rise in the U.S. dollar and damped investment demand for precious metals."

"Gold for June delivery plunged $36.20, or 5.4%, to close at $637.50 an ounce during the regular session on the New York Mercantile Exchange. 'Two more days such as this in a row, would make for real worry,' said on Nadler, at bullion dealers Kitco.com. 'If we do not hold $620 then $600 or $580-ish, this phase will be considered over and a lot of repair work (to rebuild confidence) would have to take place (for quite a few months at that).'"

"But at the moment, the gist of it is, 'after rising some 60 days (almost in an uninterrupted string) a ten-day pattern of lower prices should not be too scary,' he said. Investors, mostly of the smaller, retail variety, 'appear to prefer loading up on more [gold] only if they perceive that the correction has run its full course or if prices are at truly bargain-basement levels (say from $580 to $620),' he said."

"'We still cannot rule out the possibility (now becoming more of a probability) of executing a full (or very close to full) 50% retracement of the $300 move achieved by gold during the past year,' he said. And that would bring gold 'very near the high 500s or low 600s.'"

"Ned Schmidt viewed the steep drop in gold as a buying opportunity. 'When funds meet an illiquid market like gold, prices decline,' he said. 'That equals opportunity for real investors.' So 'investors should be using this period through early next week to be buying gold.'"

"July silver lost 65.5 cents to close at $12.515 after touching a low of $12.42. Prices rose 6% in the previous session. July platinum dropped $36.40, or 2.8%, to close at $1,285.10 an ounce and June palladium shed $8.60, or 2.4%, to finish at $354.75 an ounce."

"Further growth in investment demand could send silver prices higher, or in the least, 'maintain them at levels well above what might be expected given the interplay of silver's other supply/demand components,' according to the World Silver Survey 2006 report produced by GFMS Ltd. for the Silver Institute."

It wasn't just metals. "Canadian stocks took a triple-digit dive Tuesday as gold and mining shares declined. U.S. stocks rose despite the easing of oil and metal prices. The S&P/TSX composite index tumbled 116.02 points to 11,423.91 with the capped gold index falling 4.13 per cent and the capped metals and mining index shedding 1.71 per cent."

"In commodities, oil prices dipped as traders reacted to a U.S. government report that showed domestic gasoline inventories rose for a fourth straight week. Light, sweet crude for July delivery fell $1.90 (U.S.) to $69.86 a barrel on the New York Mercantile Exchange."

"Currencies and stocks kept falling across Latin America Wednesday as investors shifted money out of emerging markets toward more secure investments. The Brazilian real fell to its weakest point of the year, closing at 2.4 to the U.S. dollar. Mexico's peso closed at 11.2850 to the dollar, its weakest since January 2005, and Colombia's peso fell to 2,541 to the dollar, its lowest since November 2004."

"The capital flight was apparent on the Sao Paulo Stock Exchange, where the benchmark Ibovespa index shed more than 3 percent in intraday trading. Local stocks and bonds also suffered in Mexico, where BBVA Bancomer said foreign investors reducing their bond positions will remain a possibility as long as the peso weakens and the market cuts its exposure to high-risk assets."

"The dollar rose against most major currencies Wednesday after a U.S. report showed that new home sales jumped in April, raising speculation that the Federal Reserve may hike interest rates in June. The euro bought $1.2773 in afternoon New York trading, down from $1.2861 in New York late Tuesday. The British pound slid to $1.8717 from $1.8843."

"The dollar strengthened against Japanese currency, climbing to 112.69 yen from 111.32 late Tuesday. The dollar bought 1.2156 Swiss francs, up from 1.2066 late Tuesday, and 1.1199 Canadian dollars, up from 1.1182."

"The Commerce Department reported that sales of new single-family homes increased by 4.9 percent last month to a seasonally adjusted annual rate of 1.198 million units, the highest rate since last December. 'The report bolsters the case for the Fed to raise rates in June,' said Michael Woolfolk, a senior currency strategist at the Bank of New York, 'because it shows a very gradual cooling off of the housing market and a soft landing, which is what the Fed hopes to attain.'"

Market Watch has the days trading numbers. "Gold futures gained $16 an ounce, copper prices rallied more than 12% and silver futures closed 6% higher Tuesday, fueling speculation that the downward correction from the price peaks almost two weeks ago may have come to an end. Gold for June delivery rose as high as $674 an ounce on the New York Mercantile Exchange before closing up $16, or 2.4%, at $673.70."

"Meanwhile, total demand for gold in the first quarter of 2006 fell 16% to 835 metric tons vs. the same period a year ago, according to figures compiled by GFMS Ltd. for the World Gold Council. The report, released Tuesday, blamed a fall in jewelry demand, particularly in Asia and the Middle East, which is considered to be a 'normal and predictable reaction to a volatile gold price.'"

"But in dollar terms, that was equivalent to a 9% in spending on gold, it said. While jewelry demand fell 22% in tonnage terms when compared with the first quarter of 2005, it reached $9.5 billion in dollar terms in the 2006 first quarter, which was a 2% rise."

"Also, total investment in exchange-traded funds and similar products for the first quarter reached 109 metric tons, a 23% increase in tonnage and a 59% increase in dollar investment vs. a year earlier, the report said. The increase reflected 'the easy access ETFs provide investors to the asset,' it said, and at the end of the first quarter, combined ETF holdings amounted to 496 metric tons."

"The 'most significant finding in the report is the fact that investment demand is surging ahead and that gold is reasserting its monetary value and is regaining respect among Western investors and institutions alike,' said Jon Nadler, an investment products analyst at bullion dealers Kitco.com. 'After being relegated to the dark recesses of the investment arena for two decades, gold is making a comeback that cannot be dismissed as a 'bubble' or the 'next dot com',' he said."

"July silver closed at $13.17 an ounce, up 74 cents, or 6%. The lows Monday were 'excessive, at least in the short run,' for silver, said Peter Spina. 'Once the markets started to rally, prospective buyers flocked back into the market.'"

"July platinum added $36.90, or 2.7%, to $1,319 an ounce, and June palladium rose $15.75, or 4.6%, to stand at $357.50 an ounce. Also Tuesday, the StreetTRACKS Gold Trust exchange-traded fund rose $1.05 cents, or 1.6%, to close at $66.35 and the iShares Silver Trust ETF added 4.1% to end at $130.30."

A global financial study is out. "Growth in the 30 mostly industrialised economies of the OECD is forecast to expand 3.1 percent overall this year, up from 2.8 percent in 2005, the Organisation for Economic Cooperation and Development said in its Economic Outlook, a twice-yearly report. 'The ongoing expansion is entering its fifth year,' it said."

"Global economic growth is speeding up and has spread to weak spots such as Japan and Europe without sparking a surge in inflation so far, the OECD said. Like the IMF, the Paris-based OECD said that current account imbalances, surpluses in China and Japan and deficits in the United States, posed a continuing and perhaps mounting threat.

"'A brutal unfolding of such imbalances would hurt the world economy,' chief economist Jean-Philippe Cotis said."

"The OECD made a first attempt to quantify how globalisation and cheap Chinese and broader Asian exports affect prices and it reported a greater inflation-limiting impact in Europe than in the United States. From 2001 to 2005, imports from China and other Asian countries knocked the U.S. rate of inflation down by 0.1 percentage points each year, and trimmed Europe's inflation rate by nearly 0.3 percentage points a year. Chinese exports have risen four-fold in 15 years."

"But Cotis said it remained to be seen whether this benefit was not more than offset by insatiable demand for oil, metals and other commodities in China and other rapidly developing economies of Asia, and the resulting upward pressure on prices. 'Experience over the past three years suggests commodity price pressures may significantly outweigh the disinflationary influence of low-cost manufacturing imports,' Cotis said."

"The OECD report did voice concern about what the organisation sees as more serious risks for the longer term. It said a risk of housing market downturns had become more pronounced in the United States, France and Spain but depended partly on future interest rate developments. It echoed the view that monetary policy was getting more restrictive after years of super-cheap lending but said it would be unwise to rush into more rate rises in the 12-nation euro zone, and that the Japanese central bank should not raise rates until next year."

"The OECD predicted a further quarter-point rise in the key U.S. policy rate to 5.25 percent, then a pause followed by a possible cut of the same size a year from now. 'A light 'tap on the brakes' seems necessary to keep the economy in balance,' the OECD said."

"It advised the Bank of Japan to keep rates at close to zero until the end of 2006 while awaiting proof that Japan's totally different problem of deflation was a thing of the past, suggesting a rise to 1 percent by end-2007 could follow."

"It reserved its most eye-catching advice for the ECB, which the financial markets believe is itching to raise its key euro zone rate from 2.5 percent as early as next month. The OECD assumed the ECB would raise rates by another 1.25 percentage points gradually, but only from later this year, once hard economic data had confirmed a full-blown recovery."

The international markets were rattled today. "Major Latin American stock, bond and currencies plummeted on Monday, and stocks were on their way to post their biggest one-day drops in two years, as investors stampeded out of emerging markets worldwide fearing higher interest rates and slumping commodity prices."

"The decline followed earlier slumps in Europe and Asia. Turkey's stock market fell 7 percent, and the Indian bourse fell 10 percent. The Indian bourse closed nearly 4 percent down, at a 10-week low. Hong Kong stocks closed off about 3 percent showing their biggest fall in two years."

"In Moscow, Russian shares crashed Monday in their biggest one-day percentage slide since 2003, forcing the MICEX exchange to suspend trading after its main index fell by 11 percent. That accelerated a nine-day selloff which has sliced over a quarter off the value of Russian stocks."

"South Africa, a gold exporter, saw its currency, the rand fall 1.7 percent, after hitting a 6-month low against the dollar, knocked by a sharp fall in commodity prices. The Turkish lira fell 1.7 percent."

"In Latin America, the stock markets in Brazil, Argentina, Mexico and Colombia fell over 4 percent, and Brazil's real currency, which bears on other currencies in the region, plunged 4.4 percent. The Brazilian and Mexican stock markets had hit record highs in early May and Argentina's bourse hit a record higher in April."

"Monday's slump in emerging market stock markets and currencies coincided with a jump in a key gauge of risk perception in emerging markets, the benchmark JP Morgan's EMBI+ index, which measures yield spreads between emerging market external government bonds and comparable U.S. Treasuries. The gauge widened 15 points to to 223 points while spreads on Brazil's debt, the biggest component and a spread closely watched by Brazilian domestic markets, widened 21 basis points to 286 points on Monday."

"Emerging market debt spreads are now at their widest levels since the end of January, marking a sharp reversal since May 1, when they were at the narrowest ever at 173 points, with Brazil at 214 points. Brazil's Bovespa index of the Sao Paulo Stock Exchange fell 4.44 percent to 38,0852."

"Mexico's IPC index fell 3.87 percent to 19,401 points. Ifthe index closes near its current level, it will be the largest percentage drop in a session since September 2002. The peso weakened 1 percent to 11.2960 pesos, bringing its loss so far this year to almost 6 percent. Argentina's stocks fell 6.9 percent on Monday, erasing all gains since the start of 2006 amid renewed fears of further U.S. interest rate increases."

"Some analysts said the Brazilian markets fall was fueled by statements in Vienna by the IMF's managing director Rodrigo Rato who said that the Fed may need to continue raising interest rates depending upon how economic conditions evolve in the United States. 'International Monetary Fund chief Rodrigo Rato said on Monday the withdrawal of stimulative monetary conditions globally is a 'healthy movement' especially given that inflationary risks are to the upside. But central banks need to time moves based upon conditions in their own regions.'"

"'I back the idea that the US monetary authorities have done a very important job in getting to a more neutral monetary policy regarding their own economy. Still some measures might be needed in the future.' Rato said."

"The end of monetary stimulation by all three of the world’s major central banks, the Fed, the ECB and the BOJ, and fears that mounting inflationary pressures worldwide may require more aggressive rate tightening has unsettled global financial markets in recent weeks."

"The dollar slipped against most major currencies Monday as the markets look ahead to the release of several U.S. economic reports later this week. The euro bought $1.2870 in afternoon New York trading, up from $1.2772 late Friday in New York. The British pound rose to $1.8872 from $1.8780. The dollar fell against the Japanese currency, dropping to 111.28 yen from 111.66 yen."

"The dollar bought 1.2036 Swiss francs, down from 1.2259 late Friday, and 1.1149 Canadian dollars, down from 1.1197."

"Gold futures climbed Monday, recovering from a three-week low to post their first gain in four sessions. 'Nearly completing a full $100 correction from highs recorded just 10 days ago, gold now appears to be a reasonable-enough buy to more and more investors,' said Jon Nadler, an investment products analyst at bullion dealers Kitco.com."

"No one is 'yet certain that the bout of profit-taking has come to an end, at the very least, increasing numbers of sidelined buyers feel more comfortable with the low $600's as a buying opportunity,' he said."

"Gold for June delivery rose 20 cents to close at $657.70 an ounce on the New York Mercantile Exchange, recovering from a low of $643.50, an intraday level the contract hasn't seen since April 28. July silver closed at $12.43 an ounce, up 7 cents, after a decline to a low of $12.21. July copper slumped 0.75 cent, or 0.2%, to end at $3.4615 a pound."

"July platinum shed $28.80, or 2.2%, to close at $1,284.60 an ounce, and June palladium dropped $10.05, or 2.9%, to finish at $341.75 an ounce."

Some reports on what is shaping up to be an interesting week. "Conditions in the financial markets are eerily similar to those that precipitated the 'Black Monday' stock market crash of October 1987, according to leading City analysts. A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board."

"'We are very uncomfortable about predicting financial crises, but we cannot help but see a certain similarity between the current economic and market conditions and the environment that led to the stock-market crash of October 1987,' said David Woo, head of global foreign-exchange strategy at Barclays Capital."

"Federal Reserve Chairman Ben S. Bernanke may be facing a central banker's nightmare this year: what (economist) Allen Sinai terms 'a mild dose of stagflation.'"

"Surging oil and commodity prices, a falling dollar and mounting doubts about the Fed's willingness to keep price pressures in check are all increasing the risks that inflation will quicken. At the same time, the Fed's two-year credit- tightening campaign is beginning to bite; with the housing market sagging and consumer confidence wavering, the result may be slowing growth."

"'The danger is the Fed loses its inflation-fighting credibility,' says Bill Healey.
Some investors wonder whether the Fed has let price pressures build by concentrating too much on core inflation, rather than focusing on overall numbers that include food and energy costs. 'People will lose patience that the core is the right measure if energy prices keep going up,' says David Hensley, an economist at JPMorgan Chase."

From CNN Money. "Indian police are watching out for possible suicides by brokers and investors after a steep market slide wiped out billions of dollars in share values, officials said on Monday."

"Indian shares clawed back to close nearly 4 percent lower on Monday, helped by buying from state-run mutual funds and financial institutions, after the biggest one-day points drop that halted trading for an hour."

"The Bombay Stock Exchange Ltd. and National Stock Exchange suspended trading for an hour after the market fell more than 10 percent at one point. The Bombay exchange which had a market value of $657 billion last week after falling 10 percent in the previous two sessions, slid as much as another 10 percent in early trade on Monday following sales of stocks held by brokers as security on behalf of their clients."

"'Gold has turned into brass. We are finished,' said S.S. Gupta, a middle-aged Mumbai broker who said he had lost millions of rupees in two hours of trading on Monday morning. With over five million retail investors, the city is one of India's main trading hubs where people have put in millions of dollars of their disposable income into the stock market."

"'I borrowed money to trade in the market. I lost it all in the past two days,' said 37-year-old Sanjay Joshi, a small investor. 'I don't know how will I repay my loans.'"

"In the 1990s, a stock market meltdown led to several bankrupt brokers and small investors committing suicide across India, some of them drowning in rivers or throwing themselves off highrises."

Forbes has the latest currency news. "The dollar rose against most major currencies Friday, rebounding from a slide that followed a drop in a widely watched barometer of U.S. economic activity. The euro fell to $1.2772 in late New York trading, well below the $1.2829 it bought in New York late Thursday. The British pound also slipped to $1.8780 from $1.8908."

"The dollar strengthened against the Japanese currency, climbing to 111.66 yen from 110.89 yen. The dollar bought 1.2259 Swiss francs, up from 1.2081 late Thursday, and 1.1197 Canadian dollars, down from 1.1206."

"Little new data was produced to move markets on Friday, but the dollar appeared to benefit from movements in other markets, according to Dan Katzive, a currency strategist at UBS AG."

"'The dollar's rally doesn't seem to be driven by any change in fundamentals,' he said. 'Rather, it seems caught up in the reduction of risk positions in other markets like metals and emerging markets. On the whole, the markets are still bearish on the dollar.'"

"Gold futures tumbled by more than $23 US an ounce Friday as the U.S. dollar gained strength against other major currencies and investors shifted assets out of the precious metal. The June futures contract for gold fell $23.40 to close at $657.50 US an ounce in New York trading. Just last week, gold was trading at a 26-year high of $732 US an ounce."

"On the TSX Friday, Barrick Gold shares dropped 12 cents to $34.09. Goldcorp fell $1.09 cents to $33.40. Despite the drop, many analysts remain bullish on bullion and are still forecasting the price will hit $800 US or higher by the end of the year."

"Commodity prices had their biggest weekly drop in more than 25 years, led by metals and grains, on speculation that higher interest rates will erode the appeal of copper, gold and silver as alternative investments. 'The speculators are piling out of the metals,' said James Vail, who manages $700 million in natural-resource stocks. 'There's been so much money made in this sector that people are trying to protect themselves. There was skepticism on the upside, and now there's panic on the downside.'"

"The Philadelphia Stock Exchange Gold & Silver Index of 16 companies, including Newmont Mining Corp., fell 12 percent for the week, the biggest drop since July 2002. Toronto-based Goldcorp Inc. led the declines, down 20 percent for the week, followed by New Orleans-based Freeport McMoRan Copper & Gold Inc., down 17 percent."

"Palladium fell about 6 percent, silver shed about 1.3 percent, and spot platinum also trekked south on liquidation in the metals complex and commodities generally. Silver prices also followed gold and fell to a three-week low of $12.11 an ounce, down 3.6 percent from $12.58/12.68 in the U.S. market. It was last quoted down 10 cents at $12.38/12.48."

"Palladium was the worst hit among the group, falling to a five-week low of $330. It last fetched $338/343 an ounce, versus $356/361 previously. Platinum dropped as low as $1,280 an ounce before marginally rising to $1,281/1,289, compared with $1,300/1,308 in New York. It had hit a record high of $1,336 this week."

"Platinum had not fallen as sharply as other precious metals because of positive market fundamentals, dealers said."

"After more than three months of a marathon run, the gold market took this week to finally begin a decent correction,' said Jon Nadler, analyst with bullion dealer Kitco. 'The market had obviously gotten ahead of itself and was overdue for a pullback of some magnitude,' he said."

"'It's a combination of options and technical-related selling. Potentially there is scope now for further pressure back even towards $600,' said James Moore, precious metals analyst at TheBulliondesk.com. 'It's a short-term correction. We are still firmly in a bull trend as there are far too many factors supporting gold.'"

"Traders said large deficits in the U.S. economy, inflation concerns, the overall weak dollar sentiment, tension in the Middle East and a slow growth in mine production were expected to provide support to the market. South Africa, the world's biggest gold producer, saw output fall by 10.9 percent to 68 tonnes during the first quarter of 2006 from last year due to worker holidays and restructuring, the Chamber of Mines said."

The Financial Times reports on what may be behind recent stock moves. "The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated."

"In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months, and these bets are now unravelling because volatility has increased sharply."

"'This is an incredibly sensitive topic but it looks as if some big investors are being forced into big moves because they need to hedge these [derivatives] positions,' one senior trader said yesterday. It is impossible to track this type of derivatives trading with accuracy, since the investors and banks engaged in these markets are extremely anxious to keep their positions private."

"One factor that suggests the market is experiencing some unusual dislocations is that in recent days there have been large price gyrations in European equity futures market after 4pm each day. This is the time when many banks and other large investors reassess their trading positions, and then rebalance their books by buying or selling assets."

"'These market movements could just be programme selling, but the timing suggests that something elseis going on,' said a senior derivatives trader at a leading bank. The issue that is believed to be triggering this turmoil is an instrument called a 'variance swap.' This is a type of derivative that has become very popular among hedge funds in recent months, since it allows them to place bets on the direction of stock market volatility in a leveraged manner."

"The banks that have been writing the derivatives contracts with these hedge funds have apparently been trying to hedge these positions by making large trades in conventional equity options."

"Some observers believe that these movements are temporary, and will quickly correct themselves after a few days. However, others argue that the self-reinforcing nature of these trends could create serious market problems in the coming days, particularly since there are relatively few investors willing to take the other side of these positions at present."

The New York Times. "'Many investors have taken large positions in stocks and they are getting spooked,' said James Glassman, senior United States economist for J. P. Morgan Chase & Company. 'These investors are often hedge funds and foreigners, and if the Fed is going to raise rates more than they thought, that makes it less attractive for them to hold onto their big positions.'"

"Indeed, the sudden unwinding in the market began on May 11, the day after Fed policy makers raised interest rates another quarter-point, to 5 percent, and left open the prospect that more interest rate increases 'might yet be needed to address inflation risks.'"

The Associated Press has the trading numbers for Thursday. "Gold and silver prices slipped Thursday, despite a sharp rise in U.S. jobless claims and the dollar's drop against the euro. However, without the effect of a partial government shutdown in Puerto Rico, jobless claims would have dropped from the previous week, the Labor Department said, suggesting strength in the job market."

"June gold futures settled $11 lower at $687.80 an ounce on the New York Mercantile Exchange. July silver fell to a low of $12.50 an ounce Thursday, before settling at $12.52 an ounce, down 72 cents from a day earlier. Platinum settled below the key $1,300-an-ounce level for the first time since Monday. July platinum closed $18.60 lower at $1,297.80 an ounce. Palladium also ended down at $372.50 an ounce, a loss of $10.60 on the day."

"The dollar fell against other major currencies Thursday, with the euro buying $1.2829 in late afternoon New York trading, up from $1.2741 late Wednesday."

"'Precious metals appear to be in a dilemma as to whether to continue their (welcome) correction or simply turn around and climb higher as dollar difficulties continue to undermine confidence and bolster defensive posturing,' said Jon Nadler, an investment products analyst at bullion dealers Kitco.com. 'The consensus among traders remains that several sustained closings above $690 to $700 might be required to resume gold's climb beyond the $730 and $750 marks,' he said."

"'Long-term gold investors are apparently undeterred, as they watch the sad saga of the U.S. dollar unfold while the yen and euro bask in a glow of strength,' said Nadler. 'Stock market weakness could also add to gold's current resilience as will, no doubt, the Iranian rejection of the terms of appeasement it was recently offered,' he said, referring to the recent European Union offer of certain incentives in exchange for Iran's halt of nuclear activities."

"Overall, 'the persistent impression among investors...is that inflation is making an unwelcome return in the near future and thus portfolios need the protection offered by counter-cyclical assets,' said Nadler."

A report from PIMCO. "The drop in oil and metal prices this week has raised fears that a speculative bubble in commodities is bursting, but giant U.S. fund manager PIMCO says fundamentals will hold up the asset class. 'In considering commodities, we need to take a more strategic view instead of trying to predict in very short term what prices might give,' said Bob Greer, senior vice-president and manager for real return products at the $600-billion-fund which mainly invests in fixed income."

"Greer, who oversees a $12 billion allocation for commodities at Pimco, said his model showed economics would support prices of natural resources. 'To have a speculative bubble, you need one or both of two things, one, a restricted supply of whatever it is that's going to bubble up, and two, you need to lose all concept of an objective measure of value.,"

"'The former was true in real estate.' he said. 'Real estate is in limited supply and you can certainly bid up the price of that limited supply. In the case of dotcoms, there was a classic case of losing all concept of what a measure of value was. Neither of that holds for commodities.'"

Some news from the IMF. "Facing its first annual loss in decades, the International Monetary Fund on Thursday turned to a group of international financial heavyweights to figure out how to pay its bills. Managing Director Rodrigo Rato named a panel of advisers, including former Federal Reserve Chairman Alan Greenspan and European Central Bank President Jean-Claude Trichet, to evaluate how to finance IMF operations."

"The IMF uses interest from loan repayments to finance its operations. The decision of Argentina and Brazil this year to repay their multibillion dollar loans early has left the fund facing an operational shortfall of $110 million this year. And Asian countries that were hit by financial crises in the 1990s have built up huge reserves so they would not have to resort to the IMF for bailouts should they encounter financial difficulties."

"The committee will address ways to finance the fund's operating costs rather than financing for loans to member countries, IMF spokesman Masood Ahmed said. Funds available for lending are at an all-time high of about $200 billion, Ahmed said. In the past the 184-nation lending organization has resorted to selling some of its gold reserves to finance operations."

Some Fed news. "The Federal Reserve is less likely to suspend its interest-rate increases after a report yesterday showed consumer prices rose more than expected, according to Richmond Fed President Jeffrey Lacker. 'The inflation outlook is at the borderline of acceptable and perhaps moving beyond,' Lacker told reporters. 'In circumstances like that, containing inflation has to be the primary focus.'"

"Lacker spoke minutes before a report from the Philadelphia Fed showed an index of prices paid by manufacturers for energy and other commodities jumped to a seven-month high. Inflation is off to the worst start to a year since 1990, a government report showed yesterday, rising at an annual rate of 5.1 percent in the first four months."

"The Fed is challenged by rising metals and oil prices just three months into Chairman Ben. S. Bernanke's term. 'Core CPI is clearly running near or above the upper end of the FOMC's comfort zone,' former Fed governor Laurence Meyer said yesterday in a note to clients. 'We now expect the committee to move to 5.25 on the funds rate' in June."

"Federal Reserve Chairman Ben Bernanke urged bankers to bear with growing pains associated with new global bank capital standards, which he said would improve bank supervision. The Basel II bank capital accord would more closely link capital requirements with risk and keep regulators abreast of rapid changes in the financial services industry, he said."

"'As we proceed toward the implementation of this framework, success will require that bank regulators, the banking industry, the Congress, and other relevant parties engage in an ongoing and frank dialogue, and that policymakers be open-minded, flexible, and ready to make needed adjustments,' Bernanke said."

"U.S. bank regulators in March issued draft rules to guide domestic implementation of Basel II. In publishing the rules, bank oversight agencies sought to assure the industry and the public that banks would be required to maintain prudent capital cushions and set conservative steps for U.S. adoption of the agreement. The proposal sets out safeguards that require continual regulatory review and a multi-year transition that includes capital floors to keep capital from declining too quickly or too far."

"The March draft came after a test-run of the standards yielded a surprising drop in capital at U.S. banks. That pushed Congress to call for a reevaluation and led regulators to delay implementation even though banks elsewhere in the world moved ahead."

News from Iceland. "Iceland's central bank raised its key interest rate sharply on Thursday in its latest bid to cool its overheating economy after a dramatic jump in inflation in the last few weeks."

"It raised its policy interest rate by three quarters of a percentage point to 12.25 per cent, the highest level for at least 15 years, and the second consecutive 75 basis points increase since the end of March."

"Icelandic inflation has surged from 4.5 per cent to 7.6 per cent since the end of March on the back of a consumption boom, rocketing house prices, wage rises and a sharp weakening of the Icelandic krona amid global foreign exchange turbulence."

"'Inflation is now three times the bank's target rate of 2.5 per cent,' said Arnór Sighvatsson, central bank chief economist. The bank warned further rate rises, after 14 in two years, would almost certainly be needed to counter inflationary expectations."

"The krona hit a low at the end of April and has since recovered some lost ground. Ingólfur Bender, head of research at one of Iceland's biggest banks, said he expected Icelandic interest rates would peak at around 13 per cent in September. Glitnir expects inflation to rise to 9 per cent at the end of the year but believes the economy will cool and the krona rise in 2007."

"'This should mean that inflation falls near to the bank's target by the end of next year,' Mr Bender said. The Icelandic stock market has fallen about 18 per cent from its peak on February 16."

A Bloomberg report on Latin American currencies. "The currencies of Brazil, Colombia and Mexico will extend declines into the third quarter on concern rising global interest rates will reduce the attractiveness of emerging market securities, according to Merrill Lynch."

"The Brazilian real, last year's best performer against the dollar, has weakened 6.8 percent since the Federal Reserve increase its key rate on May 10 and suggested it may boost rates further to control inflation. The Colombian peso has dropped 4.7 percent, while the Mexican peso has lost 2.9 percent."

"'It's not related to one specific market, or to elections in Brazil or Mexico,' said Daniel Tenengauzer, an emerging markets currency strategist for Merrill Lynch. 'It starts from the outside world; the Bank of Japan and ECB may start hiking; the housing market in the U.S. is cooling down. Hiking banks will lead to a drain in liquidity and global slowdown.'"

"The real dropped 3.3 percent to 2.2095 in New York yesterday and is down 5.9 percent this year. The Colombian fell 1.7 percent to 2455.50 yesterday and the Mexican peso declined 1.5 percent to 11.2052 per dollar. The real may weaken to 2.40 per dollar by the end of June, the weakest since August, Merrill Lynch said. The firm forecast the Colombia peso to weaken to 2450 in the same period, and its Mexican counterpart to settle at 11.10."

"Emerging market currencies, including the Polish zloty and the South African rand, fell yesterday after a U.S. report showed consumer prices increased faster than expected in April, adding to speculation that inflation may be accelerating."

"Monetary policy within each of the Latin American nations will be one of the key factors determining which currencies of emerging markets will be most vulnerable to investment outflows, Tenengauzer said. 'Central banks consistently missing inflation targets could get punished.'"

"The Brazilian central bank has lowered its benchmark lending rate seven times since September, to 15.75 percent. Policy makers in Mexico reduced the overnight lending rate to 7 percent from 7.25 percent on April 21."

A check on what is moving the markets this morning. "Stocks plunged Wednesday after a stronger-than-expected rise in consumer prices intensified Wall Street's fear that interest rates will keep climbing. Investors were disappointed by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI, without food and energy, also gained 0.3 percent, ahead of economists' prediction and adding to worries that soaring oil prices have begun to lift prices elsewhere."

"'The CPI data really kicked the market in the teeth today,' said Ken Tower, chief market strategist for Schwab's CyberTrader. 'So the question now really is where can we find some support?'"

"The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.17 percent from 5.1 percent late Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent."

"The dollar's retreat could propel inflation since more of the U.S. currency will be needed to purchase foreign-made goods. 'The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes,' Tower said. 'It's not so much that the dollar is depreciating, it's the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot.'"

"Gold futures eased Wednesday as the US dollar rose on data showing a rising rate of inflation. 'While investors are still keen to enter what remains a firm bull market long term, the short-term risk remains to the downside as heavily leveraged funds appear keen to lock in profits,' James Moore, an analyst at TheBullionDesk.com, said."

"Fueling the latest pressure on gold prices, the dollar rose against the yen and euro Wednesday, after a hotter-than-expected consumer-inflation report reignited speculation the Federal Reserve will keep lifting interest rates."

"Gold for June delivery fell to a low of $686.30 an ounce on the New York Mercantile Exchange, before closing out the day down $1.10, or 0.2%, at $691.80. It touched a high of $712.50 earlier in the session."

"Gold wasn't the only metal that retreated from earlier highs. July silver shed 30 cents, or 2.2%, to close at $13.24 an ounce, closing at its weakest level since late April despite an earlier peak of $13.74. June palladium rose $6.10 to close at $383.10 an ounce; July platinum finished up $13.50 at $1,316.40 an ounce."

Reuters has the trading numbers. "Gold bounced from one-week lows in Europe on Tuesday after support around $675.00 an ounce held and as a weaker dollar encouraged buyers back in to a market battered by Monday's heavy price fall, traders said. 'The $675/680 area was important..and as the dollar weakened, gold went higher,' one said."

"Spot gold hit an early low of $674.00 an ounce, then rebounded smartly to $689.90/690.90 late in New York, up from $682.60/683.60 late Monday in New York. 'We believe that this correction, which we had repeatedly warned was inevitable if unforecastable in both timing and extent, will be a temporary phenomenon,' broker UBS said in a report."

"But some players were not convinced gold selling was over. 'People have been quick to say, 'Oh, I'm glad to have that behind us and be back to this commodity bull roaring forward.' But I'm not ready to buy off on that completely. Given the steepness of the decline, the market needed to take a pause, whether a pause and we're at the end, or a pause before further declines,' said COMMERZBANK Vice President Paul McLeod."

"In other precious metals, platinum stood at $1,295/1,303 an ounce from $1,270/1,278 late in New York overnight and off last week's record high of $1,334. Palladium was at $369/374 from $363/369 in New York on Monday, when it touched its lowest in nearly three weeks at $352 on fund selling."

"Silver fell to its lowest in nearly three weeks to $12.80 before rebounding to $13.59/13.69 an ounce in New York. The metal was quoted at $13.29/13.30 on Monday in New York, compared with a 25-year peak of $15.17 last week."

"The Canadian dollar rebounded versus the U.S. currency on Tuesday as commodity prices recovered some lost ground, while the greenback was pinched by economic data. The currency finished at C$1.1079 to the U.S. dollar, or 90.26 U.S. cents, up from C$1.1136 to the U.S. dollar, or 89.80 U.S. cents, at Monday's close."

"Canadian rates are also seen near the end of their recent run of increases, but a quarter percentage-point hike is expected next week, which should help underpin the Canadian dollar against a U.S. dollar that has been falling hard and is expected to continue."

"'We're still looking to be short U.S. dollars against Canada. We're looking for commodity currencies to outperform over time, and the Bank of Canada is still maintaining a flexible yet hawkish attitude toward monetary policy,' said Jack Spitz, director of foreign exchange at National Bank of Canada."

"Suspicions that the U.S. economy is softening have prompted economists to price out future U.S. rate hikes. With U.S. treasuries outperforming, U.S.-Canada yield spreads narrowed, a shift from previous sessions. The 30-year bond climbed 75 Canadian cents to C$120.60 to yield 4.435 percent. In the United States, the 30-year treasury yielded 5.215 percent."

And Bloomberg has this on Asia. "For Asia, a rising yen would arguably be more important than a stronger yuan. While China gets all the headlines, its economy is dwarfed by Japan's $4.6 trillion one. The yen is Asia's only major international currency, and Tokyo is home to the region's largest markets."

"A stronger yen could empower other Asian governments to scrap their weak-currency policies. It also might make China more comfortable with a rising yuan."

"What's often missed in Asia is that a strong currency is a sign of confidence. It helps pull in overseas capital, boosting stocks and holding down bond yields. Firmer currencies also would help Asia kick its addiction to exports."

"Things aren't that simple for China, of course. Allowing the yuan to strengthen sharply could make it harder to create the hundreds of millions of jobs needed to maintain social stability. Yet China is moving in that direction, something evidenced by the yuan's rise this week."

"Tolerance for a stronger yuan isn't about appeasing critics in the U.S., it's about getting control of an economy that's growing faster this year than many economists expected."

"Money-supply trends say it all. China's M2, which includes cash and all deposits, in April grew almost 19 percent from a year earlier. It's not just that growth rate that's alarming, but also the slight acceleration from March. China's central bank raised short-term interest rates last month, yet it needs to get more serious about restraining lending."

Some reports on what's moving the markets. "The dollar fell after government reports on inflation and housing starts boosted speculation the U.S. economy is slowing enough for the Federal Reserve to stop raising interest rates. 'Both give credence to the Fed taking a pause in June and having less of a need to tighten rates in the second half of the year,' said Tim Mazanec, senior currency strategist at Investors Bank & Trust. 'The dollar is going to weaken.'"

"The dollar fell to $1.2853 against the euro at 8:59 a.m. in New York, from 1.2796 yesterday. The U.S. currency dropped to 109.90 yen, compared with 110.49 yesterday."

"'The inflation data is the key arbiter of what the Fed is going to do,' Sophia Drossos, a currency analyst at Morgan Stanley, said before the producer price report. 'If pressures are just temporary, the Fed will probably take the opportunity to pause in June. It still points to the downside for the dollar.'"

"Gold futures headed higher Tuesday morning as weakness in the U.S. dollar helped the metal recoup some of the more than $36 an ounce it lost in the past two sessions. 'Buoyed by short covering and scattered physical buying, gold made an honest effort to recover from Monday's slump,' said Jon Nadler. 'It did not take much for the dollar to resume its downward spiral, as structural imbalances continue to put doubts into the minds of its would-be holders,' said Nadler."

"Peter Grandich said he believes 'the correction appears to have more work left to be done on the downside.'"

"Gold for June delivery rose $8.50 to $693.50 an ounce on the New York Mercantile Exchange after reaching a high of $690.90. July silver tacked on 6.5 cents to trade at $13.40 an ounce after losing more than 6% on Monday. July copper added 8.5 cents to $3.755 a pound. June palladium was up $2.25 at $377 an ounce and July platinum climbed $19.20 to $1,304 an ounce."

"The Canadian dollar rose against the U.S. dollar on Tuesday. At 9:01 a.m. (13:01 GMT), the currency was at C$1.1087 to the U.S. dollar, or 90.19 U.S. cents, up from C$1.1136 to the U.S. dollar, or 89.80 U.S. cents, at Monday's close."

"'The market is going to reinforce the view that the Fed's on pause, given the steep decline in housing starts and core producer prices,' said Beata Caranci, an economist at TD Securities. 'So it would widen the spread diversions between Canada and the U.S. with Canada still biased toward another 25 basis points, so that's a net positive for the (Canadian) dollar.'"

"China's official exchange rate weakened significantly on Tuesday, the central bank announced, defying a gain the day before that helped break through the psychologically important 8 yuan per U.S. dollar level. The dollar, measured by the central parity rate announced by the People's Bank of China (PBoC) before the market opens each business day,bounced back to 8.0150 yuan. The yuan depreciated by 168 basis points, the biggest day-on-day decline since a revaluation reform last July."

"At a time when international currency tensions are at their highest in two decades, Japan's Finance Minister Sadakazu Tanigaki has defied American warnings to stop jaw-boning the US dollar. Mr Tanigaki yesterday addressed the touchy issue of currency intervention when he told an Upper House finance affairs committee that Japan's $US860 billion ($1.13 trillion) foreign currency reserves were 'set aside for intervention in the future.'"

"'We can be ready for such an occasion to use them, but I would not comment how high such a possibility can be.'"

"Mr Tanigaki said the Bank of Japan's vast holdings of US Treasuries could be sold in future to fund intervention operations. However it's doubtful he was considering the current environment because a T-bond sell-off would further destabilise the US dollar, which is precisely what Mr Tanigaki does not want."

"Washington tried to engineer a currency easing in 2003, in spite of the overt commitment to the so-called 'strong dollar policy' that continues today, but was frustrated by a massive Japanese campaign to buy US dollars. During Mr Tanigaki's first seven months as Finance Minister, the BoJ bought more than $US200 billion. After intense pressure from the Americans and Europeans, the BoJ quit the market in March 2004 and has not returned."

"US Treasury officials have tried since the G7 finance ministers meeting on April 21 to persuade Mr Tanigaki to stop his 'verbal interventions' to prop the greenback. The G7 communique called for greater 'exchange rate flexibility' from Asian economies, though only China was named."

An update. "The U.S. dollar rebounded from a one- year low against the euro on speculation the five-week slide versus the common currency doesn't reflect the outlook that the Federal Reserve may continue to raise interest rates. The dollar appreciated to $1.2796 against the euro at 5 p.m. in New York, after sliding to $1.2972, the weakest since May 5, 2005, earlier today. The U.S. currency rose to 110.33 yen from 110.02 on May 12."

"It advanced against all 16 of the most actively traded currencies tracked by Bloomberg. Bets to sell the dollar against six of the most actively traded currencies rose to the largest amount since December 2004, according to data from the U.S. Commodity Futures Trading Commission. So-called short dollar positions against the euro, yen, Swiss franc, British pound, Australian dollar, and Canadian dollar widened to $20.4 billion in the week ended May 9."

"'The dollar sell-off has been very sharp and overdone,' said Michael Woolfolk, a senior currency strategist at Bank of New York in New York. 'It was a matter of when, not if, we'd see a corrective dollar relief rally.'"

The original post: Some reports on the active currency and precious metals trading. "China's currency, the yuan, broke through the long-standing barrier of eight to the US dollar, in a swift response to last week's decision by the US Treasury not to declare China a 'currency manipulator.'"

"The People's Bank of China sets each morning a central parity rate for the yuan, beyond which it is permitted to trade, in either direction, by 0.3 per cent through the day. The bank set the rate at 7.9982, up from 8.0082 on Friday. Last July the bank switched from a peg of 8.3 yuan to the US dollar to a valuation against a basket of currencies, albeit one in which the greenback continues to dominate, and at the same time revalued by 2.1 per cent."

"Most analysts believe China will not pursue further revaluations by step, but will continue to let the yuan steadily trade up. Goldman Sachs China strategist Thomas Deng said: 'Our currency analysts reaffirm their dollar-bearish view, and expect the yuan to appreciate against the US dollar to 7.34 in a 12-month horizon, representing over 9 per cent of potential currency gains.'"

"The United States, which has been coping with a record-high trade deficit with China, welcomed the rise in that country's currency. 'Greater flexibility in China's exchange rate is something we've long advocated,' Treasury Department spokesman Tony Fratto said Monday in response to the appreciation in China's currency, called the yuan or the renminbi."

"The dollar may fall for a fifth week against the yen, the longest stretch since December 2004, as investors slow purchases of U.S. assets and anticipate the end of the Federal Reserve's cycle of interest-rate increases, a Bloomberg survey showed."

"'I am getting more and more dollar bearish,' said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. 'Nothing, not even strong economic data, could stop the dollar's falling recently. The market's focus is shifting from interest rates to the global imbalances.'"

"Gold futures tumbled as much as $32 an ounce Monday to touch a one-week low as a rally in the U.S. dollar helped extend a pullback from 26-year highs. Friday marked the beginning of a '10% to 20% correction that can literally take place in a manner of days, but more likely weeks, since copper, gold and silver had extremely high overbought readings,' said Peter Grandich."

"Gold for June delivery fell to a low of $679 an ounce on the New York Mercantile Exchange, a level it hasn't seen since May 8. The contract was last down $28.80, or 4.1%, at $683 an ounce. The precious metal has now lost $49 since reaching a high of $732 in electronic trading on Friday."

"July silver dropped $1.015, or 7.1%, at $13.22 an ounce after reaching $13.05, its lowest level since April 28. July copper shed 13.9 cents, or 3.6%, to $3.725 a pound.
June palladium was knocked down by $27.35, or 6.9%, to $371 an ounce. It touched a four-year high of $409 on Friday. July platinum slumped $40.50, or 3.1%, to $1,278 an ounce, after running up 11% the prior week."

"Prices for platinum failed to find support even after Johnson Matthey said platinum supply was in deficit for a seventh year in 2005 due to surging demand. The London consultancy also said trend should accelerate this year amid increasing demand for the metal from Europe's automobile industry."

A wrapup on a busy week for money and metals. "Gold prices fell Friday, but ended the week with a gain of more than $30 an ounce. The metal rallied sharply this week above $700 an ounce to 26-year highs, fueled by fund buying. The dollar was mixed Friday, gaining ground against Japan's yen and paring losses against the euro following a report that showed the U.S. trade deficit narrowing in March."

"After climbing more than 6 percent over the past three days, June gold futures pulled back to settle at $711.80 an ounce on the New York Mercantile Exchange, down $9.70 on the day. The contract moved as high as $732 an ounce in electronic trading, the highest futures level since September 1980."

"Elsewhere in metals, July platinum settled up $22.90 at $1,318.50 an ounce, extending Thursday's strength to touch a record at $1,340. June palladium lost $1.65 to settle at $398.35 an ounce, after trading at a four-year high of $409.July silver dropped 70 cents to settle at $14.235 an ounce after reaching a 25-year high of $15.20 on Thursday."

"The Philadelphia Gold and Silver Index was down 4.4 percent at 158.77 and the CBOE Gold Index retreated to 160.96, down 4.7 percent, this after touching a lofty 175.05."

"The Amex Gold Bugs Index stood at 368.03, losing 5 percent. Among individual standouts, shares of Randgold Resources fell 12.1 percent to $21.69 and Hecla Mining lost 9.3 percent to trade at $5.49."

"The dollar fell to one-year lows against the euro and British pound on Friday despite an unexpected decline in the U.S. trade deficit. In afternoon New York trading, the euro rose to $1.2914, up from $1.2839 late Thursday in New York. The British pound jumped to $1.8932 from $1.8792 the day before."

"The dollar also dropped against the Japanese currency, falling to 110.03 yen from 110.63 late Thursday. In other trading, the dollar bought 1.1979 Swiss francs, down from 1.2123 late Thursday, and 1.1093 Canadian dollars, up from 1.1011."

"A report from the U.S. Commerce Department that the gap between what the country sells abroad and what it imports narrowed to $62 billion in March, the smallest deficit in seven months, failed to boost the dollar against the euro, which has been trading strongly all week. Traders said the widespread bearishness on the dollar made it hard for the U.S. currency to sustain any strength, despite the positive news."

"'Sentiment remains extremely poor,' Marc Chandler, global head of currency research at Brown Brothers Harriman said."

"The Canadian dollar fell against the greenback on Friday, hampered by disappointing economic data, weaker commodity prices and uncertainty over the likelihood of a Bank of Canada interest rate hike this month. Weaker oil and gold prices, key drivers behind the currency, coupled with a surprise drop in Canada's March trade surplus, conspired to push the loonie down."

"Statistics Canada said the trade surplus narrowed sharply in March to C$5.14 billion, shy of analysts' forecasts of C$6.05 billion."

"'What's influenced price action today has been position squaring, short covering and Canada losing on the crosses,' said Jack Spitz, director of foreign exchange at National Bank of Canada. 'Canada's been quite a loser against euro and yen and, in fact, sterling.'"

This Market Watch article sizes up the Feds' performance. "All eyes are on the Fed, and one respected institutional service thinks there are reasons to dislike what they're seeing. It's nearly eight years since the Long-Term Capital Management hedge fund cratered. At that time, the Federal Reserve engineered an extraordinary bailout on the (highly debatable) theory that the financial markets would otherwise be fatally disrupted. What would happen if there was another LTCM today?"

"The Connecticut-based institutional service Bridgewater Daily Observations, which itself manages over $150 billion, has been asking this disturbing question and getting a fairly disturbing answer. In recent issues, Bridgewater pointed out that money invested in hedge funds is now five times higher than in 1998, when the LTCM debacle occurred."

"Bridgewater also tried to show that hedge funds are vulnerable to the same things: 'tight credit, widening credit spreads, and falling equity markets.'"

"Bridgewater's summary: 'We estimate that an unfavorable environment, in degrees comparable to 1994, 1998, and 2000/01 will cost..equally to about 2/3 of the S&L crisis and twice the size of the Mexican default in 1994, i.e. it is material, but not system threatening.'"

"That's the good news. The bad news: 'the system can withstand a moderate economic crisis (like those that occurred post-1993) but not a major one (like 1974).' Bridgewater estimates that losses with the current hedge fund regime would have been $80-$100 billion in the post-1993 crises, $300-$350 billion in 1974 (and $500-$600 billion in 1929)."

"And then there's the REALLY bad news: Bridgewater also expects a major international system crunch exactly like the collapse of the fixed exchange rate Bretton Woods system, which lead directly to the inflationary crisis of 1974."

"Wednesday morning, Bridgewater's Daily Letter was headlined, 'The Tremors Before the Big One' and concluded: 'We believe the odds of a dollar/ U.S. debt crisis in the next twelve months are elevated (say 50 percent).' A week earlier, Bridgewater pointed squarely at China's manipulation of its exchange rate and at new Fed Chairman Ben Bernanke's handling of the situation."

"In an issue titled 'Bernanke's Test begins,' Bridgewater wrote: 'Today's imbalances are much larger and global in scale. They have been sustained for a longer time because China, and many other countries, are not defending a declining currency with shrinking reserves. Instead, they are resisting rising currencies with increasing reserves, a much more sustainable action.'"

"The result, according to Bridgewater: 'bigger imbalances that have taken longer to build, have been sewn deeper into the economic fabric, and will take much longer to unwind, with dramatically larger financial consequences.'"

"Bridgewater's savage summary: 'Now you've got a new, academic, waffling Fed chairman, a falling dollar, a falling bond market, rising gold and commodities prices, and an underperforming stock market all with a giant current account deficit.'"

"Its caustic conclusion: 'Bernanke is rapidly losing control.'"

Some reports on the volatile currency and precious metals action. "U.S. precious metals shot to fresh highs on Thursday, carried by another wave of investment buying. Aggressive buying by funds and speculators drove the latest gains in a long-time rally fueled by strong demand, a weak U.S. dollar and growing diversification into commodities, dealers and analysts said."

"June delivery gold finished up 2.2 percent, or $15.80 higher, at $721.50 an ounce on the New York Mercantile Exchange. A $1 jump in crude oil futures helped spark some of the gold buying as a hedge against inflation, dealers said. Oil was at $73.25 a barrel."

"Less hedge selling by miners, strong interest in exchange-traded funds, soaring copper, and near-term supply tightness in platinum also supported gold, analysts said. As to the dollar, analysts said its upside was limited as investors increasingly expect U.S. interest rates to peak soon, after the Federal Reserve raised rates for the 16th straight time Wednesday, taking the fed funds rate to 5 percent. The dollar fell to a 12-month low against the euro on Thursday, benefiting gold as a U.S. currency alternative."

"Silver rose above $15.00 an ounce for the first time since January 1981, rising as much as 5.9 percent on Thursday. COMEX July silver settled at $14.9350, up 65.5 cents or 4.6 percent, dealing from $14.15 and $15.20. Spot silver advanced to $14.94/15.04, versus its last close at $14.20/30. The London fix was at $14.43."

"Across the floor at NYMEX, July platinum futures reached a high of $1,299.50 an ounce, before ending at $1,295.60, a rise of $35.90 or 2.9 percent. Spot platinum climbed to $1,293/1,298. June palladium shot up $9.80 or 2.5 percent to $400 an ounce. Futures earlier hit a four-year high of $401.10. Spot rose to $395/400."

"Investors are now looking ahead to Friday's release of the U.S. trade deficit for March, which is expected to widen to $67 billion. 'We really need a trade (deficit) number below $62 billion for a positive dollar reaction,' said Kathy Lien, chief fundamental analyst at Forex Capital Markets. 'Anything worse than $67 billion will further cause an extension in the euro to $1.30,' she added."

"Speculation that China and other Asian countries may be turning to gold as a way to reduce their foreign reserve holdings, mostly denominated in dollars, on a weakening U.S. dollar is also spurring investor sentiment, participants said."

"'With all the rumors still about of China and the Iran issue still playing on people's minds, the dollar's not really driving gold at the moment,' said Darren Heathcote, trading head at Rothschild Australia. 'The pure weight of funds going into commodities is driving prices, not just fundamentals,' he said."

"Despite gold's steep rise, some advisers say it could go higher. Although it is approaching its nominal peak of $850, it is far below its real or inflation-adjusted high. According to the Bureau of Labor Statistics inflation calculator, $850 in 1980 would be worth $2,100 today."