By Jon Nadler

Gold prices took off for higher ground overnight as the divergent oil and dollar fueled additional speculative interest in the metal.

There is still somewhat of a disconnect in the fact that oil as well as the dollar are scaling new highs and lows respectively while bullion is stuck some $100 away from its own recent record. Some analysts have noted that investors are possibly judging the energy complex to be a better hedge against current conditions than gold is and are thus piling into that niche for the moment. Oil has risen 79% in the past 12 months versus gold's 35% gain over the same period.

Demand for commodities from hedge funds and other speculators has probably shifted to oil in the past few weeks, said Stephen Briggs, an analyst at Societe Generale in London. They may judge energy is a better hedge against inflation and a weaker dollar than gold, he said. this, from Bloomberg this morning.

Things looked bleak for the US dollar this morning as reports of rising European inflation figures scaled back expectations of ECB rate cuts any time soon. The markets appeared to want to overtly contradict and/or test the 'resolve' shown by the G 7 to address undesirable volatility and extremes in the currency markets. The greenback fell to 1.5967 vis a vis the euro while oil was at one point seen at $114.50 per barrel.

New York spot trading opened with a $10.50 gain this morning, quoted at $939.20 an ounce as participants awaited US housing starts figures, but expected them to reveal possibly the lowest level of such activity in 17 years. Amid all this, earnings at JP Morgan fell by about half, as the firm earned a net of $2.4 billion in Q1. It is widely thought that The Street will greet such numbers with glee, as the mere fact that earnings were actually tallied at all at the firm in this challenging environment (according to Morgan), is nothing short of a feat usually seen in David Copperfield's shows.

Silver rose 28 cents to $18.13 while the noble metals reversed direction as well and platinum added $33 to $2009 and palladium climbed $11 to $463 per ounce. The dollar was attempting to hold near 71.45 on the index, as it took a battering from the overnight spike in oil and the EC inflation surge. Currency strategists at Japan's Daiwa and Nomura believe that the dollar is scraping bottom as we speak, and that a rebound is in the making due to the coming end of the Fed's rate cutting campaign as well as slowdowns in Japan and Europe.

Such potentially positive dollar developments were also echoed by gold analysts as quoted by Bloomberg:

While the tactical outlook for gold is more comfortable now than when gold was up at and above $1,000 an ounce, we are not banging the table to buy it here, John Reade, an analyst at UBS AG in London, said in a report today. ``The lack of performance in gold may be an indication that investors are beginning to see an end to U.S. dollar weakness and any sign of the dollar basing will undercut the story for gold.

On a final note, China's economy started to show signs of slowing if we can call them that as it posted a 10.6% growth rate in Q1, down from 11.2% in the previous quarter. Despite such a small contraction, the country is poised to possibly overtake Germany and become the third largest economy globally during 2008. Such growth rates are not necessarily what officials want, given the threats of inflation and speculative overheating. The central bank raised reserve requirements for large banks for the 16th time in two years as a result of the data.

Look for more firmness in the interim, as the weak housing starts data and blazing oil prices help gold aim back to $950/$965. However, be on alert for fast turns in either oil or the dollar as profit triggers remain very much armed, right next to the 'buy' buttons of many a fund.

Jon Nadler is Senior Analyst with Kitco Bullion Dealers Montreal

Japan Energy Investment Inflation