*****gold on the precipice***, page-20

Hi Searay,

If you are going to argue the deflation theme, I suggest that you take a look at my post of yesterday (18/6) concerning the May CPI figures in the USA.

Pressure continues in the physical goods sector of the market, but increasing inflation is breaking out in the services sector.

The services sector was indeed the main contributing factor to the 0.3% monthly rise in "core" CPI (ie: >3.6% annualised).

Eventually, the rising services' prices will feed back into the physical goods economy, resulting in an uplift factor there, as well (although, lagging by 12 -18 months).

With services inflation having risen by ~4.5% throughout 2002, and now trending towards 5%, it is likely that some of the 2002 inflationary impact will soon start to be felt in the physical goods sector (ie: the price of physical goods will start to rise to compensate for some of the services' costs).

On current trends, I would expect to see this emerging from September, onwards, meaning that both physical and services inflation will be rising by year end, and the FED will be moving to tighten by 25bp at its February 2004 FOMC meeting.

If, however, by early 2004, "core" CPI is trending above 4% (annualised), then the FED may well move to tighten by 50bp (spread over 2 consecutive FOMC meetings).

Either way, the FED will tighten during 1H04, and the FED RATE at 30 June 2004 will be above where it is today (ie: even allowing for the possibility of a 25bp rates reduction at its meeting next week).

Finally, for the record, the services sector accounts for ~45% of national economic output in the USA, and is growing. By mid decade, the services sector is expected to grow to ~50% of the USA economy and will trend closer to 55% by decade's end.