The price of spot gold rose to a one-week high above $654 per ounce in late Asian trade today, pulling back just $1 as London got down to business mid-morning.

"There was some bargain hunting and physical buying this morning," said a Singapore gold trader to Bloomberg.

But the focus remains gold's vulnerability to action in the stock and bond markets.

"The correlation between equities and gold has been quite strong," noted Andrew Harrington of the Australia & New Zealand Banking Group earlier.

"The recovery in the stock market has helped forge a bottom in the gold market," said Tom Hartmann, a commodity broker at Altavest Worldwide Trading in California, on Wednesday.

"Gold usually has a reverse correlation with stocks and the Dollar," added a Japanese trader today.

"But that isn't the case now." (Was gold ever truly a 'safe haven'? Click here for the full story now...)

Action on the foreign exchange markets also continues to lead the gold market.

The decline in the British Pound – previously a favorite destination for carry-trade cash shorting the Yen – has helped put the Sterling price of gold up at £338.50 today, a rise of 4.5% from the start of this year.

"Investors are buying gold and selling Yen," says Jonathan Barratt of Commodity Broking Services in Sydney. "Everyone wants to get a piece of it."

"It is one of those days where really if you are not long gold then really you are nowhere," says Barratt.

As for interest rates, Australia stuck yesterday and New Zealand just raised to 7.50%, a record high that's already put the Kiwi Dollar nearly 1% higher on the forex markets.

South Korea meantime won't budge, while everyone expects Frankfurt to hike at lunchtime today – all 38 economists surveyed by Bloomberg, in fact.

But the Bank of England looks set to stick at 5.25%. Caught between the carry-trade and the housing bubble, Mervyn King and his colleagues have so far only managed to make Sterling stronger by rising interest rates.

The Bank of England has failed to tackle its mandate of controlling inflation, now approaching a 15-year high. The UK money supply is growing at 13% year-on-year.

House prices gained 1.8% in Feb. alone. The underlying trend in consumer spending shows annual growth of 3.0%, up from 2.1% at the start of this year.

Jean-Claude Trichet and his colleagues at the ECB have also managed to raise interest rates without restricting the growth of money and credit.

Inflation in the cost of living slowed to 1.8% in Feb., but the money supply remains the ECB's official target – and it's racing ahead, rising 9.8% in Jan., its fastest pace since 1990.

Now Germany's biggest labor union, IG Metall, is demanding a 6.5% pay rise for its 3.4 million members.

But higher rates to curb the money supply may prove politically difficult given the ailing Eurozone economy.

Retail sales in Germany, for instance, fell 5.1% in Jan. from the month before. Factory orders dropped 1% on falling export demand – a sign, perhaps, of a slowing global economy.

Back in the gold market, we do not believe that the metal is about to turn around and shoot back to the highs," says John Reade at UBS in London.

Short-term speculative positions in gold are now held in the futures market, notes Reade – "mostly via Comex and CBOT futures, also to a lesser extent on the Tocom futures exchange in Japan" – rather than physical bullion.

By Monday, reported the Comex yesterday, open interest in gold futures had fallen 6% from a week earlier.

That shows liquidation of speculative positions, but with 388,841 lots still open in total, gold remains a busy trade.

Is it any wonder the metal has been rising and falling in line with other assets including stocks and bonds?

Click here to read more now...