Gold fell back at lunchtime in London on Thursday, slipping 0.7% towards this week's low of $955 per ounce as Western stock markets continued to rally on falling oil prices.

Crude oil has now dropped $12 per barrel from Tuesday's high above $146.

The FTSE100 index here in London today jumped 3.2% from Wednesday's three-year low beneath 5,100.

On the currency markets the US Dollar held steady after yesterday's bounce from fresh all-time record lows as J.P.Morgan reported better-than-expected second quarter results, down 53% from 2007.

Debt yields rose as bond prices fell. Broad commodity prices, as measured by the S&P GSCI index, stood 1% lower as the US open drew near.

"It takes very little to see Gold make a comeback these days," notes the latest Asian Metals Monthly, produced by Virtual Metals on behalf of Fortis, the giant Dutch banking group.

"The trouble for gold investors is that there are too many times when it needs to make a comeback. The rally in June and July (so far) has been impressive."

Pointing to the sharp reduction in forward "hedge book" gold sales by AngloGold – the world's fourth largest miner – between April and June, "the Gold Price will increasingly depend on investment," VM goes on.

"This is already substantial but it could go much higher if the financial system threatened to implode."

On a fundamental basis, "the elevated credit risk and heightened inflation awareness should ensure good support for gold and silver," agrees Walter de Wet at Standard Bank in Johannesburg.

Gold "still offers a short-term bullish picture," writes Phil Smith in his Market Technicals note for Reuters India today, "and our splendid triangle formation [repeating the pattern seen last Nov., just before Gold leapt 30% inside three months] is not letting us down."

Smith's short-term target remains at $1,020 per ounce. "The bullish run which started mid-June stalled briefly but [it] has broken through resistance at 953...This now becomes support."

On the currency markets today the Euro failed to hold a brief rally to $1.5890, despite a report from the Financial Times that the world's largest state-owned sovereign wealth funds are cutting their US Dollar investments.

"One big sovereign fund in the Gulf has cut its Dollar-denominated holdings from more than 80% a year ago to less than 60%," the FT explains, "while China's State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its Dollar holdings."

The Gold Price in Euros slipped this morning to a three-session low of €604 per ounce.

For British investors battered by a 20% drop in the FTSE share index and a 16-year jump in inflation, the price of Gold slipped to a one-week low beneath £480 per ounce.

"It's a mistake to think that inflation will fall if the economy weakens," warns European Central Bank member Nout Wellink in an interview with Elsevier magazine today.

"We saw that in the 1970s. If you don't act, you get high inflation and low growth – stagflation.

"It will take ten years before you get it back under control if you don't intervene." (Can Recession Kill Inflation? Read on here...)

Taken as a threat of further ECB rate hikes ahead, Wellink's comments stand in sharp contrast to Fed chairman Ben Bernanke's testimony to the US Congress this week.

Only one Fed member, Dallas bank president Richard Fisher, voted for a rate hike at the US central bank's June meeting.

Last month the cost of living in America rose at its fastest pace since 1982. It has risen by almost 5¢ in the Dollar since the Fed began slashing interest rates in Sept. '07, causing a collapse in the US currency's market value.

According to the latest Fed minutes, however, Bernanke's team remain convinced they can boost economic growth by keeping interest rates – and therefore the Dollar – low.

"[We] see the risks to economic growth as skewed to the downside," the committee agreed.

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