Good Morning,

Bullion prices stabilized a bit overnight after crude oil climbed above $138 and after the dollar gave up some of its gains against the euro. Also supporting gold this morning were geopolitical jitters following reports that Iran's nuclear installations had been attacked. The US said it had no knowledge of such action. Uncertainty ahead of the two-day Fed meeting is keeping the trade on the nervous side, as is digesting the (unconfirmed) report making rounds on the market floor that a hedge fund unloaded some 2 million ounces of gold yesterday morning.

Tuesday's New York session opened with a $4.70 gain for gold at $888.40 per ounce as players were eyeing a $1.70 gain in crude oil amid continuing Nigerian supply disruptions and ahead of the release of consumer confidence and housing values data, both of which are expected to paint a picture resembling Edvard Munch's The Scream more than anything. The dollar was already skirting 73.30 on the index as none of the surveyed analysts expect anything but steady rates with a small dose of anti-inflation rhetoric from the Fed tomorrow.

Silver added only one penny at $16.70 and the noble metals group drifted seeking direction with platinum off $1 at $2034 and palladium down $2 at $463. Supply fundamentals in the complex are being offset by worries that auto sales could fall through the floor in the wake of current gas prices. Certainly, new SUVs are choking dealer sales lots while old ones are slipping by the minute in the BlueBook price guide - this, as drivers suddenly demonstrate they can make do with nine less cupholders and ten square feet less cargo room in more conventional vehicles.

This is not to say that everyone sees nothing but gloom ahead on the energy front. In fact, some would have you believe that if you can now pick up that yellow Hummer you've always secretly lusted for, at half price, you might just want to do it. Why? Because in the calculations of energy specialists, if we get rid of the gamblers who have infested the oil markets of late, we can have the good old days at the gas pump right back. Marketwatch fills us in on the details:

The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday. Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets. Krapels said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets.

Record oil prices are inflated by speculation and not justified by market fundamentals, according to Gheit. Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel.

Energy speculation has become a growth industry and it is time for the government to intervene, said Rep. John Dingell, D-Mich., chairman of the full committee. We need to consider a full range of options to counter this rapacious speculation. It was Dingell's strongest statement yet on the role of speculators. Dingell introduced a bill on June 11 that would ask the Energy Department to gather the facts on energy prices, including the role played by speculators.

There are two kinds of speculators in the futures markets, Masters said. Traditional speculators are those who need to hedge because they actually take physical possession of the commodities. Index speculators, on the other hand, are merely allocating a portion of their portfolio to commodity futures. Index speculation damages price-discovery mechanisms provided by futures markets, Masters added.

The committee will likely consider legislation that would rein in index speculation by imposing higher-margin requirements; setting position limits for speculators; requiring more disclosure of positions; and preventing pension funds and investment banks from owning commodities. Both major presidential candidates have supported closing loopholes that encourage speculation in the energy markets.

Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee. Stupak introduced a bill on Friday that would limit index speculation.

Congress has grown increasingly concerned over speculative investors' role in the energy market in comparison with those buying futures contracts to hedge against risk from price changes. Lawmakers are expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on speculative trading in energy futures in some markets.

Dingell is looking into any legal loopholes that may have contributed to speculation in energy markets. In 1991, according to documents provided by the Commodity Futures Trading Commission to the committee's investigators, the agency authorized the first exemption from position limits for swap dealers with no physical commodity exposure. This began what Dingell said was a process that has enabled investment banks to accumulate enormous positions in commodity markets.

While $900 remains a challenge at the moment, gold looks fairly well supported ahead of the Fed meeting. The rate decision is not nearly as significant to participants as what the post-meeting communique will contain. Odds are still showing rate hikes in the equation, come August and September. Stagflation risks pose tricky problems and the Fed will have a task similar to a game of Operation when it takes out various instruments with which to tackle current conditions.

Look for continued nervous trading and do not discount spikes (in either direction) as statistics and/or further fund liquidations could quickly yield a mini-frenzy.

Happy Trading