Good Afternoon,

Most of the commodities which rose last Friday eased today whilst formerly falling niches such as stocks and the dollar regained some lost ground on the day. Following last Friday's memorable spikes in oil and in gold, (as was expected), some posturing did emerge over the weekend regarding the melt up. For starters, the G-8 issued a joint statement yesterday, in which they pledged to address the demand side of the oil equation by reigning in consumption, pursuing alternate technologies and addressing carbon emissions.

The Group of Eight also urged oil producing nations to ratchet up their output as soon as possible. Ali al-Naimi, Saudi Arabia's oil minister also tried to put a wet blanket on the oil market's flames by calling Friday's rise of $11 (the largest ever daily move) unjustified. Crude was trading down nearly $3.00 at last check - just under $135.80 per barrel. Adding to the (one can now say relatively small) decline in black gold were reports that Brent crude shipments were set for a rise in the coming month. The US dollar thus got quite a bit of breathing room today, and it rose to 72.90 on the index. The greenback could gain a bit more ground this week, as the first numbers out of the economic gate for the week showed a surprise (and significant) increase in pending home resales. Evidence, that -at a price- there are willing buyers. They certainly have plenty to choose from.

Bullion prices ran into expected resistance at the $910 level as participants were focused on oil prices first, but were also keeping an ear open for words from Dr. Ben later today. This is an extremely heavy Fed-speak week, with everyone from Mr. Bernanke to assorted Fed Presidents and Governors out on the talking circuit. No question that audiences and market participants expect some mention of the Fed's intended dollar strategy, the spike in oil prices, and the central bank's plans to keep the economy out of a (deep) recession while it fights the inflation bugaboo.

Gold touched a high of near $910 overnight but the going proved a bit tougher today as profit-takers cashed in some very attractive chips in the oil pits. As a result, spot prices gave back about a third of Friday's large gains, quoted at $894.50 bid and the metal looks set to now retreat and hold under the $900 area barring further surprise moves in crude oil or the dollar. In the background, India's' gold imports declined once again, this time by 59% last month, as prices soared. The world's largest importer of the precious metal, imported only about an estimated 28 to 32 metric tons of gold in May, as compared to 69 tons in same month last year, according to the Bombay Bullion Association. And, according to India's Economic Times, the sky-high gold price is beginning to engender a change in deeply rooted traditions in this culture:

As the price of gold has soared, people have felt its pinch across the Arab world as well as in Asian countries such as India, the world's largest gold consumer.

Gold in this region is not a luxury but a part of the culture, so its rise in price has triggered changes in tradition that could not have been imagined before.

Shoppers are buying just one set of gold for weddings these days, instead of at least two for the bride and another for the future mother-in-law. The sets are now much lighter in weight. And few people are buying gold for other occasions.

Gold in India is so deeply tied into the culture that sometimes people make provisions in wills to give gold to yet unborn grandchildren.

Similarly, in the Arab world, babies are showered with gold from the moment they are born. Tiny crosses or verses from the Quran are pinned to their clothes, and gold ornaments are given for birthdays, Mother's Day and Valentine's Day.

Further proof that price-driven demand destruction is not limited to crude oil and its by-products. Caveat Speculatores.

Silver dropped 30 cents to $17.21 and platinum lost $16 at $2053. Palladium fell $7 to $423 per ounce. Holding at, or closing above the $900 level remains gold's first task at this juncture, as the trade is well aware that much of the Friday near $25 jump required sending 'thank you' notes (primarily) to the oil trade. Support still remains visible at somewhat lower levels, as oil is not (yet) melting down.

Well, it looks like the beginnings of some regulatory intervention in the commodities markets is in the works after the various bubbles that have been popping up within them for the past five years have attracted public as well as official attention (and not of the admiring kind). Faith Bremner, over at Gannett News reported this weekend that:

The Commodity Futures Trading Commission has announced plans to help stabilize rising food prices, but critics say it doesn’t go far enough to rein in Wall Street speculators who have contributed to a 183 percent increase in the cost of food, crude oil and metals over the past five years.

The CFTC initiative, unveiled June 3, calls for the agency to reconsider a 17-year-old decision to allow investment banks to purchase unlimited numbers of futures contracts for commodities like wheat, corn and soybeans. All other nonagricultural market traders have limits to protect the market from excessive speculation. Some market and agricultural experts say the unregulated banks are overwhelming the commodity markets with their stacks of cash and should also have limits.

Congress began regulating the commodity futures markets after World War I for two purposes. One was to help farmers, grain elevator operators and their customers – livestock and chicken producers, food manufacturers and the like – buy and sell futures contracts to protect themselves from sudden changes in prices. The other was to create a basis for spot market prices.

There’s no question the increased number of investors in commodities markets have really increased volatility and driven up prices, said Patrick Woodall, a senior policy analyst with Food and Water Watch, a consumer advocacy organization. It’s being felt in grocery stores and at overseas ports.

As part of its plan to stabilize commodity markets, the CFTC also announced it has been investigating a sudden run-up in the cotton futures markets during February and March.

The commodities markets have always had speculators. But the amount of money unregulated speculators put in the commodities markets has exploded, from $13 billion at the end of 2003 to $260 billion as of March, according to Mike Masters, a managing member of the hedge fund Masters Capital Management LLC.

It’s not just the amount of money they pour into the agriculture markets, it’s the way they pour it, Masters said. The large investment banks and their customers overwhelmingly treat the commodity markets as if they’re stock markets – they buy and hold their contracts for long periods of time rather than buy and sell frequently, Masters said. These investors hardly ever sell.

In essence, investment banks are hoarding commodities, treating the futures market like a virtual warehouse and driving up prices, Masters said. For example, unregulated speculators are sitting on 1.1 billion bushels of wheat futures, Masters said. That’s enough wheat to supply every American with bread, pasta and baked goods for the next two years.

The commodities futures markets were not designed for that strategy, Masters said. They’re designed for bona fide hedgers who consume and deliver their wares.

Among the many reasons food prices are increasing - high energy prices, droughts in Australia, the weak U.S. dollar, and growing economies in China and India - futures speculation ranks at the top, Masters says.

It’s very hurtful having institutions amplify price moves by significant amounts, Masters said. This is a societal issue, this is something people need to know about.

Today's afternoon action will be largely focused on Mr. Bernanke's speech tonight and such focus might well take precedence with the trade before it turns prices decisively into one or another direction. Profit-taking remains the primary risk at this juncture. Remain alert, as intra-day and overnight surprises have recently become commonplace.

Happy Trading