Good Morning,

The new week started on a mixed note in overseas markets following last Friday's memorable spikes in oil and in gold. As we expected, some posturing did emerge over the weekend regarding the melt up in oil prices. 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 also urged producing nations to ratchet up their output as soon as possible. Ali al-Naimi, Saudi Arabia's oil minister also tried to put a blanket on the oil market's flames by calling Friday's rise of $11 unjustified. Crude was trading down nearly $2 at last check - just under $137 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 a bit of breathing room and rose to 72.40 on the index.

New York spot bullion trading opened with a loss of $1.00 this morning, quoted at $901.20 as participants will certainly look at oil prices first, but will also be watching for the release of US economic figures as regards construction spending and manufacturing activity. This is an extremely heavy Fed-speak week, with everyone from Mr. Bernanke to assorted Fed Presidents and Governors out on the 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 might prove a bit tougher today if profit-takers cash in some very attractive chips in the oil pits. India's' gold imports declined by 54% last month, as prices soared. The world's largest importer of the precious metal, imported 32 metric ton of gold in May as compared to 69 tons in same month last year, according to the Bombay Bullion Association.

Silver dropped a dime to open at $17.40 and platinum lost $30 at $2039. Palladium showed no change at $430 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 remains visible however, as oil is not (yet) melting down, the Dow might have a difficult day (mostly on Lehman's $2.9 billion loss) and the dollar is not exhibiting the post-Bernanke spring in its step that we saw early last week.

Well, it looks like the beginnings of some regulatory intervention in the commodities markets are 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 will still likely be a day of sorting out last Friday's events (for both the bulls and the bears) but the building anticipation of Mr. Bernanke's speech tonight might take precedence with the trade before it turns prices decisively into one or another direction. Remain alert however, as intra-day surprises have become commonplace.

Happy Trading