Good Afternoon,

Gold prices broke key support at the $915 level on continued long liquidation this morning. A major slide in crude oil prices aggravated bullion's condition and the metal fell hard despite obvious safe-haven flows into...the yen today - and not the US dollar. Something that did very well today, were Treasury prices. One of the US government's most successful 10-year auctions in history went down today. The event should (one would think) quiet down the incessant chatter in various camps about the ability of the US to sell is debt, and about the willingness of investors to scoop up same when the offering time comes.

Marketwatch reports that analysts have paid more attention to the government's debt sales in the last few months in search of signals of whether investors, particularly foreign central banks, remain willing to buy U.S. debt. One of the persistent questions from investors is who is going to buy all these Treasurys the government is issuing to finance the yawning budget deficit, said Marc Chandler, a strategist at Brown Brothers Harriman. So far this year, Germany, China and the U.K. have held auctions that failed to garner bids for the whole amount they attempted to sell, he said. The U.S. has not had that problem, Chandler said.

If nothing else, some definite speculative wind was knocked out of bullion's sails by this auction. However, the dominant theme for the day was oil's freefall. Marketwatch also reports that: Crude fell for a sixth straight session Wednesday, marking the longest losing streak since December after the U.S. regulator said Tuesday it will hold a series of hearings this summer on whether to limit investor positions in commodities futures markets. Neither firmer U.S. dollar, the weakening oil price nor the currently stagnating investment demand provide any support for gold, analysts led by Barbara Lambrecht at Commerzbank wrote in a note.

It is not at all a stretch to believe that gold was directly affected by the liquidation in oil. What is also probably not a stretch is to posit that it was and remain indirectly affected by the regulation-related apprehensions that are rising among commodity traders of the institutional, as well as the individual variety. But then, this is a warning we issued roughly a year ago, when, in the wake of oil prices that as little to do with reality and with fundamentals as was possible, the proverbial envelope that had been pushed well beyond its design limits finally tore apart.

New York spot bullion prices continued with heavy losses in the afternoon hours. Gold was off by $15.00 quoted at $909.30 per ounce, and was now seen aiming for second-level support, thought (or hoped) to exist near $900. The yellow metal was thus trading at a 60-day low and continues to show signs of summer 'doldrumitis' as ETFs appear apathetic and investors manifest generalized confusion as regards the state of the markets, opportunities in same, and the overall direction of the global economy.

If only the G-8 summit could shed some light or point a finger into a more clear cardinal direction... The $880 to $900 area might come into the focus of players next. An rather unequivocal 'short gold' call was issued today by Ralph Preston, commodity analyst at Heritage West Futures in San Diego.

So, $880 gold? If not this week, anytime soon? Such a dip is to possibly be followed by fresh highs for gold during what remains of 2009. At least, such is the opinion of London-based GMFS, whose Chairman spoke at a presentation in China. Platts reports that:

Gold prices could decline below $900/oz during this summer before rebounding later in the year, with supply increasing and demand declining sharply, according to Philip Klapwijk, chairman of GFMS, the London-based metals consultancy. The price may have pulled back a fair bit from the February highs but that was largely just the market's reaction to jewelry demand crumbling and scrap booming, said Klapwijk at the launch of GFMS's 13th Chinese-language edition of its annual Gold Survey in Beijing Wednesday. 

 We believe that it's far from game over for investors. The gold price in the coming months could easily reattain the $1,000 mark and is likely to push up towards a fresh record high before the end of the year. The consultancy forecasts that the gold price will reach a new record high in the second half of 2009, as the threat of inflation will drive a new wave of investment.

However, the upswing in gold prices will come only after inflationary pressures start to build following the summer lull, that could take the metal's price below $900/oz. In his presentation, Klapwijk noted that GFMS expected an increase in overall supply in 2009. This is because an expected further drop in net official sector sales could be offset by a modest increase in mine production and, especially, a record high in the recycling of fabricated products.  

On the demand side, GFMS is forecasting that gold used in jewelry and other fabricated applications will fall considerably in 2009, due to high and volatile gold prices coupled with the slowdown in the global economy. As a result, the market will move into substantial surplus this year but much of the gap is expected to be filled by investors. The consultancy believes that sustained concerns over the global economy, and the health of the financial system, will continue to fuel safe haven interest in the yellow metal.

Silver showed a 23-cent loss this afternoon, quoted at $12.86 per ounce at last check. Our projections calling for $1100 platinum in a Bloomberg market note a few days ago, now appear to have actually been achieved, and then a bit more. The noble metal dropped $38 on this session, and was quoted at $1095.00 per ounce. Palladium sustained $8 worth of damage at the open, being quoted at $232.00 per ounce. Bloomberg fills us in on the details in this morning's commodity roundup:

Platinum fell to a seven-week low in London, heading for the longest losing streak since October, on concern a slower economic recovery will hurt demand. Gold was little changed after dropping to a two-week low. The MSCI World Index of shares retreated for a fifth day on speculation that second-quarter earnings reports will show the first global  recession since World War II is far from over. Crude oil slid  for a sixth day, while the dollar traded near a two-week high  against a basket of major currencies.

A slower economic  recovery is ''bad for the car industry, because there's less demand for platinum-group metals,'' Bernard Sin, head of currency and metals trading at Swiss refiner MKS Finance SA, said by phone from Geneva. ''There was also some stop-loss selling'' from Asia today, he said. Some investors sell commodities when prices fall below certain thresholds. Platinum for immediate delivery dropped as much as 2.5 percent to $1,106  an ounce, the lowest since May 18.

The moves in the noble metals complex were aggravated by apprehension on the regulatory front as well. A few days back we reported on the clear and present danger that commodity speculation a la last-year's oil price spec fund Roman orgy was being targeted by the powers. Now, our own Globe and Mail reports that today's swing to lower values in the platinum and palladium pits was (aside from the US dollar's strength) very likely also being driven by: 

News the U.S. futures market regulator, the Commodity Futures Trading Commission, was considering a clampdown on excessive speculation in commodities by restricting holdings of big players also put some downward pressure on prices, dealers said. The CFTC announcement is definitely putting some pressure on metals, as well as on energy, said one European precious metals trader.

The news prompted speculation that the approval of proposed U.S. platinum and palladium ETFs could be delayed until the CFTC had finished its deliberations. We do wonder whether the proposed U.S. listing of platinum and palladium ETFs - under consideration by the SEC at present - can possibly be approved until the CFTC's investigations are concluded, UBS strategist John Reade said in a note.

Quick: for the bonus round, name the last hard-money dispatch or conference presenter who used the words substantial surplus in connection with the gold market's current balance status. Of course, you cannot name one, as there has not been one. Why, just overnight we received another warning missive emanating from a sales shop tried to steer one towards the perception that 'tight conditions' putatively exist in the gold market, and that dwindling supply is being pressured by exploding demand.

Something is indeed 'exploding' there. The ego of the writer in question. And, likely, the sales book at that particular shop as well. Nobody questions gurus. It is their divine right not to be questioned. Even by honest facts and figures supplied by firms such as GFMS who hold the market's pulse hand very close in their lap, quarter after quarter. Just hand the money over.

Someone else will hand some money over (or, will not be handed some money by others) if regulators have their way with commodities in the not so distant future. Not that such possible upcoming problems will make conspiracy forums unhappy or anything...Bloomberg reports that:

Goldman Sachs Group Inc. and Morgan Stanley may never have the same leeway in commodities as they did when oil reached a record $147 a barrel last year.

The Commodities Futures Trading Commission will consider greater regulation of oil, gas and other energy markets at hearings this month. It plans to review exemptions to trading limits that since the 1990s allowed Goldman and Morgan to build multibillion-dollar ventures in futures, swaps and over-the- counter markets.

They're very significant swaps participants, and they're very significant dealers for over-the-counter swaps in the commodities market, said Dan Waldman, former general counsel of the CFTC and a senior partner at Arnold & Porter LLP in Washington. If their ability to do some of that business was limited, they'd have to find other ways to reduce their risk or reduce the size of their commodity swaps books.

Energy swaps are trades in which parties exchange the difference between two price payments, one fixed and one floating, for a specific commodity for a period of time. Goldman Sachs and Morgan Stanley accounted for about half of the $15 billion in revenue that the world's 10 largest investment banks generated from commodities in 2007, Ethan Ravage, a financial-services industry consultant in San Francisco, estimated last year, as energy prices neared records. Spokesmen for both banks declined to comment, as did one from Barclays Plc. Spokesmen from JPMorgan Chase & Co. and Citigroup Inc. didn't immediately return calls for comment.

Soaring Prices

Oil prices almost tripled to a record $147.27 a barrel in July 2008 from less than $50 a barrel in January 2007. It took less than five months for prices to peak after topping $100 a barrel in February 2008. Crude oil for August delivery fell $2.34, or 3.7 percent, $60.59 a barrel at 11:40 a.m. on the New York Mercantile Exchange. That's up 87 percent from a low of $32.40 in December. Oil touched $73.38 on June 30.

A lot of what we've seen in recent years has nothing to do with the underlying fundamentals of the market, said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. Something has to be done to reduce some of the speculation, no doubt about it. Exchanges regulated by the CFTC are allowed to set their own position limits or accountability levels which are designed primarily to keep one party from gaining too much control of a market. The limits are applied to futures that call for actual delivery of the commodity rather than settling in cash.

Financial Risks

Investment banks typically use commodity market transactions to protect themselves against financial risk from deals that have very little to do with the actual production or consumption of the commodity in question. That differs from hedging done by energy producers or consumers who have a direct stake in the price.

It sounds like unless you're a true hedger like Southwest Airlines, unless you are a producer in Texas, you're going to lose your status to have nearly unlimited position size, said James Cordier, portfolio manager and founder of in Tampa, Florida. Right now, you can hold as many contracts as you like. You simply need to report them. The Nymex's position accountability levels and limits restrict oil traders to 10,000 net futures for any one trading month, and 20,000 net futures for all months, though they can't exceed 3,000 contracts in the last three trading days of the spot month, Anu Ahluwalia, a Nymex spokeswoman, said in an e- mail. Natural gas traders are limited to 12,000 net futures and 1,000 in the last three trading days.

Trading Limits

Traders can go above those levels, though such moves open them up to review by the exchange, which can tell them to reduce or freeze their position. Traders can often get around the Nymex limits via loopholes that allow them to invest in futures and swaps on other exchanges. The CFTC is trying to close some of those loopholes, which have been blamed for price fluctuations.

The CFTC doesn't want to see these wild swings occur, said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. I don't think a lot of people in the industry would argue against imposing strict limits on investment funds. U.S. House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, said position limits would be one way to keep speculators from distorting markets to the point where they're no longer effective risk management tools for actual users of a commodity.

'Pretty Hard'

I think it's pretty hard to argue there wasn't some effect on markets last year when index fund money flowed into commodities markets that were setting records, he said in an interview yesterday in Washington. Peterson's committee passed a bill in February that limited positions a trader could hold.

U.K. Prime Minister Gordon Brown and France's President Nicolas Sarkozy believe volatile oil prices have caused grave damage to the world economy and must be addressed urgently, they said in an article they wrote for the Wall Street Journal today. The oil market is complex, but such erratic price movement in one of the world's most crucial commodities is a growing cause for alarm, they wrote in the article, posted on the newspaper's Web site. They argued for more dialogue between producers and consumers through the Riyadh-based International Energy Forum, whose members account for more than 90 percent of global oil and gas supply and demand.

Aggregate Positions

Politicians and regulators have to be careful what they wish for, said Pierre Andurand, who manages the $1.1 billion BlueGold energy fund from London. I don't think many people would benefit from a few oil trading companies deciding what the price of oil should be and leaving very few tools and liquidity to companies to hedge their production and consumption. A big remaining question is whether the CFTC should have authority to impose position limits on energy speculators across all markets, so-called aggregate limits, Senator Peterson said.

Hedge funds and banks are always an easy scapegoat for regulators when they see price increases that are detrimental to consumers, said Christopher Peel, chief executive officer of BlackSquare Capital LLP. The London-based firm manages about $250 million in funds of hedge funds, including one dedicated to commodities.

Enforcing Limits

Critics say that enforcing position limits and driving the investment banks out of the market will hurt liquidity and cause prices to rise. These possible CFTC limitations are going to be a huge factor for prices for a lot of commodities, said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. Speculators are being driven out of the market now as they get nervous about what limitations might be put in.

Entities like Goldman Sachs and JPMorgan are the market makers, said Mark Lewis, a partner in the Washington law office of Paul, Hastings, Janofsky & Walker LLP in a telephone interview. Those are the entities that have the huge positions, he said. If the financial players, the banks, the hedge funds, et cetera, are limited to the number of trades they can take, it will lead to less trading. Less trading, I don't think necessarily leads to lower prices. Senator Byron Dorgan, a North Dakota Democrat, dismissed as absolutely absurd talk that position limits will harm energy markets. No one's talking about changing the market that in any way denies the use of it for legitimate hedging purposes. Financial players are in the market to try to make a quick buck. That market was created for hedging, not gambling.

Paul Zubulake, a senior analyst at Aite Group LLC in Liberty Corner, New Jersey, said lack of liquidity is going to increase costs, which will be passed on to consumers. That's what the political scene refuses to acknowledge.

 All we are saying is that such changes cannot but also affect the metals markets to some degree, eventually. Be it in regulatory ways, or be it in fallout terms that reflect in prices.

Back into the 110-degree desert heat, out in the Old West. Headin' for Freedom Fest. Where the ones who congregate, are truly and only the best.

We will report on the fun and brain stimulation (of the very sober variety) in coming days. Until then,

Happy Trading.