Good Afternoon,

Gold prices turned lower during the mid-week session, as the US dollar took another fairly sizeable forward step on the index, bolstered by inflation combat comments from K.C. Fed Pres. Thomas Hoenig and by credit crisis related observations from the Treasury's Henry Paulson. The greenback was approaching 60-day highs on the index (@ 73.60) and tomorrow's ECB meeting is expected to yield no change in interest rates across the Pond (which could lift the greenback a bit further). Oil prices climbed over $123 per barrel, but did not manage to stimulate higher gold values today.

India ushered in the festival of Akshaya Tritiya and hopes were high that the next day or two will prove that locals are more interested in gold at current levels than they have been during Q1 of this year. The very latest from Reuters indicates that sales are off to only a moderate start (though we will have to wait a day for a full tally): There is not much buying in the wholesale segment, but the retail side is good, said a dealer in a large private bank in Mumbai.

New York spot bullion traded as low as $862.70 in the morning hours, and subsequently rebounded to near $870 per ounce, showing a $6.00 loss while participants digested the Q1 productivity (better than expected), unit labor costs (rising much less than expected) and mortgage applications (up 15.6% week-to-week) data. Given a just a few of the most recent background developments (esp. the dollar) the tilt in the market once again points to a retest of the $845 area as the more likely occurrence. Silver fell 21 cents to $16.63 while platinum managed to eke out a $1 gain to $1961 and palladium shed $8 to $424 per ounce.

What's behind the latest show of resilience by the dollar? Forbes indicates that:

Kansas City Fed President Thomas Hoenig said late on Tuesday that [U.S. interest] rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar. Analysts said that Hoenig's statement, along with a string of surprisingly strong U.S. economic data, was fuelling the view that U.S. rates may have bottomed out at 2 percent, following a series of aggressive rate cuts over the past few months.

Though he's not a voting member, Hoenig's comments suggest that the Fed might need to tighten rates because of inflation pressures, said Adam Myers, market strategist at Credit Suisse, adding that this was supporting the dollar. Also helping the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told the Wall Street Journal in an interview that the worst is likely to be behind us from the crisis spawned by surging defaults on U.S. home mortgages.

Such shifts in attitude and louder jawboning by U.S. as well as European officials do not appear to perturb the perma-bulls as they continue to see a one-way street for the dollar, interest rates, as well as for Fed policy. We would remind them of previously successful mop-up operations by the central bank, once the economic engine was fired up. What comes down, can also go up, for obvious reasons. The dollar is has not yet secured its release papers, but it has been placed into the recovery room of the rehab wing.

Other background factors making their way onto the front of the stage these days are giving rise to worries of a different kind. The kind that spells: intervention. The complex but clearly distorted situation in oil and agriculturals has analysts and policy makers (not to mention election candidates) studying the current reality and coming up with explanations and/or solutions. The implications of what they say, in many cases, point to some possible type of active intervention in one or more of these markets. It could be only a question of time. While there is no realistic chance that Mrs. Clinton will be able to dismantle OPEC (or Mr. McCain bomb it), the rhetoric has been turned up quite a bit since the daily oil headlines have been printed with extra large-sized fonts. Here is a sampling of recent findings, as relayed by Marketwatch and UPI Asia:


The Federal Reserve's seven interest rate cuts in as many months, which helped protect the U.S. economy from the full effects of the housing crisis and the resulting credit crunch, also contributed to the spike in raw material costs that has been felt across the globe, experts said. In short, the integration of world markets means that subprime mortgage fraud in Las Vegas is linked to food riots in emerging economies.

But the decision by the world's most powerful central bank to flood financial markets with liquidity has helped to fuel speculation that has exacerbated the problem, experts said. In essence, they [the Fed] viewed the commodity-price spike like water damage. It wasn't welcome, but it wouldn't prompt them to turn off the hose until the

fire was definitely out, economists said.

The Fed made a choice. It wanted to make sure the economy and financial system stayed in reasonable shape, said Allen Sinai, founder and chief global economist for Decision Economics Inc. Fighting inflation was not their number one goal.

The Fed was is well aware of the consequences of its aggressive rate cuts, and statements such as the one above from Mr. Hoenig indicate that at some stage the mopping up of excess liquidity will need to commence.

Savvy traders understood that the Fed's top priority was protecting the economy. They saw that the Fed was not fighting inflation and was pouring liquidity into the financial system. In order to make money, these traders bought commodities as a hedge against inflation while simultaneously selling dollars, economists said. That made the

problem worse, by pushing down the value of the dollar and further boosting prices for grains.

When speculators saw the U.S. economy was stumbling and there was uncertainty about the dollar, speculators bought real assets: oil, gold and commodities, said Jim Glassman, economist at J.P. Morgan Chase.

Some economists already see the music stopping and the lights coming on at the speculators' commodity-price party. We may see a sharp reversal in energy prices and the dollar, simply because they've stretched it so far beyond what the economic reality suggests is an equilibrium price, said Bruce McCain, chief investment officer at Key Private Bank in Cleveland.

But others, including Sinai, said that as long as the global economy remains firm and central banks focus on protecting economic growth, commodity prices won't fall all that far. [to which we add: but fall they likely will.]

So, was the spike due to insatiable demand, or to something more basic - like greed and opportunity?

In recent months, hedge funds, pension funds and other group investment vehicles, which strive for maximum return in minimum time, have turned the commodity market upside down. These funds of the rich and famous, facing difficulty in the stock market lately, turned their attention to the commodity market. Instead of trading in blue chips and other stocks they began trading in commodity futures -- setting off the current steep rise in commodity prices.

Hedge funds and others have gained piles of cash from Middle Eastern oil-producing nations in the last three years. As oil prices scaled new heights, a situation like that of the mid-1970s emerged, with oil producers needing a place to park their extra cash. It was handed over in bundles to countries including Brazil, Argentina and Mexico. These countries borrowed the money, misspent it, and soon had to be bailed out by the International Monetary Fund.

This time around the fund managers were smart. Instead of putting money in questionable investments, they decided to invest it in commodities. Relaxed limits by the U.S. Commodity Futures Trading Commission on how much money could be pumped into the grain trade by hedge funds, index funds and pension funds, helped them a lot.

The price rises over the past year of all commodities including food grains are a testament to this manipulation. Minor climatic events in Australia and elsewhere have cut into food grain production, but these have been balanced by huge increases in the overall production of wheat, coarse grains, pulses and rice in India and elsewhere.

Speculators are busy informing the public that it is not their fault, claiming it is increased demand by prosperous China and India creating price volatility. This is a flimsy argument. India does not plan to import any wheat this year. This behavior is puzzling to an unseasoned watcher. Even the very investigative U.S. media have missed the connection between hedge funds and high grain prices. They have fallen for the propaganda that since oil prices have quadrupled, other commodity prices have to follow suit. This argument is also absurd. The oil component in grain production is about 17 to 19 percent. This alone would not triple production costs.

Since the inevitable has happened, what is next? Do we have to let a few rich and powerful people in Chicago, Kansas or New York mess with the world food supply? Should the U.S. government not get investment funds out of the grain trade? Should funds managers not be penalized for messing with the fragile supply and demand of the world's food?

If the CFTC acts, will this bubble in the commodity market burst? Probably, yes. Wide price swings in the grain market, well above industry fundamentals, will belong to the past. Wheat and other grain prices will return to their real value under normal pricing structures. Speculative money is undermining the world order and it is a dangerous game. The U.S. regulatory agency must step in soon; otherwise, civil unrest will become the norm.


The above findings and opinions aside, you have - by now - heard threats and promises from Mrs. Clinton regarding OPEC and the current oil situation. Regulators are looking into the goings-on in the oil market for irregularities and/or evidence of manipulation. We would remain on a careful watch regarding such developments as their impact could be felt widely across the commodities sector.

For the moment, the focus remains on the dollar's spring bloom and on the unfolding oil price saga. Progress may become a bit more difficult as we head towards the weekend. Look to India for support. Hope that it comes.

Happy Trading.