By Jon Nadler

Metals prices remained within fairly tight ranges overnight as little demand emerged from Asia around the $910 level. The US dollar once again came very close to the critical 1.60 mark against the euro, while crude oil scaled new peaks above $118 spurred by labour problems in the UK and Nigerian supply disruptions.

Much as we would like to believe otherwise, a worrisome decoupling appears to be taking shape in gold vis a vis the dollar and oil. That the metal is not trading at least $20 to $60 higher presents some significant food for thought, and may have been the prime catalyst for yesterday's exit by noted advisor Denis Gartman. Gold really needs a rally, and it needs it...yesterday.

New York spot trading opened with a $3 gain this morning, quoted at $920 bid as participants tried to track an oil price near $117.75 and a dollar index value of 71.57 thus far not very successfully. The market will likely await retails sales data and look forward to a raft of figures coming in the second half of the week before a clearer direction emerges, but the risks to the downside remain in place. Silver rose 9 cents to $17.51 and platinum lost $21 to $1991 as rising apprehensions about lower US automotive demand gnaw at the price that was so well supported by S. African power woes. Palladium gained $1 to $453 and appears stuck in the $450/$460 range for the moment.

Evidently, Denis Gartman was not alone in his decision to pull the plug on speculative gold positions. CityWire UK tells the story this morning:

Banque de Commerce et de Placements global CIO Fran and ccedil ois Nordhof is steering clear of gold, guided by the policy of the Swiss National Bank. Nordhof, who is responsible for asset allocation and heads up fund selection at the Geneva based firm, currently has no exposure to commodities including precious metals.

The Swiss asset allocator says he is particularly wary of gold, and has become even more cautious on the precious metal following a meeting at the Swiss National Bank six weeks ago, where he learned the bank had been selling gold.

It is never a good idea to be contrarian to the national bank. The timing may not be perfect, but if they say they are selling gold you ve got to trust them, Nordhof says. Nordhof is particularly wary of the volatility associated with commodities and believes that the returns offered by the asset class are too unstable. He says he would only look into the asset class again if the economy really turns bearish and there is a huge recession .

After the rally in commodities there is no reason to invest in commodities, he says.

Well, at least as far as the speculation in the agricultural sector is concerned, the gentleman may have a point. It is becoming (as Mr. Gartman pointed out yesterday) the focus of global concern. Dr. Michael Berry writes in his Morning Notes today that:

Food price increases are potentially the most destabilizing. The US Congress ill advised move into corn based ethanol was one of the most egregious and thoughtless pieces of legislation we have seen. But perhaps it will highlight the basic supply demand situation in the world that has reached the food chain (by way of the energy chain). Yesterday it was reported on Bloomberg that China and the Asian BRICS are now consuming more energy than the West. A society cannot remain prosperous without cheap energy. Cheap energy translates directly into available food stores. There are solutions. They involve energy conservation in the West. I suspect $5 to $7 gasoline will have a hand in that sooner than most realize. Now our leaders must realize that the basic question of cheap energy production is of paramount importance. Nuclear, stranded and heavy oil and domestic natural gas, a sensible renewable energy policy, bi partisan cooperation on capital Hill and global cooperation are required NOW.

One form this cooperation could take is the one that has traders worried but only to a point these days. The Wall Street Journal reports this morning that:

Food's surging cost has coincided with unprecedented levels of financial speculation in grain futures markets. Now consumers and Farm Belt market participants hurt by more volatile prices are asking Washington to rein in increasingly powerful commodity investors.

Some grain buyers say speculators' big bets on relatively small grain exchanges, especially recently, are pushing up prices for ordinary consumers.

When you get a huge influx of speculative money, as happened in December and January, the price inflates beyond what the fundamentals would dictate and creates a sort of balloon, Daren Coppock, chief executive of the National Association of Wheat Growers, said in an interview. The rules of the game need to be changed to make the market function better.

There's heartburn in the heartland, CFTC Commissioner Bart Chilton said. He said he recognizes that financial investors add necessary liquidity to commodities markets, providing more robust buying and selling. But he said the commission should study more carefully the effects of these investments because of concern about how these risk management markets are working.

Another issue likely to dominate the hearing is the notion of convergence and whether financial investors have distorted it. A futures contract is an agreement by one side to buy, and the other side to sell, a commodity at a set price on a set date. Often traders make offsetting trades to get out of their bets, but if they don't, futures contracts often result in physical delivery of a commodity. As a futures contract gets closer to its expiration date, the price is supposed to converge with the price that actual wheat or corn, for example, is trading at on the open cash market. The commission will be looking some instances of discrepancies in those prices.

Perhaps nothing will be done as yet. Perhaps the issues are just coming under consideration. It is, however, important to ponder the potential for change in these markets that have been ablaze over recent months. It certainly cannot be a case tight supplies across the board.

As yesterday, watch the dollar and oil but more importantly watch how gold correlates (or does not) to the group.

Jon Nadler is s Senior Analyst with Kitco Bullion Dealers Montreal