Good Morning,

Crude oil's seemingly endless surge continued to fuel dollar selling and additional buying of gold overnight, and the metal tested near-term resistance at $927 with success. Long-range oil futures approached $140 per barrel as speculative funds continued to pour into the commodity. The effects of this were seen across a wide range of assets, but probably none more so than the dollar, which lost another .39 to come very near the 72.05 mark on the index. Stock markets are now falling in the wake of this oil tsunami (the Nikkei picked up on yesterday's 200 point drop in the Dow and fell 233 points, while stock futures point to another down day on Wall Street).

New York bullion trading opened with $3.50 gain for gold, quoted at $922.30 spot bid (the overnight high was $928.10) while oil continued to roll on above $130 with a $1.15 gain on the day. The economic calendar shows consumer confidence numbers and mortgage applications in the pipeline, but the likely focus will be the release of the Fed meeting minutes from the end of last month. The explosion in oil prices is threatening to derail the Fed's plan to put a floor under the dollar and could effectively delay the timing of rate hikes as the economy takes the punch. The inflationary effects of same present the other challenge to the Fed at this point. Silver showed an 8 cent gain at $17.74 and platinum rose $31 to $2180 this morning. Palladium dropped $2 to $445 per ounce.

A potential fight is shaping up between lawmakers and market officials as the mushrooming oil price has now become public enemy No.1 in many places (Indonesians protested by the thousands against a 30% fuel price hike). We are told however, that the next time we cringe at the filling station's posted prices, we should be squarely pointing a finger at the managers of our very own pension funds. We have previously pointed out that excessive speculation such as we are witnessing could spark some sort of intervention in particular markets (whether or not such action is legitimate or desirable is not the issue here - it is the likelihood or lack thereof that matters at this time). The New York Times reports that:

The chairman of a Senate oversight committee said Tuesday that he was considering legislation limiting large institutional investors in commodities markets. The legislation would be aimed at speculators and other investors who use commodities like oil as a way to hedge against swings in other investment instruments, like stocks and the American dollar, Joseph I. Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, said at a hearing.

Crude oil, which settled at a record $129.07 a barrel on Tuesday, has doubled in the last 12 months. The Reuters/Jefferies CRB Index of 19 commodities including coffee and corn has surged 31 percent in the 12 months that ended April 30.

We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can’t afford it, said Mr. Lieberman, an independent from Connecticut.

The plunging value of the dollar, the American housing crisis and widespread problems in the banking sector have led investors away from traditional instruments and toward commodities, witnesses said.

Jeffrey H. Harris, the chief economist for the Commodity Futures Trading Commission, said it was clear that there were more institutional investors in commodities, but he said they had not systematically driven up prices.

Prices are being driven by powerful fundamental market forces and the laws of supply and demand, Mr. Harris said in testimony.

Michael W. Masters, portfolio manager for Masters Capital Management, told the committee that investors were buying up commodities and holding their positions, creating an artificial premium. Assets allocated to commodity index trading strategies had risen to $260 billion as of March, from $13 billion at the end of 2003, he said.

While, Mr. Harris may try to convince Mr. Lieberman that fundamentals are the key driver here, the influx of nearly a quarter of a trillion dollars into these markets speaks for itself. The question is how large the artificial premia are in various commodities and how much of these billions of hot dollars will get up and leave the complex when either the profit triggers flash red, or when lawmakers intervene on behalf of their constituents.

Either way, as some see it, the euro's April 22 surge to a record high of $1.620 -- its loftiest level since it began trading in January 1999 -- was also partly due to surging oil prices. Oil surged over $119 a barrel on that date, before dropping back, and fueling a dollar rise in its wake. Any correction in crude oil futures is likely to coincide with a similar dollar rise, strategists say. A fall in the euro/dollar below the $1.50 level could well prompt a deep profit-taking exercise, taking crude oil back to $100 a barrel, said Bank of New York Mellon's Michael Woolfolk.

You may continue to look for volatile conditions and expect oil to be the first one that gives in this trio as it has been in the lead. However, given the current environment, $100 could be its new floor according to analysts. Standard Bank analysts see a possible trip towards $950 for gold should $934 be taken out first. ANZ analysts see firming gold this week, followed by an easing next week and into the summer months.

Happy Trading.