Good Morning,

Spot gold trading started the new week with impressive (but hollow) gains as the dollar's renewed erosion and initially much higher price levels in oil once again dominated sentiment. Certainly, the greenback and its prospects for strengthening will take an even more important position in coming days, as we approach next week's Fed meeting. Participants expect that whatever was missing from the G-8 press release may be offset by the Fed's post-meeting policy statement. Thus, yet another yo-yo week of prices appears in store for some very tired and cranky commodities traders. Opinion remains divided as to where we are headed, and some still sense cause for worry (according to Bloomberg):

The precious metal has trailed gains in energy and grain prices. Crude oil and corn jumped to records today. Gold hasn't benefited from ``all this talk about inflation,'' Tom Hartmann at Altavest Worldwide Trading said today.

The Reuters/Jefferies CRB Index of 19 raw materials climbed to a record for a fourth straight session. Hedge-fund managers and other large speculators cut net-long positions in Comex gold futures by 11 percent in the week ended June 10 to the lowest since September, Commodity Futures Trading Commission data showed on June 13. Speculative long positions, or bets prices will rise, outnumbered short positions by 151,248 contracts, the agency said. It was the second straight weekly decline.

``The reduction in the gross longs may be a further sign that gold is losing its attraction,'' John Reade, analyst at UBS said.

The principal driver of the (unsuccessful) stab towards the $900 level this morning was (unsurprisingly, again) a fresh (and successful however) attempt at rallying the price of black gold to new highs. Gold stalled out at $895.00 after crude oil made a sharp U-turn and slid to $133.50 in the afternoon hours. Profit-takers took...profit and ran with it. But then again, they had already heard from the Saudis this morning as to what is coming next in...the pipeline, so to speak. The country plans to hike output to levels not seen since 1981. Mr. Bush's pleas evidently paid of...if a bit late.

If any single day has presented prima facie evidence of some of the forces whose influence we cover in this article (see below) - today was as classic an example as we can ever get. Sorry to say once again, gold is simply being toyed with, and dragged along for oil's roller-coaster ride while playing second fiddle. A pure fund play date. By 4 PM, the yellow metal had given up more than half of its earlier $25 gains and was quoted at $882.60 per ounce - albeit that $12 gain was by then more reflective of the .42 drop on the index by the greenback (to 73.62). Silver rose 63 cents to $17.14 while platinum gained $16 to $2047 and palladium climbed $11 to $458 per ounce,

In the interim, the ECB has its own hands full with an inflation level not seen in 16 years and is preparing to hike rates by 1/4 point next month. Silver rose 13 cents to $14.64 while platinum gained a relatively modest $7 to $2038 and palladium added $6 to $453 per ounce. The absence of concrete dollar statements gives bulls a chance to rally the metals ahead of the released of economic data later in the week, and ahead of the Fed meeting.

Thus far today, the Empire State manufacturing index, Lehman, AIG, and builders' confidence all converged to help keep the dollar in check. Let's see what officialdom's response it. Thus far, the Fed's Mr. Lacker asserted that the risks to the US economy have abated somewhat, and he joined the growing contingent of monetary policy makers calling for a rise. On a normal day last fall and winter, especially amid such sour news from the US economy, such talk would have been pure heresy, punishable by the rack.

As mentioned, the weekend summit of the Club of Eight yielded quite a few poker faces in terms of what might be done about the dollar. On the other hand, the formal communique was certainly shaping up as a giant collective index finger pointed and wagging at crude oil and other commodities, however. The Wall Street Journal reports:

Finance ministers from the Group of Eight leading nations who gathered this weekend focused their attention firmly on high-cost commodities, notably oil and food, which they warned can undermine economic growth and stir up inflation.

Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable, and may increase global inflationary pressure, the ministers said in a joint statement Saturday.

As expected, they refrained from commenting on foreign exchange rates in their final joint statement. However, the subject was a hot topic in meetings on the sidelines, where U.S. Treasury Secretary Henry Paulson repeated his recent support for a stronger dollar. Meanwhile, ministers reiterated their commitment to strengthening the resilience of the financial system to prevent a replay of financial crisis that nearly a year ago saw fallout from the U.S. subprime mortgage market ripple throughout financial markets and economies around the world.

The ministers did not discuss currencies or intervention at the meeting, Japanese Finance Minister Fukushiro Nukaga said, leaving analysts pondering a retreat by the dollar on Monday. Some people may have expected stronger comments about inflation, and as part of that, concern about the dollar. The market may take profits from the dollar’s rise, said Masafumi Yamamoto, chief currency strategist for Japan at Royal Bank of Scotland in Tokyo.

The G- ministers called on national authorities to examine commodity futures markets and take appropriate measures as needed. They also asked the International Monetary Fund and the International Energy Agency for a report later this year on the factors behind surging oil and commodity prices.

A call in the statement for more information on how much money is flowing into the oil market indicated that there are serious concerns among some G-8 members such as France, Germany and Italy that speculators have been a key driving force behind recent record-high oil prices of nearly $140 a barrel on the futures market. Ministers urged producers to ensure more oil makes it onto the market and asked the International Monetary Fund and the International Energy Agency to further analyze the recent surge in oil and other commodity prices.

The presence and influence of commodity speculators in these markets that the G-8 has alluded to needs to further confirmation than Christine Harper's report on Bloomberg this morning:

Goldman [Sachs] and Morgan Stanley are expected by analysts to report the best second-quarter earnings of the world's biggest securities firms this week, having limited their losses from the collapsing credit market.

The swing factor for such a performance? You guessed it:

They also lead Wall Street in commodities trading, where crude oil futures doubled in the past year and the price of products from gold to corn soared to record highs.

Commodity trading may account for perhaps more than 7 percent of the revenue at the two firms, although they are not reported separately from other income. The two may have earned more than $5 billion in commodity plays last year. And that, is before these markets really melted up.

`` There's just a lot of money chasing these markets,'' said Peter Fusaro, chairman of New York-based Global Change Associates, which advises hedge funds on energy investments. The number of energy-related hedge funds his company lists has more than tripled to 634 in less than four years.

These wads of cash at play in relatively small niches not only has the G-8 worried about the inflationary effects of such activities, but quite a few market watchers and investment gurus as well. Their take? Let's just say that it involves the frequent use of the word bubble.

``We are facing a very dangerous situation caused by these tremendously increasing prices for commodities, food and oil,'' German Finance Minister Peer Steinbrueck told a meeting of executives and government officials in Russia this month. While supply shortages and rising demand from emerging markets such as China and India account for much of the price gains, money managers such as Michael Masters at Atlanta-based hedge fund Masters Capital Management LLC say financial speculators and a shift of pension fund money to commodities are also responsible.

Billionaire investor George Soros has said commodity prices may be turning into an unsustainable ``bubble.'' Crude oil rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001. That surpasses the 640 percent gain in the Nasdaq Composite Index before a reversal in technology stocks in March 2000 triggered a 78 percent decline.

Does this mean that everyone getting into the game knows the markets and knows what to do to navigate the treacherous waters of the commodities' complex? Hmmm..

Asked last year about competition from Wall Street banks that have been building commodities divisions -- chief among them London-based Barclays Plc and New York-based JPMorgan -- Goldman Chief Financial Officer David Viniar warned about the pitfalls.

``A lot of very smart people have gotten into a lot of trouble or lost a lot of money by getting into the commodities business,'' Viniar said at an investor conference in February 2007. Goldman has a ``long history of watching our competitors get into the commodities business at the top of the market.''

At New York-based Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, President Gregory Fleming said the commodities boom could turn out to mirror the rise and fall of technology stocks in the late 1990s and structured-credit products between 2002 and 2007.

``I'm hearing a lot of talk about supply and demand in commodities is not necessarily what we should be looking at,'' Fleming said in an interview on May 29. ``Boy I've heard that twice before in less than a decade in two different markets.''

Oil's daily gushing and retreating continues to define these markets as anxiety battles greed and vice-versa. As for the dollar, please remain mindful however, that:

Currency forecasters are betting that the dollar rally is just getting started as the Federal Reserve's shift to fighting inflation makes it likely to raise interest rates more aggressively than the European Central Bank.

The currency will strengthen 2.5 percent to $1.50 per euro by year-end, according to the mean estimate of 39 firms surveyed by Bloomberg.

On to the next few days of economic data and oil/dollar gyrations. Quiet, it will not be.

Happy Trading.