Good Morning,

Gold prices staged an overnight recovery rising to near $889 but significant bargain-hunting failed to emerge as participants are becoming apprehensive that given the oil/dollar situation the meta could still be vulnerable to further selling in the near-term. The greenback was last seen heading towards 73.15 on the index, while crude oil -albeit up a tad at $127.95- was the primary focus as players have begun to ponder the impact of demand destruction and how that might play into their long crude positions eventually. UK housing prices caught the US price flu in the latest numbers that were revealed yesterday. Today, we got news that the contagion includes consumer confidence. The Brits are exhibiting the lowest such levels since Mrs. Thatcher left office.

New York spot trading opened with a $8.10 gain this morning, quoted at $885.10 per ounce and the trade will be looking for the consumer sentiment numbers due later in the day while beginning to square the trading logs as the month draws to a close. After two consecutive months of net losses, the yellow metal is struggling to maintain a 1% or thereabouts gain for May. Let's see what the close brings to this tally. For the moment, oil prices are calling the shots, as they have all week long. Silver rose 23 cents to $16.83 while the noble metals each added $5 to values, with platinum at $2004 and palladium at $431 per ounce. As noted yesterday, this could be a session of repair work but the clouds have not dissipated after the week's rout.

Let us now take a look at...drum roll....speculation and manipulation - favorite topics for many. Oil's recent meteoric rise has given everyone plenty of opportunity to come up with wild theories as to who is responsible, and how such a trajectory was achieved. Much like in the gold market, allegations of manipulation and a proliferation of conspiracy theories have been the hallmark of the commodity of late. Much like in the gold market, at the end of the day no one has been able to prove that such nefarious activities are real. Much like in the gold market, the available evidence as to why prices move (and sometimes with great force) only points to hedge funds and their ilk when it comes to finding what/who is behind the scene. Business Week's Moira Herbst reports:

Speculation. Manipulation. As politicians, business leaders, and ordinary consumers try to grasp the causes and effects of the historic surge in oil prices, attention turns to dark notions of exploitative financial maneuvering.

Are savvy traders cashing in—or even cornering some portion of the market—and thereby contributing to the painful runup that's shaking everyone from airlines to commuters at the gas pump?

Sounding a populist note on the Presidential campaign trail, Senator Hillary Clinton (D-N.Y.) has called for cracking down on speculation by energy traders and market manipulation in oil and gas markets. Exxon Mobil Senior Vice-President J. Stephen Simon, trying to deflect criticism of oil company profits, told a Senate panel on May 21 that speculation, along with geopolitical instability and a weak dollar, have created a disconnect between past price patterns and the current gusher to $131 a barrel. Motivated by a similar desire to direct outrage elsewhere, OPEC Secretary General Abdalla El-Badri also has stressed the role of traders in driving prices higher.

When oil jumps as much as it has, doubling since May, 2007, it's natural to assume that something striking must have changed. Some say the world is running out of the stuff; others blame market manipulation. The search for a culprit is understandable.

But persuasive evidence of manipulation by traders is, so far, lacking. Speculation—placing bets on future prices—is another matter. There's plenty of that, and it's generally legal. In fact, there's a good argument, if not conclusive proof, that sharply escalated trading in oil futures has contributed to price increases. But it's important to remember that the nature of the oil market—specifically, the extreme inflexibility in both supply and demand—is amplifying whatever influence traders exert on prices.

For there to be real manipulation, financiers somewhere would have to hold substantial amounts of oil off the market, planning to unload it in the future. Jeff Bingaman (D-N.M.), chairman of the Senate Energy Committee, has suggested that a recent trend of institutional investors acquiring oil storage capacity creates concerns regarding potential market manipulation strategies. In a letter on May 27, he scolded officials with the Commodity Futures Trading Commission for glaringly incomplete testimony during recent hearings on oil speculation. He demanded more information about how the agency tracks trading.

But suspicion isn't the same as substantiation. To date, no one has pointed to particular examples of hoarding. CFTC experts testified that market forces are driving prices. The agency says it's working on a response to Bingaman's letter.

What can be corroborated is vastly increased trading levels as hedge funds, investment banks, pension funds, and other professional investors have poured money into oil and other commodities, seeking a hedge against inflation and alternatives to a shaky stock market. In the past five years investment in index funds tied to commodities has grown from $13 billion to $260 billion. More than 630 energy hedge funds are placing bets, up from just 180 in 2004, according to Peter C. Fusaro, founder of the Energy Hedge Fund Center, a trading information Web site.

Futures contract traders on the Intercontinental Exchange made bets on oil with a total paper value of $8 trillion in 2007, up from $1.7 trillion in 2005, according to U.S. Securities & Exchange Commission filings. Over the same period the volume of futures contracts traded on the New York Mercantile Exchange more than doubled, although dollar figures aren't available. The over-the-counter market is even larger but difficult to measure.

With energy demand in China escalating and world supplies static, the influx of money has helped chase prices higher. The hedge funds and speculators have run it up way beyond where it should be, says Malcolm M. Turner, chairman of Turner, Mason & Co., a refining consulting firm in Dallas.

In most markets, skyrocketing prices would result in increased supply and decreased demand. That would cause prices to ease. But the oil market isn't working that way. Supply is essentially fixed in the short term because it takes years to find new fields and bring them online. Demand, meanwhile, is also essentially fixed, since there is no ready substitute for gasoline, diesel, and jet fuel. Flush with cash from investors of all stripes, traders observing these conditions have bid prices up and up.

It's hard to calibrate the influence of speculation because most of the oil market is unregulated. That murkiness almost guarantees that conspiracy theories will continue to proliferate.

In the meantime, Mark Hulbert continues to wring his hands about the stubborn bullishness among gold timers. For the second time this week, Markewatch's observer of contrarians and gold timers rings the alarm bell based on what he sees:

I noted earlier this week that gold-timing newsletters were being strangely jubilant in the face of weakness in gold's price, and that according to contrarian analysis this was a bad omen.

Believe it or not, I can say nearly the same thing now, despite two more days of steep drops in the price of gold bullion.

Take recent readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the recommended gold-market exposure among a subset of short-term gold-timing newsletters tracked by the Hulbert Financial Digest. As of Thursday night, the HGNSI stood at 33.2%, exactly where it stood seven trading sessions previously--despite gold dropping over this period from $933.20 per ounce to $881.20. (These prices are from the August COMEX gold futures contract for August delivery.)

In other words, the average gold timer is not treating a decline of over $50 as any reason to reduce his recommended gold exposure.

That's unusual, and very worrisome from the point of view of gold's shorter-term prospects. Normally, gold timers reduce exposure when bullion declines, and when they don't it means they are stubbornly resisting the notion that the decline has much further to go.
As contrarians like to say, bear markets like to descend a slope of hope. And what we're seeing among gold timers right now has all the hallmarks of exactly that.

What would it take to persuade contrarians to once again be positive about the yellow metal?

By way of an answer, consider the sentiment that prevailed in early May in the gold market. At that time gold bullion was trading more or less at the same level it is today. And yet the HGNSI at that time stood at minus 10.7%, meaning that the average gold timer was recommending that his clients allocate 10.7% of their gold portfolios to going short -- an aggressive bet that gold bullion would continue to decline.

As I pointed out in a column at the time that appeared in Barron's On Line, that pessimism boded well for gold bullion. And, just as contrarians were expecting, bullion did rally smartly over the next couple of weeks.

The sentiment situation that prevails today couldn't be much more different. Until the average gold timer throws in the towel and begins betting that gold is sure to go lower, contrarians will continue to tread cautiously.
That might come sooner than you think. The consensus mood among gold timers has been shifting with dizzying speed in recent weeks. So stay tuned.

Indeed, staying tuned (but not necessarily jumping in) may be the theme for the rest of this final session of May. A recapture of the $890/$900 prize might be very nice at this juncture, but much depends on black gold and the greenback as far as the yellow metal is concerned.

Happy Trading.