Bullion prices gave up Tuesday's gains and fell back under the $930 level as the midweek session prepared to get underway in New York. Gold fell despite a marginally weaker dollar, but it appeared to pay attention to oil prices falling to under $70 this morning. The dollar eased against the euro after traders dialed back on expectations of a Fed rate hike - before year's end anyway.

In fact, they expect Fed hints that such hikes will not take place, given current economic conditions that are as fragile as the Waterford section of your local Macy's. The dollar spiked higher following the first increase in CPI in three months (blame gas) but the overriding news du jour was the staggering 1.3% drop in CPI over the past year - a fall like one not seen since 1950...

New York spot gold dealings opened on the soft side, with the metal losing $6.40 per ounce, and quoted at $928.40 at the start of the Wednesday session. The risk remains that of seeing lower values, amid flat ETF accumulation patterns and what appears to have become the end of de-hedging in the mining sector. Recall that is was in large part such an unwind that helped gold towards four-digit territory in recent years. In fact, net de-hedging was practically zero (okay, it was about 100,000 ounces...).

Meanwhile, noted economist Nouriel Roubini (normally, a favorite one to quote among the elite strike forces of the Radical Extremist Gold Bugs) was in New York, addressing the Reuters Investment Outlook Summit. He told participants there that gold looks overextended as deflation is likely to outweigh and risks of inflation in the near term. Mr. Roubini also opined that it may be too soon to hedge with gold. REGBs will keep chanting Weimar! Weimar! and point to 'rigged' numbers when their 'shadow' sources tell them otherwise. No problem, keep those blinders on.

Silver broke under $14 this morning, starting out with a 20-cent loss at two pennies under the round figure. Platinum broke under $1200 and lost $17 to start the day at $1199.00 per ounce. Palladium dropped $5 and was quoted at $236.00 an ounce. Yesterday, we shared news about rhodium becoming practically extinct in autocat usage, and that the market is staring into a surplus abyss.

The automotive sector continues to go through some kind of tectonic shift, with various nameplates in play, and all kinds of new ownership making the list of candidates. Hummer bought by the Chinese, Saab bought by Koenigsegg, Qatar Investment to take a stake in Porsche, Volvo still up for grabs, and Indian carmakers (Mahindra and Tata) looking for a foothold in the US market (?!). The automobile industry and market will look nothing like that of today, in five years, or less.

Okay, then, today is the day to hear news on the inflation front. What inflation? is still the question. Mr. Roubini has this one nailed, at the moment:

U.S. consumer prices increased a seasonally adjusted 0.1% in May as higher gasoline prices were largely offset by falling food prices, the Labor Department reported Wednesday. It was the first increase in the consumer price index in three months. The core CPI - which excludes often-volatile food and energy prices -- also rose a seasonally adjusted 0.1% in May. The CPI has fallen 1.3% in the past year, the sharpest decline in prices since April 1950. The 0.1% rise in the headline CPI in May was much lower than the 0.3% forecast by economists surveyed by MarketWatch. The consensus on the core CPI was right. - Marketwatch at 8:30 NY time, today .

So, we have to go back to watching crude oil. This inflation/deflation scene has a whole lot to do with black gold than with the (too early) bets being placed on the yellow variety at the moment. Forbes.com chimes in on the matter:

Widespread unemployment is stopping companies from raising prices for fear of losing cash-strapped customers. But not at the gas station. While the economy remains mired in recession, oil is again on the rise, complicating the outlook for inflation.

At the end of 2008, the price of gasoline fell to near $1.60, according to AAA's Fuel Gauge Report. But since late April, pump prices have marched upward for a record 49 days in a row, reaching $2.67 on Tuesday. In California and Hawaii, average fuel prices have topped $3 a gallon again. It seems the respite from last summer's high prices was mostly temporary, though we're still well below the July 17 peak of $4.114.

This rise is likely to weigh heavily on the Consumer Price Index for May, to be released Wednesday. The CPI's less-watched cousin, the Producer Price Index, showed a slight gain of only 0.2% this month, but beneath that headline figure was a 2.9% rise in energy prices, offset by everything else falling. The PPI was weaker than economists had forecast, primarily because food prices fell faster than expected.

When talking about the price indexes, economists focus on overall inflation and core inflation, which tries to tease out energy costs (since energy is a factor in producing nearly everything, the separation is incomplete). Overall inflation will be supported by rising oil prices. Core inflation, however, has been weak this year. For consumers, it has been buoyed primarily by rising tobacco prices. Tobacco prices were rising in anticipation of a new tax on tobacco products that, by May, was fully in effect and not likely to continue to exert upward pressure on prices.

Economists generally believe that widespread unemployment, and consumers who have quit shopping and are instead focused on paying off credit card debt, will stop inflation from taking hold. In normal times this is true, but the Federal Reserve has created new money out of thin air to combat the recession and the government is in the middle of spending $787 billion in stimulus funds. So far, the slack of unemployment and timid consumers have had the greater impact. The Producer Price Index and Consumer Price Index are below their levels of a year ago . The PPI has fallen 5% between May of this year and last. As of April, the CPI had fallen 0.7%. Only the return of rising oil prices suggests the inflation picture is not so simple.

Policymakers remain worried about a crippling bout of deflation . The financial markets beg to differ--presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices and potential commodity price inflation worldwide, argues Simon Johnson, a former chief economist for the International Monetary Fund, in his blog on the financial crisis, baselinescenario.com.

Rising oil is seen as a harbinger of returning inflation. While unwelcome, it could still be a false omen. In fact, 'reflation trades,' have become the flavor du jour in virtually every business column and economic and strategy publication we come across these days, says David Rosenberg, the former chief economist for Merrill Lynch, in a note to clients of his current firm, Gluskin Sheff. Has there ever been a more crowded trade? Something else is indeed going to happen. It's called, welcome back, 2002.

Following the burst of the dot-com bubble, inflation remained subdued in 2002. Wednesday's inflation report could support this view. Core CPI should finally soften up after two straight months of artificial elevation due to tobacco taxes, and this may help reduce the number of fearmongers predicting inflation woes, says Eric Lascelles, the chief economics and rates strategist for TD Securities. Oil remains the key wild card. If oil prices level off, the inflationary bullet may be dodged. If they continue to rise, stagflation could follow.

And, then, there is the whole regulatory mess that speculators will now have to deal with. Poor saps. No longer will they be able to throw all kind of sums at all kinds of markets and push the envelope as if it were made of...paper. The janitorial program that the Obama administration has had to put into motion after inheriting the largest pile of financial dung in history is starting to become quite visible. We warned one year ago that regulation is coming and that given the extreme misbehavior out in the streets of the markets, it will be a tough set of rules to swallow. Here it is.

Today is also the day when the government debuts sweeping reform, and a whole bunch of aggressive speculators are likely to greet these plans not only with a sour face, but with what will very likely turn into a departure from these markets. Why bother -they will say- if we cannot play like we used to? We say, get ready for shifts in trading patterns, volumes, and sectors towards which money will shift. In any case, change is afoot. The Wall Street Journal reports that:

The Obama administration will propose on Wednesday sweeping changes to the way the U.S. government oversees financial markets and will push Congress to grant new powers to the Federal Reserve to oversee the economy, according to a near final draft of the plan viewed by the Wall Street Journal.

* The 85-page proposal is part of an effort by the Obama administration to redraw the rules that govern finance in an attempt to restore confidence in U.S. and global markets.

* It would also give the central bank more powers over the payments and settlements systems in U.S. financial markets to prevent a breakdown that officials fear could destabilize the economy.

* Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission.

* The administration proposes the creation of a consumer-protection agency, which would have the ability to write rules related to mortgages, credit cards and other consumer products, takes away powers previously held by the central bank.

* All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,

* The plan also seeks to ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties. It calls for ensuring the SEC and CFTC have clear, unimpeded authority to police and prevent fraud, market manipulation, and other market abuses involving all OTC derivatives.

* The Commodity Futures Modernization Act of 2000 prevented the Securities and Exchange Commission and the Commodity Futures Trading Commission from directly regulating swaps, although the SEC has some anti-fraud authority on security-based swaps. Banking regulators also may look at swap data as part of their routine regulatory supervision of banks.

* In addition, some products like energy swaps traded electronically on exempt commercial markets may be overseen by the CFTC if they help set market prices. Processing swaps through clearinghouses, which guarantee trades and cushion the market impact in the event of a default, is only voluntary right now. Swaps can be traded electronically or via telephone.

* The Obama regulatory plan proposes to require all standardized OTC derivative transactions to be executed in regulated and transparent venues and cleared through regulated central counterparties.

* To improve price transparency, standard products would also be moved onto exchanges or electronic trade execution systems. Trading of over-the-counter customized products would still be allowed, but regulators will for the first time have authority to collect data on these trades.

* The plan calls for amending commodities and securities laws to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.

* In addition, the CFTC will for the first time be able to set position limits on over-the-counter derivatives if they help set market prices .

Dollar and oil remain at the centre of this equation. Let's see what the jawboning sounds like, later on. For the moment, Mr. Obama has already warned that 10% unemployment is in the cards. With the unemployed not buying much of anything at all, inflation will just have to wait. A year. Or two. Or more. On the regulatory topic, well, at least some firms pushing gold and other things on margin might have to fill out a whole lot more paperwork than it's worth...Consumers and investors can only benefit from everything being spelled out for them as we go forward.