Good Morning,

New York gold's last trading session of the month and the quarter ended with a small loss in the August contract and spot prices were quoted near $926 at last check after a rally that stopped short of $940 following small gains in the US dollar (up to near 72.50 on the index) and an evaporation of most of the early gains that crude oil exhibited in early going. After climbing to new peaks above $143 black gold eased back to $140.75 retaining only a half dollar advance on the day. US military officials downplayed the potential for Iran to do anything significant in the Straits of Hormuz as far as oil flows are concerned, even if a pre-emptive US or Israeli strike befalls on its nuclear installations.

Stocks were fairly quiet, gaining less than 50 points on the day. Thus far, the month and quarter-end book squaring activity expected for the day has yielded less little in terms of volumes and volatility. Silver lost 6 cents to trade at $17.42 while platinum was still ahead $12 at $2054 (primarily on Lonmin's smelter repairs shutdown) but palladium lost $5 a5 $461 per ounce. The gold ETF made a rather lukewarm debut in Tokyo and will -for the time being- still remain a US institutional and geographic concentration phenomenon.

Dollar policy, interest rate trends, and energy markets unfolding remain at the epicenter of the mid-year markets' pivot points (as they have indeed pretty much dominated the headlines of the first half of 2008) and uncertainty is still part of the financial and market fabric as we head for the second half. The trio may range-trade for a short while yet, but course changes are very likely in the making as we cover the current action.

For example, Bloomberg reports that implied volatility on options for the dollar was at 10.3 percent today, according to a JPMorgan Chase & Co. index. It was 14.5 percent on March 17, the same level at which the G-7 stepped into the market in 1995 to influence prices. Whether dollar intervention takes place at 1.60 or 1.65 no one is certain, but if the trendline slips to touch those levels, the trigger will probably be pulled. That is worth noting. Not worth noting so much (and markets did not) were Mr. Paulson's words in Moscow today, that a strong dollar is a good thing. Duh, and duherer...

Amid strident predictions that the fireworks in stuff are just getting started, and that the second half of this year may yet prove to be the green frosting on the commodities' seven year old birthday cake, a number of factors have slowly emerged behind the scenes -one which could put the party on hold, or worse, send its very sated guests towards the exit doors. Hopefully, not all at once. Bloomberg's tireless London-based Claudia Carpenter brings us a different perspective than what you might read in the latest average hard money, survivalist, apocalypse-now newsletter. You may wish to balance your background knowledge base with the following observations:

Commodities are heading for their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply. The 19 commodities in the Reuters/Jefferies CRB Index jumped 29 percent this year, the most since 1973. High costs are slowing the pace of demand for gasoline in the U.S., and gold purchases in India, the biggest buyer, plunged 50 percent from a year earlier. Producers are expanding supplies of wheat in the U.S. and steel in China.

We're near some kind of reckoning in commodities, said Michael Aronstein, president of Marketfield Asset Management in New York, who returned 15 percent a year in the 1990s managing commodity investments. I've probably been positive for seven years and this is the first time I think there could be really a dramatic secular reversal, that it's not just a pullback

High energy costs will deter consumers and reduce second- half prices, after oil doubled in the past year to a record $142.99 a barrel June 27, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. In the U.S., the world's largest energy user, the number of travelers over the Fourth of July holiday will drop for the first time this decade, after gasoline rose above $4 a gallon, motoring group AAA said June 26. Surging jet-fuel costs led to the failure of at least a dozen airlines in the past six months, grounding planes.

China Slows Purchases

Demand is slowing for copper after the metal jumped 28 percent this year and reached $4.2605 a pound May 5, the highest ever, partly because of temporary supply disruptions in Chile, Peru and Mexico. China said June 10 its copper imports fell 19 percent last month to the lowest since August. Buyers in China, the world's biggest metals importer, are price sensitive, according to Freeport-McMoRan Copper & Gold Inc., the world's second-largest producer.

Gold demand from jewelers, the biggest users, has stalled since September, London-based UBS AG analyst John Reade said May 29. After reaching a record $1,033.90 an ounce March 17, gold will average $850 this year and $750 next year, he said. The World Gold Council said May 20 that first-quarter demand fell to a five-year low.

Rising Output

Price gains that curb demand are encouraging producers. Katanga Mining Ltd. restarted the largest underground copper mine in the Democratic Republic of Congo. The Lisbon-based International Copper Study Group on April 28 forecast a supply surplus this year and next.

The world's wheat farmers will boost production by 8.2 percent to 658 million metric tons in the next 12 months, the International Grains Council said June 26. Wheat jumped to its highest price ever in February.

Prices for commodities including crude oil, copper, wheat and gold advanced in London, New York and Chicago trading today.

Output is gaining as economic growth slows.

The odds of the U.S. entering a recession in the next 12 months are 50 percent, according to the median forecast of 61 economists in a Bloomberg survey. Slowing global growth signals commodity demand will soften, the International Monetary Fund said in March. During the last U.S. recession in 2001, the CRB index plunged 16 percent.

Commodities advanced this year during a buying orgy by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March.

Outgaining Equities

The UBS Bloomberg CMCI Index of 26 commodities rose 32 percent this year to a record through June 27. Equity markets trailed behind, as the Standard & Poor's 500 Index dropped 13 percent. U.S. Treasuries returned 2.1 percent.

Indexes linked to commodities took in an unprecedented $235 billion as of mid-April, according to Lehman Brothers Holdings Inc.

The expansion is now slowing. Second-quarter net inflows into European exchange-traded products linked to commodities fell about 58 percent to $800 million from the previous quarter, Barclays Capital said.

The prospect of increased regulation also may make investing in raw materials less attractive, said Dennis Gartman, whose $250 million fund in commodities, stocks and bonds climbed about 30 percent since April 2007. The House of Representatives approved on June 26 a measure requiring the Commodity Futures Trading Commission to use its emergency authority to curb excessive speculation in energy.

Dollar Rally

Investors also may shift away from commodities as an alternative to dollar assets. The U.S. currency will end a two- year slide and advance 4.7 percent in the second half, according to forecasts compiled by Bloomberg.

Lower prices would ease social tensions. The World Bank warned that 33 countries from Mexico to Yemen faced unrest because of higher commodity costs. The Egyptian government now spends about 5.5 percent of the national budget on bread subsidies and people were killed during food riots.

Some commodities may keep rallying.

Floods across Iowa, the largest corn-growing state, and in Illinois and Missouri threaten to cut corn and soybean plantings by 4 million acres, or 2.5 percent. The U.S. Department of Agriculture releases its next crop forecasts today.

Jim Rogers, who in April 2006 correctly predicted oil would reach $100 and gold $1,000, said investors should steer clear of the dollar and favor commodities. Agricultural prices have much higher to go over the next decade, Rogers said in a speech in Shanghai today. We have a shortage of everything, including seeds.

Profit-taking still lurks as a tempting undertaking amid current heavily overbought conditions. Much depends on as yet unknown triggers (see geopolitics) but volatility will not be lacking in this abbreviated trading week. Tomorrow we bring you our projections for the second half of the year in precious metals. It has been a turbulent first half to be sure, and signs that the track ahead is full of twists and turns and complete upside-down loops are everywhere.

Happy Trading.