Question: Who regulates the commodity markets?

Answer: The Commodity Futures Trading Commission, an independent federal agency headed by five commissioners appointed by the President, took over the job from the Department of Agriculture in 1974.

Since then the federal government has played an increasing role in overseeing the futures markets and protecting the public interest.

The CFTC's efforts to exert its authority have run into intense opposition from the commodity exchanges, which pride themselves on their "self-regulation" and resent government interference in what they regard as the ultimate free market.

The federal regulators have demonstrated their clout by temporarily closing down commodity markets on two different occasions in the past year and by jawboning the exchanges into acting against irregularities.

But the CFTC tried unsuccessfully to ban sales of commodity options despite widespread abuses and so far has been unable to stop the growth of commodity frauds, particularly in oil, gold and silver.

Q. Does that mean there are lots of crooks in commodities?

A. Most of the con-men in commodities operate outside the recognized futures markets, where they would come under the scrutiny of both the exchanges' self-regulation committees and the CFTC.

Legally, commodity futures contracts can be bought and sold only on one of the exchanges -- The Chicago Board of Trade, the Chicago Mercantile Exchange , the Kansas City Board of Trade, the Minneapolis Grain Exchange, the Mid-America Commodity Exchange, Commodity Exchange Inc. (Comex) and the New York Mercantile Exchange, Cocoa Exchange, Coffee and Sugar Exchange, Cotton Exchange and its Wool, Citrus and Petroleum Associates.

If someone touts a commodity investment that's not listed on one of the exchanges, be careful. Be suspicious of any stranger who calls offering a commodity deal, especially in gold, silver, platinum or petroleum. The major commodity brokers are not soliciting business in these highly volatile commodities and in many cases are actively discouraging them.

Most of the problems with commodity fraud have come from telephone sales of investments masquerading as futures contracts. The sellers call them by various names: commodity options, limited risk forward contracts, spot market forward contracts, etc.

The first thing to ask any commodity investment seller is: "Are you registered with the CFTC?" The second is to ask to see the disclosure statement the CFTC requires on all legitimate commodity investments.

Q. What about speculators "cornering the market" or otherwise manipulating prices?

A. That can happen, despite the vigilence of the CFTC.

The federal regulators shut down the Chicago Board of Trade's wheat market for two days last year because they feared prices could be rigged. At that time a handful of professional grain speculators held thousands of "long" contracts calling for delivery of millions of bushels of wheat in March. There wasn't enough wheat in Chicago elevators to fulfill all the contracts. CFTC lawyers said it appeared the speculators would demand the wheat, creating a temporary shortage that would send prices through the ceiling, so the government stepped in.

The same potential problem came up in the silver market this month.

Huge holdings in silver futures were in the hands of a small number of investors, the most prominent of them Texas billionaire Nelson Bunker Hunt and his relatives. Unlike most futures investors, who settle their trading for cash, the silver speculators were insisting on the metal. Prices were soaring.

To avoid a "squeeze" that could have jacked up prices even more, Comex and the Chicago Board of Trade stopped taking new orders for silver and forced the speculators to begin selling out. The exchanges came up with their own remedies after CFTC Chairman James Stone warned that the futures markets could be destroyed if metals investors used them only to buy large amounts of the shiney stuff.

Q. Hold it, I'm confused. I thought one reason futures markets exist is to let buyers lock in the price they will have to pay several months in advance. How can they do that, if they can't buy the commodities?

A. Remember, the futures markets deal in paper promises to buy and sell commodities, not in bushels of corn or bags of silver. Almost 98 percent of all futures contract trading is settled in cash, not commodities.

Sometime before the final day of trading in a particular month's contract the investor clears the account. A "long" simply tells the commodity broker to sell the contract; if the price is higher than when the contract was purchased, the investor makes money. The "short" does the same thing, buying a "long" contract to offset the "short" position; if the price has gone down, there's a profit to take.

The commodity markets simply are not set up to handle the actual delivery of large amounts of grain, gold or anything else. The futures market has evolved into a highly specialized and abstract system based on trading contracts.

When it begins to deal mostly in physical commodities -- as has happened with silver -- the rules change. The heavy purchasing of silver through the futures market in recent months has made it virtually impossible for the market to perform its traditional functions of hedging and price discovery. The usual hedgers have dropped out of the market.