The Daily Resource 07/16/2008

Precious Metals

Gold, which was slightly down in the far East, bolted higher from the London open through to mid-morning, peaking at $988, before getting taken down hard, back to $970, then rallying into the Globex and finishing at $977.20/oz., up $5.10. Overnight, gold has been flat.

Platinum still gets no love, as it fell from its high at the New York open to end barely off its intraday low at $1960/oz., down $41. Overnight, platinum has fallen further.

Silver hit its high at $19.45, shortly after the New York open, but plunged steeply from there, rallied back over $19 at noon, then eased the rest of the day, closing at $18.89/oz., down 20 cents. Overnight, silver has been flat.

It was a strange day for the metals, with gold hanging onto at least some of its gains while platinum and silver went south.

But perhaps it made some sense, in that gold may have pushed higher on the back of the dollar's early weakness, while the other metals, with more industrial uses, responded more to the freefall in the price of crude.

Not that gold isn't also sensitive to what's happening with energy, as its fall from its "intraday high ... was a result of the massive liquidation that was going on in the crude-oil market," in the words of Burton Schlichter, of New World Trading.

It's just that there are few other places to go, as the dollar keeps declining and equities show no signs of stabilizing.

It's no wonder that, "People are freaked out," as Matt Zeman, a metals trader at LaSalle Futures Group in Chicago, said. "Gold is catching a flight-to-quality bid. People are looking for hard assets to put their money in."

And Zeman sees more of the same to come. "People weren't as concerned about inflation in March, but that's kind of changed now," he said. "The credit-market losses are going to continue, you're going to see more banks failing, and the dollar should continue to lose ground. You'll see a more sustained run on gold."

Supporting that view, SPDR Gold Trust, the biggest ETF backed by gold, reported that its inventory of vaulted metal jumped 7.2% to an all-time high of 705.9 metric tons on July 11, far exceeding the previous record of 663.8 tons, set on March 17.

Currencies and Economic News

In the currency market, the dollar rallied from $1.6036, a new alltime low against the euro, clawing its way just back into positive territory. Late Tuesday, the euro was trading at $1.5899 vs. $1.5904 on Monday.

Traders were carefully watching Fed Chair Ben Bernanke's testimony to Congress on the state of the economy.

Big Ben continued to bounce his rhetoric between an "increase in upside inflation risks" and "significant downside risks to growth," with most analysts seeing his words, on balance, as backing off a bit from the recent inflation hawkishness Fed spokespeople have been displaying.

That sent the federal funds futures market lower, reflecting only a 26% chance of an interest-rate increase of a quarter of a percentage point as soon as September -- down from a 52% likelihood on Monday.

Meanwhile, a lot of economic data rolled in, none of it particularly good. The Commerce Department reported that, despite some $50 billion in stimulus checks, retail sales rose a paltry 0.1% in June, with auto sales experiencing their biggest drop in more than two years, at -3.3%. Expectation had been for a 0.4% bump in retail sales.

Then the Labor Department said that wholesale prices rose 1.8% last month, after seasonal adjustments, with energy prices shooting up by 6% and food prices increasing by 1.5%. Economists had been looking for a considerably more modest rise of 1.4%.

Energy

In the energy market Tuesday, crude for August delivery went into freefall, plunging more than $9 from high to low before settling at $138.74, down $6.44, the biggest one-day drop in price for a front-month contract since January, 1991. August reformulated gasoline plummeted 20 cents, to $3.38/gallon.

Traders reacted swiftly and brutally to Bernanke's warnings of "significant risks," and to OPEC lowering its forecast for world oil-demand growth for 2008 and 2009..

"Signs of economic contraction and financial-market malaise are becoming harder and harder to ignore," said John Kilduff, of MF Global.

And, as "oil fell to lows we saw at the end of last week [it] probably triggered quite a few automatic sell-stops," said Nathan Golz, of Wachovia Securities.

In OPEC's monthly report, the cartel reduced its forecast for world oil-demand growth for 2008 to 1.03 million barrels a day, a drop of 70,000 barrels from its previous estimate. Global oil demand this year is expected to average 86.81 million barrels a day.

"Everyone knows that demand growth has been nonexistent in the U.S. and Europe," said Jeff Spittel, of Natixis Bleichroeder in Houston. "If things are appreciably worse in the developed world, eventually there will be spillover" to the developing countries.

Base Metals

The base metals were mostly lower on Tuesday. Copper held up until mid-morning when it hit a steep downdraught, from which it was able to recover only to $3.8033/lb., down nearly 4 cents. Nickel was down in the pre-dawn hours, but rallied into positive territory, then traded sideways to close at $9.3742/lb., up 3 1/4 cents. Zinc slumped badly from the pre-dawn hours straight through, just coming off its intraday lows to end at $0.8345/lb., down 6 2/3 cents. Aluminum also hit the skids day-long, finishing at $1.4362/lb., down 4 1/2 cents, while lead took a very jagged path back to its starting point, at $0.8946/lb., unchanged.

Copper's loss was its biggest in a week, as traders gave in to negative thoughts that a global economic slowdown will reduce demand.

"The atmosphere of gloom and doom about the economy is severe," said William O'Neill, of Logic Advisors in Upper Saddle River, New Jersey. "We're seeing an economic malaise that's not bullish for long-term copper demand."

Bernanke didn't help generate any enthusiasm when he told Congress that a weakening housing market, tighter credit conditions and rising oil prices threaten the economy.

And, "There's no evidence that we can expect a turnaround in the economy anytime soon," O'Neill added. The problem is that, "It's not just the U.S., it's global. The pervading factor here is that there is virtually no confidence that there is going to be any imminent change."

On the supply side, inventories monitored by the LME rose 325 metric tons, to 125,050 tons on Tuesday.

Copper will continue to fall given that global weakness, Standard Chartered prognosticators wrote yesterday. Usage in China, for example, which rose 17% last year from 2006, will slow to an increase of 8% this year, in their opinion.

And Platt's chipped in, saying that, "The demand side does not look like it is getting better. In the absence of any fresh labor problems or production problems, the market could be prone to working itself down toward the $3.60 area."

Despite all the dark talk, though, the fact is that copper remains within spitting distance of its alltime high.

That's what's happening ... see you tomorrow!

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