The Daily Resource 07/17/2008

Precious Metals

Gold pushed higher through the first hour of the New York session yesterday, peaking at $981, but then ran into some determined selling that sent it spiraling downward into the Globex, where it flatlined to finish at $959.30/oz., down $17.90. Overnight, gold has fallen further.

Platinum's long slide was prolonged for another day, as the metal skidded from the last hour of NYMEX trading through the Globex to end at $1900/oz., down $60. Overnight, platinum has been flat.

Silver remained above $19 through the mid-morning hours, but faded from there, closing at $18.76/oz., down 13 cents. Overnight, silver is little changed.

The precious metals took a trip south, as would have been expected as the usual suspects lined up uniformly against them, with oil continuing to slide, equities staging a powerful rebound, and the dollar rallying against the euro.

Dan Norcini, writing on jsmineset.com, commented that, "It was amusing reading the wire service commentary attempting to explain the drop in gold this morning.

"One provider stated that gold declined because Bernanke said that inflation is too high and is a top priority for the US government. Oh sure it is! And to show how serious it is, the Fed is going to immediately begin a rate hike cycle in which they will add 100 basis points before the end of the year is out. Of course, they will be sure to do just that while the feds bail out FRN and FRE and while the FDIC attempts to clean up the mess at Indy Mac. Don't forget Washington Mutual whose share price is trading closer to $4.00 than the $44 it was trading at a year ago. Yes indeed, that is just what the financial stocks ordered - a hawkish Fed talkfest! Meanwhile they are forced to print Dollars like candy wrappers to hold things together! I am sure China and the rest of the sovereign wealth funds are thrilled."

What seems sure is that gold was due for a bit of a correction. "Gold has had an impressive run, so it's going to take a breather anyway," said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. It is currently in "overbought status" and "a pullback is expected," Zeman said.

But the bulls' optimism is undented. "While the need for cash prompts some investor liquidation in the short term, we expect the backdrop of geopolitical concerns and financial market jitters to limit price weakness, with the metal well-placed to challenge above $1,000 an ounce," said James Moore, of TheBullionDesk.com.

Currencies and Economic News

In the currency market, the dollar rallied against the euro. Late Wednesday, the euro was trading at $1.5823 vs. $1.5899 on Tuesday.

Traders were scrutinizing the release of the minutes from the last Fed meeting, searching for the future direction of interest rates, and apparently decided from the mixed signals that the Fed is about to turn hawkish on inflation.

As Dow Jones Marketwatch reported: "Some members said the Fed had aggressively cut rates to 2% to guard against downside risks to growth and now that these risks had 'diminished' that 'some firming in policy would be appropriate very soon.'

"But other FOMC members said financial conditions were still too fragile and borrowing costs were higher for consumers than before the Fed starting cutting rates last fall.

"The minutes show a clear divide and intense debate between one camp that favored rate hikes sooner rather than later and others who believed the outlook was still uncertain at best."

Those who think the Fed will have to raise rates got support from the day's most important numbers. The Labor Department reported that the consumer price index rose by 1.1% in June. It was the biggest monthly increase since Hurricane Katrina nearly three years ago, and well above economists' expectations for a 0.8% gain.

CPI was led higher by a 6.6% jump in energy prices and a 0.8% increase in food prices.

"The Fed will face an ongoing inflation threat that will eventually require a policy response that we continue to expect before year-end," wrote Michael Englund, chief economist for Action Economics.

Energy

In the energy market Wednesday, crude for August delivery prolonged its tailspin, plummeting another $4.14 to close at $134.60/barrel. August reformulated gasoline dropped 10.1 cents, to $3.279/gallon.

Traders reacted to a surprise growth in crude stocks. In its weekly report, the Energy Information Administration said that inventories rose 3 million barrels in the week ended July 11. That shocked analysts, who had instead predicted a decline of 3 million.

"If there is anything that should keep the bulls in the corral while the bears feed in the berry patch, this EIA report is it," said James Williams, of WTRG Economics.

Concurrently, the EIA reported that gasoline supplies rose by 2.4 million barrels, and distillate stocks gained by 3.2 million barrels. Refineries were operating at 89.5% of capacity, as opposed to 89.2% in the previous week.

Meanwhile, the government pretended to move against high energy prices as a group of Democratic senators introduced a bill that would require futures regulators to allow only those companies that buy or produce petroleum to be considered legitimate hedgers. That could limit the ability of large investment banks to use exchange-traded futures to offset swaps with financial investors such as pension funds.

Base Metals

The base metals were all stuck in the red on Wednesday. Copper declined from the pre-dawn hours to mid-morning, after which some buying took it off its intraday lows to finish at $3.7552/lb., down 4 3/4 cents. Nickel slumped until the New York open, then traded sideways for the rest of the day, closing at $9.2503/lb., down 12 1/3 cents. Zinc bottomed in the last hour before New York, then edged modestly higher to end at $0.8096/lb., down 2 1/2 cents. Aluminum had a day-long decline, just coming off its lows at $1.3899/lb., down 4 2/3 cents, while lead rallied off its lows better than its sister metals, losing only a penny and a third, to $0.8808/lb.

Copper led the other industrial metals lower, as fear of the global economic slowdown ruled the day.

"The demand picture looks pretty sloppy," said Michael Gross, of OptionSellers.com in Tampa, Florida. "With the economy slowing, it's creating a shift in the fundamentals that paints a bearish picture for copper for the next three to six months."

Of particular concern to the metals buyers is that the economic slump appears to have spread beyond the U.S., with "evidence of a slowdown in Asia and beyond," Gross added. For example, the Bank of Japan yesterday cut its assessment of the economy for the first time since April, citing flagging growth. And unemployment in Britain jumped the most in June since the latter stages of its last recession in 1992.

Gross isn't predicting a complete meltdown, however. "I'm not expecting copper to crash," he said. "Prices are just going to correct from these much higher levels as demand falls."

In supply news, Freeport McMoRan said yesterday that workers at its Peruvian copper mine have canceled a planned strike as negotiations continue between the big copper producer and the union.

Zinc lost ground after China's large smelters ended a two-day industry meeting without supporting output cuts proposed by smaller producers.

Small and medium-sized zinc smelters agreed last Saturday that they would cut production by 10% from July to September, raising concerns that the country's big smelters would follow suit and put a real crimp in global supply.

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

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