The Daily Resource 12/31/2008

Precious Metals

Gold fell in the far East on Tuesday and never really recovered, in thin trading, bottoming at $867 at the New York open, then regaining a bit of lost ground through the Comex and Globex, and finishing at $873.60/oz., down $7.00. Overnight, gold has fallen off.

Platinum was also off into the New York open, falling to near $890, but pushed higher through the day and ended dead flat at $911/oz. Overnight, platinum has drifted lower.

Silver had a real rollercoaster day, falling as low as $10.65 as the Comex opened, rising sharply to peak at $11.10 at the noon hour, then declining again until a small bump at the end of the Globex took it to a close at $10.92/oz., up 6 cents. Overnight, silver has edged lower.

With trading thinning still further ahead of the New Year’s holiday, the prospect of volatility was ever present, but it never materialized as the precious metals showed little to no change yesterday.

The usual suspects offered little in the way of direction, as equities posted gains, oil fell back, and the dollar retreated.

Chart watchers noted that gold’s seven-day relative-strength index for futures topped 70 yesterday, a signal generally taken to mean that prices may be headed lower in the near term.

“Gold is bouncing up against some resistance and needs to digest some of these gains,” said Stephen Platt, of Archer Financial Services in Chicago.

Another technician, Dennis Gartman, editor of the Gartman Letter, wrote that, “Gold’s technical problem is that since March, each high has been progressively lower, as has each new low.”

Nevertheless, gold is poised for its eighth straight yearly gain, up about 5% on the year. What else is in positive territory for 2008?

Even Gartman admits that, “If the Fed is going to expand the monetary aggregates as they have in order to sponsor economic growth, then inflationary pressures will become more evident after the turn of the year, and so too should our exposure to gold.”

And investors continue to pile into the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion. As of Monday, the fund’s vaults had swollen 24% this year, to a record 780.2 metric tons.

Currencies and Economic News

In the currency market, the dollar declined modestly against the euro. Late Tuesday, the euro was trading at $1.4086 vs. $1.4013 on Monday.

The day was full of very shaky economic data, led by the Conference Board’s report that its consumer confidence index declined to a record low of 38 in December, from a revised reading of 44.7 last month. That was well below economists’ expectations, which were for a modest rise to 45.8.

“The further erosion of the consumer confidence index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008,” wrote Lynn Franco, director of the Board's Consumer Research Center. “The overall economic outlook remains quite dismal for the first half of 2009, and only a modest recovery is expected in the second half.”

The consumer confidence subindex for present conditions plummeted to 29.4 in December from 42.3 in November, the Board said.

Meanwhile, home prices in 20 major U.S. cities dropped 2.2% in October from September, and fell a record 18% from the previous year, according to the Case-Shiller home price index, as reported by Standard & Poor's. That sends prices back to their March 2004 levels.

Falling prices are likely to accelerate in coming months, said Patrick Newport, economist at IHS Global Insight. “The main force driving house prices down is foreclosures, which are still rising,” Newport wrote. “The Obama administration and the Fed are working on ways to limit the number of 'preventable foreclosures.' Unfortunately, trial and error will be part of this process.”

Energy

In the energy market on Tuesday, oil dropped back below $40, with crude for February delivery closing at $39.03/barrel, down 99 cents. February reformulated gasoline gained a penny, to $0.93/gallon.

The Israeli/Hamas conflict commanded attention, but with the possibility of a cease-fire in the offing, traders’ fears subsided somewhat.

“The probability of any significant [supply] disruption remains low and so the surge higher on the news in the last few days seems a little overdone and fits more as a correction higher within the current bearish trend,” said Michael Davies, of Sucden Financial Research.

“However, as the violence continues and looks likely to escalate, the market will remain sensitive to news, especially while many traders remain on holiday until the start of the New Year,” Davies added.

And Edward Meir, of MF Global, chipped in with: “With most global economies struggling and credit markets still in an impaired state, it is hard to get too excited about the upside potential in energy markets attributable solely to geopolitical factors unless, of course, these are directed at the heart of the oil-supply system.”

Base Metals

The base metals were mixed on Tuesday. Copper fell in the pre-dawn hours, then rallied through the New York session but not quite enough as it finished at $1.2851/lb., down 2 2/3 cents. Nickel pushed strongly higher through the day, closing at its intraday high of $4.7166/lb., up 30 3/4 cents. Zinc traded rangebound with a down bias, ending at $0.5017/lb., down a penny and a half. Aluminum fell way off in the pre-dawn hours and couldn’t recover, dropping almost 2 1/2 cents, to $0.6625/lb., while lead moved higher, adding three-quarters of a cent, to $0.4258/lb.

Copper dropped off on Tuesday, as the grim global economic outlook took firm hold of the market.

Bad news out of Asia led the way, as South Korea's industrial output slumped to a seasonally adjusted 10.7% in November from October, its biggest decline in 21 years.

Meanwhile, Japan’s economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, Barclays Capital said.

Stockpile growth contributed. While it slowed a bit yesterday, copper inventories monitored by the LME still gained another 650 metric tons, to 337,350 tons.

Bloomberg reported: “Industrial metals as measured by the LME index are heading for a second consecutive annual drop. The 162-member Bloomberg World Mining Index has plunged 61 percent this year.”

Zinc’s outlook “remains bleak” for the next 12 months, according to a Moscow-based Troika Dialog report. “With all the major zinc consuming industries like car manufacturing and construction suffering the worst decline in many decades, zinc prices are unlikely to show much vigor until the second half of 2009, if not 2010,” the report said.

After easing somewhat in November, LME aluminum inventories are on the rise again. They jumped a whopping 49,000 metric tons, or 2.2% yesterday, to 2.30 million tons, the highest since 1994.

Looking ahead, though, Bloomberg reported: “China’s … Yunnan Copper Industry Co. will start storing their production as part of the government’s initiative to aid metals producers. Expenses incurred during the stockpiling period will be funded by bank loans with the inventory as collateral, and by provincial government’s subsidies, Yunnan Copper said.”

And copper output from Chile, the world’s biggest producer, fell 6.4% in November, the National Statistics Institute said.

That’s what’s happening … have a happy and safe New Year’s holiday, and see you on Saturday!

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