Good morning … Hope you had a pleasant holiday, and welcome to what will hopefully be a very prosperous new year.

Precious Metals

Gold slipped in the overseas markets, bottoming at $868 right at the New York open, moved higher to mid-morning, then went flat for the rest of the day in thin trading, finishing at $874.90/oz., down from the shortened Wednesday session but up $1.30 from Tuesday. For the week, gold added 4.4%.

Platinum was higher through the Comex, falling a bit during the Globex to end at $940/oz., up $29 from Tuesday. For the week, platinum gained a robust 10.5%.

Silver dipped below $11.10 in London trading, but was off to the races as soon as New York opened, rising all through the Comex and tacking on a bit more during the Globex, to close at $11.53/oz., up 61 cents from Tuesday. For the week, silver tacked on 6.6%.

The year began with a bang for platinum, and especially silver, as gold was stuck spinning its wheels.

Gold might have taken a lead from two of the usual suspects—oil, which moved higher, and equities, also up—but was effectively capped by a dollar that began 2009 by rallying strongly against the euro.

While gold may be “tracking movement in the dollar,” wrote economists at Action Economics, “expectations of more U.S. economic-data weakness and continued tension in the Middle East should limit the pace of any decline.”

Frank McGhee, of Integrated Brokerage Services in Chicago, concurred, saying that Middle East tensions are starting to trickle “back into the trading psyche.”

Still, many traders remain wary, put off by reports such as the one out of India, the world’s biggest buyer, noting that bullion purchases fell for a second straight month in December. Gold buying dropped to about 3 metric tons, from 16 tons a year earlier, according to the Bombay Bullion Association Ltd.

“Unless gold can bank on investment demand to more than offset the slump in Indian purchase tonnages, we must remain on alert and exercise caution,” said Kitco’s Jon Nadler. “Demand destruction of this type is not beneficial.”

That investor demand may well be there, as gold wrapped up 2008 with a gain of 5.5% on the year. Gold was clearly the place to be, as virtually every other asset declined, with the Case Shiller housing index down 18%, S&P 500 down 38%, 10-year Treasury yields down 42%, crude down 59%, live cattle down 15%. Etc., etc.

Those who sat on bullion did relatively well, compared with everyone else. Will 2009 be the same? We shall have to see what the year brings, but it seems likely that the answer will be more yes than no.

Currencies and Economic News

In the currency market, the dollar rallied against the euro. Late Friday, the euro was trading at $1.3869 vs. $1.4086 on Tuesday.

The buck was buoyed against the euro as the European purchasing managers' index showed manufacturing activity fell for a seventh consecutive month, to 33.9 in December, from 35.6 in November. The reading was the lowest in the survey's history.

Any dollar gains, however, were likely capped by more gloomy data on the home front. The Institute for Supply Management reported that its index of manufacturing activity declined to 32.4% in December, from 36.2% in November. It was the fifth straight monthly drop, marked the lowest point in more than 20 years, and was totally counter to economists’ expectations for a rise to 36.3. Readings under 50 indicate contraction in the industry.

“The decline covers the full breadth of manufacturing industries, as none of the industries in the sector report growth at this time,” wrote Norbert Ore, chairman of the ISM.

That caused John Brynjolfsson, the managing director of hedge fund Armored Wolf in Aliso Viejo, California, to write that the report indicates: “Macroeconomically, we’re in a freefall … That’s a complete destruction in industrial production and demand, and this is likely to keep pressure on the commodity sector in general.”

The ISM also said that new orders now have contracted for 13 consecutive months, and are at the lowest level on record, going back to January 1948. Manufacturing payrolls also shrank, as the employment index fell to 29.9% from November's 34.2%.


In the energy market on Friday, oil initially dropped but then busted back to the upside, with crude for February delivery closing at $46.34/barrel, up $1.74 from the short Wednesday session and $7.31 from Tuesday. February reformulated gasoline gained 8 cents from Tuesday, to $1.1105/gallon.

Analysts cited a convergence of factors, including a Russian move to cut off natural gas to Ukraine, the ongoing conflict in the Middle East, and OPEC's projected production cuts.

“A new mood has greeted the early days of 2009 and one that is not so gloomy,” said Phil Flynn, of Alaron Trading.

The Energy Department provided a boost, too, saying yesterday that it will take advantage of low oil prices to buy oil for the 727 million-barrel Strategic Petroleum Reserve, and fill it in 2009. The energy agency said it has issued a solicitation to buy about 12 million barrels of crude oil for the reserve, to replenish supplies sold after hurricanes Katrina and Rita in 2005.

Base Metals

The base metals were all sharply higher on Friday. Copper rose from the late pre-dawn hours straight through to afternoon, only just coming off its intraday high to finish at $1.4273/lb., up 14 1/4 cents from Tuesday. Nickel staged a very strong upmove, building on Wednesday’s short session gains to close at its intraday high of $5.7417/lb., up $1.205. Zinc also just backed off its intraday high, ending at $0.5606/lb., up nearly 6 cents. Aluminum was nicely higher at $0.6937/lb., up more than 3 cents, while lead soared, adding nearly 8 cents, to $0.5048/lb.

Copper closed at a 3-week high on Friday, as investors chose to open the new year with a brightened outlook.

Or not. Many were downplaying the day’s action, and that of the last couple of days of 2008 as balancing acts. Typically, commodity index compilers recalculate the weightings for the individual commodities in their indexes at the turn of each year, and the volatility associated with that can be unconnected to any definitive market sentiment.

Jiang Mingjun, an analyst at Shanghai Oriental Futures Co., called it “window dressing,” and added that, “For at least the first quarter, we’re still going to see higher inventory levels and lower prices … Movements in the U.S. dollar will also continue to drive the entire commodities complex and hence copper prices.”

Stockpiles are certainly not suggesting any copper rally. Inventories monitored by the LME gained another 775 metric tons on Friday, to 340,550 tons, raising them to near a 5-year high.

But the metal got a little additional support from news that two key Chinese domestic smelters, Jiangxi Copper and Yunnan Copper, will lose production due to equipment malfunctions.

Meanwhile, nickel also benefited from speculation that index funds will buy more industrial metals this month during re-weightings in their benchmarks. Nickel has gained gained 36% in the past four trading sessions.

But Edward Meir, of MF Global said recent gains “will likely recede over the course of next week when participants return from holiday and conclude that the macro landscape looks depressingly unchanged from where they left it.”

That’s what’s happening … have a great weekend and see you on Tuesday!


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