Good morning …

Precious Metals

Gold was lower overseas, dropping below $840 at the London open and again just before New York opened on Tuesday, but it edged higher to the noon hour, then really took off, peaking at $870 in early Globex trading before easing to finish at $864.60/oz., up $6.30. Overnight, gold has been flat.

Platinum also pushed higher through the Comex and Globex trading, ending just off its intraday high at $961/oz., up $18. Overnight, platinum is sharply higher.

Silver was stuck around $10.90 until New York opened, then a rally ignited that drove it to $11.50 before it back off slightly to close at $11.44/oz., up 22 cents. Overnight, silver is trending lower.

The precious metals all had reasonably strong days, especially considering the mixed support from the usual suspects, as equities moved higher, but crude slipped and the dollar moved higher against the euro despite losing most of its early gains.

The smart money seems to be betting that the dollar’s rally is about to stall, and that’s gold-positive.

Thus yesterday, “Gold turned when the dollar started to weaken,” said Frank McGhee, of Integrated Brokerage Services in Chicago. “The additional amount of money that’s sloshing around the financial system will weaken the dollar.”

That’s a long-term trend. The U.S. government has pledged more than $8.5 trillion to bail out financial companies and help the country recover from a recession, and the president-elect has admitted that we’d better find a way to accept trillion dollar deficits for years to come.

McGhee also called attention to a technical development that had traders turning more bullish on gold. “Gold touched the 200-day moving average and didn’t fall apart,” McGhee said.

Still, not everyone is buying in. For example, Societe Generale predicted gold will average only $650 an ounce this year, more than $200 below its average for 2007.

“Deleveraging in the first half of this year will keep gold under some pressure and rallies may be false dawns,” analysts at Societe Generale wrote.

Currencies and Economic News

In the currency market, the dollar lost most of its early gains but still finished slightly higher against the euro. Late Tuesday, the euro was trading at $1.3529 vs. $1.3588 on Monday.

The buck declined after the release of minutes of the Federal Open Market Committee's mid-December meeting, which showed members seeing an increasing risk of depression and deflation..

The text of the minutes revealed that some participants envisioned “the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome. However, with inflationary pressures likely to dissipate, “some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels.”

David Watt, senior currency strategist at RBC Capital Markets, noted that the minutes “did not indicate any optimism on either the FOMC or the Board of Governors that better times were at hand.”

In hard data, the Commerce Department reported that U.S. factory shipments plunged a record 5.3% in November, with orders for U.S. factory-made goods falling 4.6% in the month. That was twice the 2.3% decline expected by economists.

And the National Association of Realtors said its pending home resale index fell off 4% in November, to 82.3, from 85.7 in October. It’s now at its lowest level since inception in 2001.


In the energy market on Tuesday, oil broke over $50 but then retreated, with crude for February delivery closing at $48.58/barrel, down 23 cents. February reformulated gasoline gained less than 3/4 of a cent, to $1.1892/gallon.

“The first attempt against the $50 psychological level is keeping a lid on this market,” said Burton Schlichter, of New World Trading.

But Phil Flynn, of Alaron Trading, was blunter. “Oil is running out of steam because at the end of the day the global crises have not cost the globe one drop of oil,” Flynn said.

Yet, one might add, as supply cuts haven’t really kicked in. Iran and Kuwait said they will deepen curbs on supplies to customers this month, joining OPEC peers in cutting back output, Reuters reported.

Base Metals

The base metals were all strongly positive on Tuesday. Copper rose from the pre-dawn hours straight through the New York day, just edging below its intraday highs to finish at $1.5308/lb., up more than 10 1/2 cents. Nickel peaked as New York opened, but only slipped a little during the day, closing at $5.8665/lb., up more than 23 3/4 cents. Zinc had a decent day, ending at its intraday high of $0.581/lb., up better than a penny and a half. Aluminum pushed higher all day, ultimately adding 3 1/4 cents, to $0.719/lb., while lead shot straight up to its intraday high of $0.5398/lb., up 4 cents.

Copper led the industrial metals higher, soaring to a one-month high past the $1.50 mark as the new year buying momentum gathered some steam as economic stimulus optimism prevailed alongside the annual portfolio rebalancing by index funds.

“Metals could do somewhat better over the course of the week,” wrote Edward Meir, of MF Global. He noted that copper prices may be supported by “a massive stimulus program coming out of the Obama administration.” President-elect Obama has reportedly told House Speaker Nancy Pelosi he favors a $775 billion stimulus package.

However, any new demand will remain theoretical in the face of stockpiles that continue higher. Copper inventories monitored by the LME gained another 1450 metric tons yesterday, to 343,500 tons.

Brian Hicks, of U.S. Global Investors in San Antonio, says that, “I think we’ve found a bottom for copper, and that’s reflected in the changing sentiment.” But Hicks admits that, “I’m still not sure how much upside there is now” because of the sagging economy.

Questionable demand or no, resource-dependent Chile is wading into the fray. Yesterday, President Michelle Bachelet announced a $4 billion stimulus package that includes $1 billion in capitalization for state copper giant Codelco, the world's largest producer, to help shore up its investment plans. The stimulus package will be funded from copper windfall earnings saved in sovereign wealth funds as well as through a bond issuance, Bachellet said.

And on the equities front, a number of Canadian base metal miners hit multi-month highs on the Toronto Stock Exchange on Tuesday, as some hope for a sustained rebound has leaked into the hard-hit sector.

“The realization is that the demand tap has not been turned off, it's just been turned down a tad,” commented Ron Coll, an analyst at Jennings Capital.

That’s what’s happening … see you tomorrow!


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