Good morning …

Precious Metals

Gold was steady until the beginning of the London session on Monday, when it began declining, a fall that turned into a near $20 plunge in the first few minutes in New York, yet that was not the bottom as the metal kept on sliding lower until it finally went flat on the Globex, finishing at $819.90/oz., down $33.70. Overnight, gold has edged lower.

Platinum was in positive territory until late Hong Kong trading, after which it mirrored gold’s path, taking a huge $35 hit as New York opened, down close to $940 before it rebounded slightly to end at $952/oz., down $47. Overnight, platinum is sharply lower.

Silver didn’t receive nearly as strong a negative jolt in New York, but it too was down pretty much straight through the day, finally closing at $10.62/oz., down 53 cents. Overnight, silver is trending lower.

It was a grisly start to the week for the precious metals, as any positive effect that might have been derived from climbing equities was trampled by cratering oil prices and a stronger dollar.

Bears have begun to stretch and roar. “The deflationary scenario is still incredibly intact, even though the government has thrown trillions of dollars at it,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Gold has a long ways to go down.”

Kaplan added that he feels gold has some catching up to do with other commodities as a deepening recession forces raw-material prices lower.

Well, perhaps. But a lot of investors don’t think so. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, rose almost 1% last week, to 787.6 metric tons. The fund’s assets shot up 24% in 2008, a down year by any standard.

In addition, hedge-fund managers and other large speculators increased their net-long positions in Comex gold futures last week, for the fourth straight week, according to Commodity Futures Trading Commission data released January 9.

Dan Norcini, of, chipped in a technician’s view, writing: “With crude oil getting whacked and the Dollar having another one of those ‘let’s get out of risky trades’ rallies, gold had as much chance as a snowball at one of Al Gore’s global warming symposiums (Note to Al – look out the window every now and then if you want to learn something – that white stuff that is everywhere is called ‘snow’). It collapsed through downside support near $840 and continued lower driven by sell stops until it breached the $830-$828 support level. If gold cannot recapture that $830 level and hold above it, technically-related selling pressure will increase. Support now emerges near the 40-day moving average at $814 with the 100-day moving average just beneath that at $810. Should gold move down into that region, it will be critical from a technical standpoint for the market to attract quality buying or face a much greater exodus of longs that could bring the market down to $800 or below.

Currencies and Economic News

In the currency market, the dollar pushed higher against the euro. Late Monday, the euro was trading at $1.3373 vs. $1.3452 on Friday.

It wasn’t so much that the buck soared as that the euro got slammed by news that Standard & Poor's might cut its ratings on Spain, and by growing expectations that the European Central Bank will cut interest rates later this week.

“At the end of last week, the rating agency S&P put Greece's long-term sovereign rating on credit watch for a possible downgrade. [Yesterday] it did the same for Spain,” said Marc Chandler, of Brown Brothers Harriman.

“The market appeared to take advantage of the headline announcement to do what they wanted to do and that was take the euro down,” Chandler added.

In addition to the S&P downgrades, there’s been a recent run of abysmal euro-zone data, leading to the ECB expectations. The central bank’s key lending rate now stands at 2.5% with most economists expecting it to be slashed by half a percentage point, or 50 basis points, on Thursday.

Even if the bank does meet expectations, “we would need to see significant flexibility on the part of the ECB to help stabilize the economy and sentiment on the euro,” wrote strategists at BNP Paribas.


In the energy market on Friday, oil’s slide continued for a fifth straight day, with crude for February delivery plunging below $40 to close at $37.59/barrel, down $3.24. February reformulated gasoline dropped 2.7 cents, to $1.0841/gallon.

“The demand destruction amid continued weakness in the global economy, coupled with excess supply in the market at the moment, is likely to continue to dominate sentiment,” wrote Nimit Khamar, of Sucden Financial Research.

Khamar added that prices remain “susceptible to further declines, even a test toward recent lows before some base is established.”

The oil market is now in an advanced state of ‘contango,’ which normally just means that the present price of a commodity exceeds the future price, usually by the carrying cost. But at the moment, oil producers, refiners and investors have put a record amount of crude oil into storage at a key delivery point, as they stockpile in the expectation of a sharp price rise by next summer.

Inventories in Cushing, Oklahoma, the delivery point for futures traded on the New York Mercantile Exchange, jumped more than 40% in the month ended January 2, to the highest level in at least four years.

That reflects the gap between the price of oil for delivery in the next month and contracts to deliver oil later this spring and summer, nearly $15/barrel higher.

Base Metals

The base metals were all shoved back deep into the red on Monday. Copper declined from the pre-dawn hours to mid-morning, then traded just off its intraday low for the rest of the day, finishing at $1.4285/lb., down nearly 9 cents. Nickel was off sharply into the New York open, then traded slightly higher through the day to close at $4.6622/lb., down 61 1/4 cents. Zinc followed a similar path, ending at $0.5518/lb., down a penny and a half. Aluminum was weak, shedding almost 2 1/2 cents, to $0.6718/lb., while lead plunged to its intraday low of $0.5182/lb., down more than 2 1/3 cents.

Whatever euphoria developed on Friday was gone with the wind on Monday, with copper leading the industrial metals lower across the board, as traders decided there was little room for optimism amid global demand destruction.

Copper was particularly hard hit because of a report out of China. According to government officials, the world’s largest metal consumer has discarded a plan to buy copper to support domestic smelters because producers are still profitable and inventories aren’t overly high.

The officials, who asked to remain unidentified, added that it has also been deemed risky to buy the metal now from overseas, since prices may have further to fall.

Granted, that may be a temporary position. “Aluminum and zinc prices [have] fallen below production costs and domestic supply can meet local demand,” however, “China still relies on imports to meet copper demand,” said Yang Changhua, analyst at Beijing Antaike Information Development Co. Chinese smelters don’t have enough copper to help build state reserves, he added.

Also adding pressure were copper stockpiles, which have been rising by leaps and bounds, a trend which shows no signs of abating. Inventories monitored by the LME surged another 5,925 metric tons yesterday, to 369,500 tons, hitting a fresh 5-year high.

One of the few notes of caution to the bears came from UBS analyst John Reade, who said that, “COMEX copper could be vulnerable to another short-covering rally due to the rather large net short position.”

In company news, Rio Tinto has postponed the US$2.15 billion expansion of its Corumba iron ore mine in Brazil, as the global downturn hits steel production. The world's fourth-biggest diversified mining group is scrambling to cut costs and raise cash to ensure it can meet payments later this year on nearly $40 billion of debt.

The Corumba expansion was projected to boost annual capacity at the mine more than six-fold. from 2 million to 12.8 million metric tons.

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


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