Good morning …

Precious Metals

Gold held in positive territory until just before New York opened on Wednesday, but then sold off by about $15, to $810, and it hung around that level for the rest of the Comex and Globex, finishing at $810.10/oz., down $10.20. Overnight, gold has been flat.

Platinum started its slide several hours before the New York open, and moved steadily lower until the late morning, where it leveled off to trade flat and end at $929/oz., down $8. Overnight, platinum has fallen off.

Silver peaked in late Hong Kong trading, fell sharply from the New York open to mid-morning, but rallied from there, advancing to a close at $10.55/oz., down 16 cents. Overnight, silver is trending lower.

Gold hit its lowest level in five weeks, but that the selloff in the precious metals wasn’t worse was probably some consolation to their fanciers, because the usual suspects were lined up solidly in opposition, with equities tanking, oil plummeting, and the dollar edging higher against the euro.

“The fact that the recession is deepening is making people very jittery,” said Matt Zeman, of LaSalle Futures Group in Chicago. “Money is flowing back to the dollar. Gold is looking pretty vulnerable. People haven’t been buying metals for safety.”

Zeman added that, “The Treasury market is where people have gone … It’s a flight-to-quality day, and people want to get out of everything.”

His words were corroborated by the sector-wide nature of the decline, as the Reuters/Jefferies CRB Index of 19 raw materials declined as much as 1.9%.

Is the dollar’s strength sustainable?

Kitco’s Jon Nadler thinks so, writing that, “The greenback’s rally has further to run, and it is not the bounce of a cat in rigor mortis … The question is: How much cash will some wish to raise to head for the hills with?”

That’s one good question. Another is: How much cash will they want to be caught with when inflation kicks in?

Currencies and Economic News

In the currency market, the dollar inched higher against the euro. Late Wednesday, the euro was trading at $1.3176 vs. $1.3187 on Tuesday.

The drumbeat of economic news was grim indeed yesterday, beginning with an estimate from the Commerce Department that retail sales plunged 2.7% in December, much worse than the 1.5% decline economists were projecting. Excluding autos, retail sales recorded their biggest drop since record-keeping began in the early 1990s, falling 3.1%.

Sales have now fallen for six months in a row -- the longest decline on record -- with the declines accelerating in the final quarter of the year. Sales data were revised lower for both October and November, to declines of 3.4% and 2.1%, respectively.

“Holiday sales posted the biggest decline on record,” wrote Anika Khan, an economist for Wachovia. But worse, “Sales have been primarily driven by extensive discounting which is hurting retail profit margins.”

The Fed’s Beige Book report covering early December to early January painted a sober picture. Conditions in the labor market were especially poor, with layoffs, hiring freezes, pay freezes and salary reductions commonplace. Both commercial and residential real estate are suffering from tighter credit standards and a drop in lending activity.

Banks’ woes continued, as Deutsche Bank warned it will report a loss of about €4.8 billion for the fourth quarter, and analysts predicted that HSBC Holdings may need to raise $30 billion in equity and slash its dividend in half.

Closely watched will be today’s ECB meeting. Most are expecting the bank to cut interest rates another half-point, but a minority believe it may stand pat, citing signals from some ECB officials of a desire to slow the pace of cuts.


In the energy market on Tuesday, oil slipped lower, with crude for February delivery closing at $37.28/barrel, down 50 cents. February reformulated gasoline added 1.9 cents, to $1.1677/gallon.

In its monthly inventory report, the Energy Information Administration said that crude stockpiles gained 1.2 million barrels for the week ended January 9. Gasoline supplies were up 2.1 million barrels, while distillates soared by 6.4 million. Refineries operated at 85.2% of capacity last week, up from the previous week's 84.6%.

Crude stocks at Cushing, Oklahoma, the delivery point for crude futures traded on the New York Mercantile Exchange, rose 2.5% to 33 million barrels. They’re up 20% in four weeks, and are approaching Cushing's operable storage capacity of about 34 million barrels, according to Platts.

“The substantial build in heating oil and diesel as well as a new record for oil supplies at Cushing should add to downward pressure on prices of all petroleum products and crude,” said James Williams, of WTRG Economics.

Base Metals

The base metals were all red-stained on Wednesday. Copper declined from the pre-dawn hours to the noon hour, but recovered a little ground late to finish at $1.4561/lb., down nearly 3 cents. Nickel’s chart looked very similar, and it closed on a small upnote at $4.6954/lb., down more than 18 cents. Zinc had a weak day, ending at $0.557/lb., down a penny and a half. Aluminum was slowly lower, shedding a penny, to $0.6547/lb., while lead failed to get even a small late day bump, dropping to its intraday low of $0.5018/lb., down a penny and a quarter.

The industrial metals were down across the board, with copper leading the way lower after the weak retail sales numbers reinforced the notion that there isn’t anything bright in the metals’ future.

John Gross, publisher of the Copper Journal, sees the metal as rangebound at the moment, with key support in the benchmark March contract at $1.40 a pound, and key resistance at around $1.60.

“Depending on which way we break out of that range is going to dictate near-term conditions,” Gross said.

But most were more gloomy, with Edward Meir of MF Global commenting that, “On the macro side, there is no evidence that things are getting better, and if anything, they seem to be getting worse … Producers are still not slashing production fast enough to get ahead of imploding demand.”

And giving the gloom a starkly personal touch was Mo Ahmadzadeh, president of Mitsui Bussan Commodities, who said that, “If you drive through New York, you would be astonished at how empty the streets are … It's really ugly – unemployment is exploding which means spending is shrinking ... the consumer side of the economy is deteriorating fast.”

Also factoring in was the index re-balancing buying, which fades away after the first couple weeks of the year.

Stockpiles are exploding at what seems to be an ever-increasing rate. Yesterday, copper inventories monitored by the LME roared higher by a stunning 7,300 metric tons, to 382,150 tons, yet another fresh 5-year high.

Stockpiles may surge another 57%, to 600,000 tons, in the next four to six months as demand continues to decline, in the view of commodity research firm CPM Group.

Meanwhile, China's State Reserves Bureau has agreed to buy a total of 59,000 metric tons of refined zinc from seven state-owned smelters at 11,800 yuan per ton, smelter sources said yesterday.

That’s lower than the expected 100,000-200,000 tons, and it “reflects the over-all weakness of the market that the government has to go out and buy inventories,” said Michael Widmer of BNP Paribas.

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


James Passin: Rising Commodity Prices to Trigger Renaissance for Nuclear and Gold - The Gold Report Commenting on what he views as an inevitable hike in commodity prices-and an equally inevitable shift into inflation-James Passin considers a nuclear renaissance a sure bet too. James is the co-founder and portfolio manager of Firebird Global Master Fund, Ltd. and Firebird Global Master Fund II, Ltd. In that role, he has made considerable investments in uranium, an indispensable element in the nuclear equation. In this exclusive interview with The Gold Report, James discusses the changing landscape of nuclear technology and shares his love of gold and his thoughts about where its price is headed in the coming years. Read the full interview here...

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