Good morning …

Precious Metals

Gold was rangebound on Wednesday, staying mostly between $850 and $860, with no sharp moves in either direction, and when all was said and done it finished little changed at $853.20/oz., down $2.60. Overnight, gold has drifted lower.

Platinum continued to slump, declining slowly from Europe to Globex trading, where it perked up just a bit to end at $919/oz., down $14. Overnight, platinum has edged higher.

Silver shot higher at the London open, cresting at $11.51, held at $11.40 until mid-morning, fell off 30 cents in an hour, but then underwent a final reversal that took it to a close at $11.30/oz., up 13 cents. Overnight, silver is trending lower.

It was a mixed day for the precious metals as gold and platinum edged lower, but silver pushed upward after a session of sharp peaks and valleys.

Investors might have wished for a little better performance by gold in the light of surging equities and a dollar that slipped against the euro, but rising oil prices likely kept a cap on gains.

Looking forward and generalizing, Edward Meir, of MF Global said that, “We think most commodity markets, metals included, will be held hostage by the fate of the U.S. stock market, and in particular, on the outlook for banking stocks.”

Analysts at Morgan Stanley struck an optimistic tone as they wrote that investment demand should continue to support a $900 an ounce gold price in 2009.

If not more, we would say, especially since we agree with Morgan that, “Essentially, a long gold view now is a view that inflation will be higher than what central banks are suggesting they are willing to accept.”

Whether the banks like it or not, there is not likely much they can do about it as they pursue their chosen course. “A globally synchronous and aggressive fiscal and monetary stimulus may be needed to re-inflate the global economy, and we think this continues to present significant upside to gold prices,” Morgan’s analysts concluded.

While admitting that near-term risks of a rally in the U.S. dollar and concerns over deflation could drive prices to as low as $750 an ounce in the first half of this year, they said that their fair value model suggests a gold price of almost $900 an ounce for 2009 and over $1,000 an ounce for 2010. A very conservative view, in our opinion.

Currencies and Economic News

In the currency market, the dollar was off slightly against the euro. Late Wednesday, the euro was trading at $1.2872 vs. $1.2856 on Tuesday.

Sterling continued to take a pounding, so to speak, falling nearly to $1.36 before edging back over $1.37.

With the UK’s financial system in shambles, Bank of England Gov. Mervyn King said that the central bank is considering buying up a range of assets in the coming weeks, in an attempt to re-start stalled lending to businesses and households.

King also promised quantitative easing measures that could be used to boost the money supply (i.e., roll the printing presses), considering the economic contraction that threatens to push inflation below the central bank's 2% target.

Back home, Timothy Geithner, Barack Obama's embattled Treasury secretary-designate, told the Senate Finance Committee that the president is working on a comprehensive bank-rescue package that will be unveiled in the next few weeks.

Geithner refused to talk numbers, but Obama advisor Paul Volcker, the former Federal Reserve Board chairman, told the same panel that the cost of fixing the banks would run to several trillion dollars, and no one contradicted that estimate.


In the energy market on Wednesday, oil erased early losses that drove it below $33, with crude for March delivery closing at $43.55, up $2.71. March reformulated gasoline rose 3 cents, to $1.20/gallon.

Crude rose “amid hopes OPEC [members] will succeed in cutting production close to their quota,” said Nimit Khamar, analyst at Sucden Financial Research.

However, a more important factor may have been that, “The market has been in an extraordinarily large contango that is not sustainable long-term and a good portion of the increase is due to the March contract closing on the other contracts,” said James Williams, of WTRG Economics.

Also factoring in was a report from Mexico's state oil company Pemex that its oil production fell 9.2% to average 2.799 million barrels per day in 2008.

“The production declines are due to the maturity of the company's main oil field, Cantarell, and to the difficulty in completely offsetting Cantarell losses with production from other existing fields,” wrote Allyson Benton, of Eurasia Group. “The company's exploration plans over the next several years are unlikely to lead to major new oil discoveries that can compensate for production losses in the near term.”

Base Metals

The base metals were nearly all in the red on Wednesday. Copper declined from the pre-dawn hours straight through, only just coming off its intraday lows late in the day to finish at $1.4573/lb., down 2 2/3 cents. Nickel followed pretty much the same path, falling back under $5 to close at $4.8534/lb., down 20 cents. Zinc ended barely off its intraday low at $0.5046/lb., down 3 3/4 cents. Aluminum was also a loser, dropping 2 cents, to $0.5925/lb., while lead bucked the trend, riding a late-day rally to a gain of 2 cents, at $0.535/lb.

Copper declined for a second day, as burgeoning stocks continue to underline the slackening demand for the metal.

Copper inventories monitored by the LME shot up another 8,375 metric tons yesterday, to 417,475 tons and a fresh 5-year high.

In addition, Catherine Virga, analyst at CPM Group in New York, suggested that traders are “pricing into copper market expectations of weaker demand ahead of and during the Chinese Lunar New Year.” The Chinese Lunar New Year runs from January 26 through February 2.

The latest round of price revisions (all downward) saw Morgan Stanley analyst Hussein Allidina lowering the company’s average copper-price forecast to $1.35 a pound for this year, with a rebound only to $1.70 a pound in 2010.

Stock growth hit nickel, as well. It declined as inventories increased to 79,932 tons, the most since July 1995.

Company news was all negative. BHP Billiton, the world's largest diversified miner, said it is laying off 2,000 contract workers as it defers expansion projects. Globally, Billiton job cuts will reach 6,000, the company said. That’s 6% of its world work force.

A Billiton spokesman reassured investors that the cuts “are more to do with deferring some capital projects rather than production cuts. We're not cutting production, but we are deferring some activities while capital costs remain high.”

However, confidence in BHP will likely be shaken by an announcement that, as speculated on here yesterday, the company will suspend operations at its giant Ravensthorpe nickel mine in Australia, writing off an estimated $1.6 billion.

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


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