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Precious Metals

Gold showed promise throughout London trading and reached an intraday high above $975, but a second straight sell-off in New York that began around noon pushed the yellow metal into the red, finishing at $952.10/oz., down $10.60. Overnight, gold is little changed.

Platinum dropped about $30 in Hong Kong but gradually gained back some of what it lost yesterday, ending at $1047.00/oz., up $6. Overnight, platinum is trending slightly higher.

Silver followed a similar track to gold but the sell-off in New York was not as large and it finished the day almost where it started, closing at $13.73/oz., down 3 cents. Overnight, silver is little changed.

It was a volatile day for the precious metals, but big losses were only experienced by gold. The market has become more volatile after prices rose above the key $1000 level last week, and though factors encouraging risk aversion remain, investors are choosing to cash in on the high prices now rather than chase them higher. Traders said though light buying had aided prices, given talk of the global recession, some people may opt to sell gold to secure cash, causing the market to lack the momentum to push beyond $1000 in the near term.

Another factor contributing to gold's three-day fall was that U.S. policy makers apparently convinced many investors that the economy will recover from the recession soon, which partially eroded the appeal of the precious metal as an alternative investment.

Federal Reserve Chairman Ben S. Bernanke told Congress the government doesn't plan to nationalize banks. President Barack Obama told lawmakers last night that the recession offers a chance to solve some of the nation's problems.

People have been buying gold on economic Armageddon, so to see Obama and Bernanke paint a rosier picture, I'm not surprised to see gold come down a little bit, said Matt Zeman, of LaSalle Futures Group in Chicago.

Investors have been buying gold this year as a store of value, driving the price up 9.3% and investment in the SPDR Gold Trust to a record 1,029 metric tons last week. Sales of 1-ounce American Eagle gold coins more than quadrupled to 92,000 in January, according to the U.S. Mint. Still, a decline in prices may be an opportunity to buy, some investors said.

Those who've not yet bought gold as insurance against economic chaos have their opportunity to do so now and we would strongly urge that, Dennis Gartman, an economist and editor of the Gartman Letter in Suffolk, Virginia, told his clients yesterday.

Currencies and Economic News

In the currency market, the dollar gained against the euro. Late Wednesday, the euro was trading at $1.2718 vs. $1.2868 on Tuesday.

The U.S. dollar pushed higher against most major rivals Wednesday as downbeat economic data and more weakness on Wall Street increased safe-haven flows to the greenback. Dismal global data also weighed on the euro, Japanese Yen and British pound, making the U.S. dollar seem relatively more attractive.

U.S. stocks fell for the seventh day in eight after a report showed sales of previously owned homes unexpectedly declined in January, even as falling prices made them more affordable. Purchases fell 5.3% from December to an annual rate of 4.49 million, the fewest since 1997, the National Association of Realtors said today.

Also on Wednesday, the Treasury Department began to apply a series of new stress tests for the nation's 19 largest banks as part of a new capital injection program that, in spite of what Bernanke has said, could lead to the nationalization of several financial institutions.

According to the stress test approach, government regulators are looking at each financial institution's balance sheets and capital needs over the next two years and evaluating how much capital the company will need over that period.

Based on that analysis, the government would press financial institutions to convert their taxpayer-funded preferred shares into common shares when losses that were forecasted by the stress test actually occur.

As part of the plan, a bank could also receive new government-funded preferred shares that are converted to common shares if it turns out projected losses materialize. Like the stakes banks have already received from the Treasury, these new shares are issued in exchange for taxpayer funds.

Investors in common shares are concerned about the plan for two reasons, at least. Preferred shares are higher in the capital structure of a company, and in the event that a firm goes bankrupt and is liquidated, preferred shareholders could be in line to collect something, while common holders would get nothing. Shareholders are also concerned about the conversion of preferred shares into common because such a move would make current shares worth less through dilution. In other words, the more shares of common stock outstanding, the less valuable each share is.


In the energy market on Wednesday, crude for April delivery gained $2.54 to close at $42.50/barrel. March reformulated gasoline rose 8.23 cents, to $1.1660/gallon.

Oil was rising on growth in gasoline demand, though the weak home-sales data are weighing on the psyche of oil traders, said Phil Flynn, vice president at Alaron Trading. Oil prices were trading lower earlier after data showed sales of pre-owned U.S. homes dropped to the lowest level in 12 years.

U.S. gasoline consumption during the past four weeks rose 1.7% from a year ago, the Energy Information Administration reported. Gasoline inventories fell by 3.4 million barrels, more than analysts surveyed by Platts had expected.

On the supply side of the oil equation, the EIA reported yesterday that U.S. crude inventories rose by 700,000 barrels to 351.3 million. Analysts surveyed by Platts had expected a rise of more than 2 million barrels. The EIA also said in the report that U.S. refineries operated at 81.4% of their operable capacity last week, down slightly from the previous week.

Meanwhile, inventories at Cushing, Okla., the delivery point for Nymex oil futures, fell for a second week to 34.5 million barrels.

Base Metals

All the base metals were higher on Wednesday. Copper jumped nearly 4 cents from yesterday's close to $1.5257/lb. Nickel gained 19 cents to finish at $4.5420/lb. Zinc rose slightly more than 2 pennies, ending at $0.5076/lb. Aluminum tacked on almost a cent, closing at $0.5935/lb., while lead moved up exactly one penny to $0.4630/lb., .

The reason for the big day in base metals, China, the world's biggest copper consumer, may boost imports of refined copper by 37% this year, bolstering world prices as a recession slashes demand in the U.S. and Europe, said Trafigura Beheer BV.

Inbound shipments could jump to about 2 million metric tons as scrap metal supplies plunge and Chinese government spending sustains consumption, said Simon Collins, of Trafigura Trading Shanghai Co., in an interview yesterday.

China's buying will stabilize prices, said Collins. We believe demand is better than elsewhere. The cable industry is reporting good orders, from the people we talk to. The slump in prices has cut global supplies of scrap metal and Chinese purchases have tumbled as much as 60% percent in recent months, driving the surge in refined imports, he said. China's inbound shipments of refined copper jumped 41% to 180,490 metric tons in January from a year ago, while scrap purchases more than halved to 180,000 metric tons, customs data show.

Global demand destruction has been extremely rapid and this is reflected in soaring stockpiles on the London Metal Exchange, Collins continued. Copper inventories advanced to 548,400 metric tons on Feb. 25, the highest since October 2003. China will continue to buy refined metals as long as prices are low, Collins said, adding he expected aluminum, zinc and lead imports to recover. We've visited some very large consumers and whilst it's not what they expected in the middle of 2008, they still see very good demand, he said, referring to the lead industry.

Copper is widely used in homes, cars and appliances, making its price a barometer of economic activity. The U.S., Japan and Europe were all saddled with recessions last year, the first simultaneous contractions since 1945.

That's what's happening ... see you tomorrow!


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