Good morning …

Precious Metals

Gold took a pasting in the far East on Monday, declining from $893 to $875, after which it went flat until mid-morning in New York, then dropped another $10 before leveling off to trade sideways for the rest of the day, finishing at $868.70/oz., down $25.10 from Friday. Overnight, gold is sharply higher.

Platinum also dropped off in Hong Kong but spiked higher in European trading, peaking in the second hour in New York before a steep decline to the noon hour and listless trading thereafter led to an end at $1141/oz., down $14. Overnight, platinum is pushing higher.

Silver suffered a similar fate to gold and then some, skidding in Hong Kong and then again early in New York, bottoming at $12.09 at mid-morning and going dead flat from there to close at $12.11/oz., down 64 cents. Overnight, silver is trending higher.

The precious metals, particularly gold and silver, took another serious whacking on Monday. While there was no support offered by the usual suspects, as equities fell along with oil and the dollar rose, the primary driver appeared to be a decline in the metals’ safe haven appeal amid renewed appetite for risk.

Still, the extent of the damage took many by surprise.

The Hightower Report groped for an answer, writing that: “The gold market came under aggressive selling pressure even though the press was alive with disconcerting US financial sector forecasts. With several analysts laying out some very dire statements for the US banking system and others suggesting that recent accounting changes will offer little reprieve for financial companies, it would seem like a large portion of last week's optimism has been reversed. While some traders suggested that the kick off to the US corporate earnings cycle on Tuesday prompted the washout in the stock market, the gold bulls still had to be disappointed in the gold markets reaction to the events on Monday. With a clear recovery in the Dollar, the currency impact on gold prices was bearish but seeing June gold at times down almost $30 an ounce seemed to suggest that something more than simple currency pressure was at work.”

Another factor was noted by George Gero, of RBC Capital Markets, who said that, “There is still this fear of a lot of selling coming from different central banks and the IMF … The perception is that ‘I am getting out of the way until all the sales are completed and let's see how it's absorbed’.”

Gold has lost nearly 6% just since April 1, and has now given up all its gains for the year, down 1.4%.

But we agree with Hussein Allidina, an analyst at Morgan Stanley, who said that he sees “any weakness in price as a buying opportunity as the [feared IMF] sale would occur over years and be under the CBGA limit.”

Currencies and Economic News

In the currency market, the dollar rose against the euro. Late Monday, the euro was trading at $1.3408 vs. $1.3483 on Friday.

“Where the greenback goes from here will depend, not surprisingly, on risk trends as fundamentals have yet to really matter again for the currency,” wrote Terri Belkas, currency strategist at DailyFX.

The dollar got some buoyancy from news that the European Central Bank, the Bank of Japan, the Bank of England and the Swiss National Bank have set up swap arrangements to allow the Federal Reserve to provide foreign-currency liquidity to U.S. financial institutions.

And the buck held up even though bank stocks got pummeled as traders were keeping a wary eye on ongoing “stress tests” at the nation's top banks ahead of a likely regulators' meeting. Federal bank regulators plan to gather sometime in the next few days to try to figure out how to read the results of the tests.

Yesterday featured an exceedingly gloomy report from Mike Mayo, an influential Calyon Securities analyst, who argued that loan losses will be the main issue over the next couple of years, and he expects them to exceed the level of the Great Depression. He sees industry loan losses rising from a current 2% level, to 3.5%, “above 3.4% in 1934 or, under a stress scenario, at 5.5%.”

Mayo added that, “On a base of $7 trillion of industry loans, this implies annual losses of about $250-$400 billion, or probably in the range of $600 billion to $1 trillion over three years. Thus, while capital market write-downs of almost $400 billion seem in the later stages, higher costs for problem loans could result in total industry losses of $1.0-1.5 trillion.”

Energy

In the energy market on Monday, oil fell, with crude for May delivery closing at $51.05/barrel, down $1.46 from Friday. May reformulated gasoline dropped a penny and three-quarters, to $1.4755/gallon.

Traders showed up in a somber mood yesterday, as they braced for what are expected to be grim first quarter earnings numbers.

Crude's recent “gains faded with people looking at oil in the global economics of things, and in some ways we're not that much farther ahead than in January,” said Phil Flynn, of Alaron Trading.

Qatar’s Oil Minister Abdullah bin Hamad al-Attiyah poured some cold water on the market, saying he doesn’t expect prices to rebound to $70 a barrel this year even as OPEC implements its biggest-ever supply reduction.

“Fifty dollars a barrel is reasonable for the world economy now,” al-Attiyah said, a sentiment echoed by Venezuela’s Hugo Chavez, who also called $50 “enough.”

Base Metals

The base metals were primarily in the red on Monday. Copper made a grab for the $2 mark but was stopped just short of it in the late pre-dawn hours, then sold off straight through the rest of the day, just coming off its intraday lows late to finish at $1.9263/lb., down 2 cents from Friday. Nickel faced similar resistance at $5, falling away from it through most of the day, but still closing in the green at $4.793/lb., up more than a penny and three-quarters. Zinc was on the decline for most of the day, ending at $0.6013/lb., off nearly a half-cent. Aluminum was weak, shedding three-quarters of a cent, to $0.6462/lb., while lead was modestly lower, dropping a quarter-cent, to $0.5938/lb.

Copper’s recent rally fizzled out in the light of the New York day, as analysts noted sentiment that the runup may have been overdone, given that there are few real signs the global economy is getting any better.

Copper jumped 9% last week, in tandem with a rally that sent the S&P 500 3% higher.

“People had gotten pretty excited last week about the economy,” said Michael K. Smith, of T&K Futures & Options in Port St. Lucie, Florida. “The reality is not that the economy is good. It’s just not as bad as people had feared. We could see copper pull back this week as some of that optimism dies out.”

The industrial metals also had benefited from better-than-expected data ranging from a rise in China's official purchasing managers' index in March, to a 2.1 percent increase in pending sales of existing U.S. homes, and a better-than-expected rate of decline in U.S. construction spending.

But Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York said that, “I can’t see copper being able to hold on to these prices because there isn’t any sustained underlying growth. The move higher was just a temporary thing.”

The stronger dollar, which makes commodities denominated in it more expensive, factored in, as did the supply numbers. Inventories monitored by the LME rose by 2,675 metric tons yesterday, to 504,825 tons. On the plus side, though, were canceled warrants—metal earmarked for delivery—which jumped from 25,475 tons on Friday to 50,525 tons yesterday, or about 10% of stockpiles.

And there was some expected profit-taking as traders were lacking in conviction that copper could burst through the psychologically-important $2 barrier.

In company news, Rio Tinto has reportedly drawn up contingency plans to raise $8 billion in a rights issue, should the proposed $19.5B deal with Aluminum Corporation of China fall through.

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


NEWS YOU CAN USE:

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