Good morning ...

Precious Metals

Gold declined from Hong Kong through the first hour of New York trading on Monday, shedding about $15, rallied back until the noon hour, but then fell right through the Globex to finish at $906.20/oz., down $6.80. Overnight, gold has fallen off.

Platinum really hit the skids, plummeting straight through with little interruption, ending at $1140, down $35. Overnight, platinum is sharply lower.

Silver fared much better than its sister metals and, even though it too peaked in early far East trading, it managed to hold above $13 all the way through the Comex, before easing on the Globex to close at $12.90/oz., up a penny. Overnight, silver has fallen steeply.

Precious metals fanciers couldn't have been too disappointed with yesterday's action, given that silver held steady and gold fell only modestly in the face of both a rising dollar and slumping oil.

Most of the market talk yesterday centered on China's surprise announcement late last week that it has been quietly building its gold reserves for years. And though officially it has bolstered stockpiles by 34 million ounces, many observers believe that the actual figure could be much higher than that.

Even if we're getting the straight dope, The Chinese government's decision further demonstrates the leadership it is increasingly taking and its public recognition of gold's proven role as a store of value and portfolio diversifier, wrote Aram Shishmanian, CEO of the World Gold Council.

Julian Phillips, of Goldforecaster.com, went further: By publicizing this information one has to ask, are they going to buy local supply in larger quantities? Will they take all the local production? If so this will mean a drop in supplies to the open market of a substantial amount. This will be extremely gold positive!

It will also mean that not only is Russia buying around 4 tonnes a month for reserves but China is effectively buying over 6 1/2 tonnes of gold a month for reserves. Now add to that that the Central Bank Gold Agreement signatories are selling around 1 tonne of gold a month, with one signatory buying gold now, then it shows that Central Banks of importance are favoring gold far more than before. This does reflect [as the Bundesbank President said] that 'gold is a useful counter to the swings in the $.'

Certainly if the I.M.F. is to sell gold [not a foregone conclusion!] at an auction as they did in the past, then I would expect a central bank like Russia or China to be a buyer, at market prices. The implications for gold returning to a monetary role [reserve asset in support of currencies] are tremendous and gold price positive.

Phillips then cautioned that, If [gold] has such a role in the future then the possibility of governments taking over the gold market rears it ugly head.

Currencies and Economic News

In the currency market, the dollar pounded the euro. Late Monday, the euro was trading at $1.3039 vs. $1.3247 on Friday.

The main driver was the growing concern that the Mexican swine flu could turn into a global pandemic, said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets.

With Mexico at the epicenter of the flu scare, it was no surprise that the peso suffered the most against the buck yesterday, dropping 4.7%.

Clearly there's a lot of uncertainty at play right now, said James Hughes, market analyst at CMC Markets, and any change in guidance over the outbreak from the likes of the WHO will be closely watched.

Elsewhere, We need a new resolution regime for large financial institutions, said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. Creating such a resolution authority would be very bold, but needed.

The authority would be responsible for providing funding to an imploding institution so it could pay off its counterparties and creditors, and Bair wants lawmakers to hand the job to the FDIC, but granted that it could also go to the Fed or some newly-minted entity.

And GM saw its shares surge after the automaker asked its bondholders to exchange $27 billion in debt for equity or risk taking an even harder hit in bankruptcy court.

Energy

In the energy market on Monday, crude for June delivery fell off, closing at $50.14/barrel, down $1.41. May reformulated gasoline dropped 3.92 cents, to $1.4083/gallon.

Fear is dominating the cyclical commodity markets today, as investors are concerned that the spreading of swine flu in Mexico may severely damp hopes of an economic recovery, wrote analysts at Commerzbank.

However, we consider these concerns premature and expect the oil price to move sideways, with some volatility between $45 and $55, they added. Given that oil market fundamentals are still weak, downside risks prevail at the moment.

Edward Meir, of MF Global, concurred that, The Mexican situation is resurrecting fears of the chilling impact that the SARS epidemic had on economic growth, but also cited nervousness about another batch of U.S. earnings reports and macro reports.

Base Metals

The base metals were all bloodied on Monday. As quickly as copper regained $2 on Friday, it gave it back yesterday, falling hard in the early pre-dawn hours, then trading sideways through the rest of the day to finish at $1.9656/lb., down more than 7 1/2 cents. Nickel fell below $5 at mid-morning, but rebounded to close back above the mark at $5.0205/lb., down 10 1/2 cents. Zinc was a steady decliner, ending at its intraday low of $0.5998/lb., down 3 cents. Aluminum was weak, shedding more than three-quarters of a cent, to $0.6351/lb., while lead plunged to its intraday low of $0.6075/lb., down 3 3/4 cents.

Copper's turnaround was a one-day affair, as it led the industrial metals lower on Monday, dropping to a two-week low. Analysts cited concern that a potential swine flu epidemic (or threat thereof) will harm chances for an economic recovery.

With the US government declaring a national public health emergency after more than 100 flu-related deaths in Mexico, there was a sector-wide selloff. The Reuters/Jefferies CRB Index of 19 commodities sank as much as 1.7%.

Traders are getting more worried about the global economy and pulling their money out, said Michael K. Smith, of T&K Futures & Options in Port. St. Lucie, Florida. I expect further pullbacks.

Smith added that, It's a little crazy that everything has been falling on swine flu, but when people get worried about the state of things, they look for any excuse to sell.

Flu fears also played a part in the rush into the dollar yesterday, after four days of declines. The stronger dollar hurts commodities denominated in the currency.

Nevertheless, on the stockpile front, copper inventories monitored by the LME continued their decline yesterday, falling by 4,275 metric tons to 425,275 tons. LME stocks have fallen for 10 straight sessions and are now down 14% just this month.

In other news, the China Mining Association wrote that that country is expected to own rights in more than 100 million tonnes of overseas iron ore assets next year, according to estimation of the country's leading steel information provider, the Beijing-based Lange Steel Information Service. Lange added that about 80 percent of China's overseas iron ore supplies are in Australia, which have been obtained through stake purchases, purchases of assets, joint ventures and joint development.

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



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