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Precious Metals

Gold stayed almost entirely within a tight $5 range from the far East straight through the New York session on Monday, finishing at $893.20, up $8.20 from Friday. Overnight, gold has fallen off.

Platinum also traded narrowly, within a $15 range and with a bias to the upside, ending at $1975/oz., up $18. Overnight, platinum is off sharply.

Silver spiked in New York morning trading, peaking at $17.14, but was unable to hold above the $17 level, sliding back to close at $16.99, up 15 cents. Overnight, silver has been trending lower.

Lack of volatility was the order of the day on Monday in the precious metals markets, which probably came as a relief to traders jolted by recent sharp price swings. And most analysts expect trading to remain thin ahead of the Fed's interest rate decision, due out on Wednesday.

Gold yesterday received support from the energy sector, which saw oil prices rising, but not much from the dollar, which was little changed.

Silver took its cue in part from copper, which was firm on supply worries.

If Gold is holding up on oil and because of the threat of inflation, according to Miguel Perez-Santalla, of Heraeus Precious Metals Management in New York, then what's the likely outcome this week?

The Fed's decision could have significant ramifications for gold. A rate cut of another 25 basis points, once thought all but certain, has picked up a bit of doubt in the face of increasing inflation.

Should the Fed go ahead with that quarter-point cut, that of course is negative the dollar and positive gold and, if the cut isn't already factored into the current price, then look for the bull trend to reassert itself, says Ralph Preston, of in San Diego, California.

However, We expect the dollar's rally to pick up steam if the Federal Reserve decides to stand pat on interest rates, said Edward Meir of MF Global. This could set off another potentially heavy round of profit-taking in commodities.

So the easy call is that, Gold will trade cautiously in the next couple of sessions ahead of the Fed, said analysts at Action Economics.

Currencies and Economic News

In the currency market, the dollar was slightly lower against the euro. Late Monday, the euro was trading at $1.5642 vs. $1.5625 on Friday.

Traders breathlessly await the Federal Reserve's critical decision, with sentiment still running strongly in favor of another cut.

However, There was some 'just-in-case' position squaring overnight, wrote David Watt, of RBC Capital Markets. The market is poised to jump on any sign of a pause and elevated inflation concerns to justify the exceptionally premature speculation about a rate hike by year end.

The Fed's rhetoric will be scrutinized almost as much as what it does, since inaction now won't be taken as an end to falling rates unless the Committee is decisive about it.

We're not calling the end of the rate cuts, wrote Ashraf Laidi, chief foreign exchange strategist at CMC Markets US.

Regardless of whether the Fed holds rates unchanged in June, we expect the easing campaign to resume in the third quarter, Laidi said, citing a persistent credit crunch, slack labor markets and the continued slowdown in housing.


In the energy market Monday, crude for June delivery spiked higher, shooting to yet another record intraday high of $119.93 before easing to close at $118.75/barrel, up 23 cents. June reformulated gasoline fell 2.3 cents, to $3.0307/gallon.

Trading was influenced by supply concerns, after hundreds of oil workers at Ineos PLC's Grangemouth refinery in Scotland started a two-day strike Sunday, forcing the closure of a BP-operated pipeline that transports 700,000 barrels of oil a day, about 40% of the U.K.'s daily crude production.

Given this troubled backdrop, we expect the markets to remain firm at least until mid-week, when the Scottish strike is scheduled to come to an end, MF Global's Meir wrote.

Analysts said the problems extend beyond the immediate impact of strike. The refinery will take some time to restart even if the labor dispute is resolved quickly, possibly forcing more lengthy disruptions of oil shipments.

Jitters were stoked by new violence from the deteriorating Nigerian situation. News reports said that five policemen were killed Sunday when rebel groups attacked the nation's largest oil and gas terminal.

Base Metals

The base metals were mixed on Monday. Copper came off its pre-dawn lows to move mostly upward and, though it couldn't dent the $4 mark, finished with a modest gain at $3.9678/lb., up 2 2/3 cents from Friday. Nickel traded very erratically, although within a fairly tight 12-cent range, closing at $13.1927/lb., down more than 5 3/4 cents. Zinc also traded narrowly, ending at $1.0261/lb., down three-quarters of a cent. Aluminum pushed slightly higher, adding two-thirds of a cent to $1.3436/lb., while lead also tacked on two-thirds of a penny, to $1.2452/lb.

Markets were quiet in thin trading ahead of this week's Fed meeting.

Supporting copper was a further stock drawdown. Inventories monitored by the LME fell by 1,875 metric tons yesterday, to 110,325 tons.

Copper also had a firm floor beneath it because of the ongoing strike by contract workers at three of state-owned Codelco's mines in Chile.

Codelco's Andina and Salvador divisions have been shut down for twelve days and the Teniente division, one of the company's largest and the world's biggest underground operation has been shut, re-opened, shut again and was running again as of Saturday, pending any further violence.

The concern is that the strike, and perhaps violent confrontation, could spread to Codelco's two other copper divisions-Ventanas and Codelco Norte, the largest producer. Union leader Cristian Cuevas has said that, We are calling from this moment onward for subcontract workers across Codelco divisions to take to the streets until this conflict is resolved.

Teniente remains vulnerable to further disruption, as well. It is key, as it produces 400,000 tons of copper a year, nearly a quarter of Codelco's total.

There is also growing sympathy among other Chilean unions, and if they walked out in solidarity, the entire company could be shut down.

In retaliation, local news reports say, Codelco is hiring some 1,500 workers prepared to cross the union picket lines, and is ready to fire some 600 subcontractor workers at Andina. Such actions could escalate tensions dramatically. Things could easily get much worse before they get better.

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


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