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Precious Metals

Gold sank pre-Fed, falling as low as $862 in London trading, then seesawed through the New York session on Wednesday, before shooting upward in the Globex market after the interest rate announcement and finishing at $876.60, up $5.50. Overnight, gold has fallen off.

Platinum traded up and down through a $20 range before settling in the afternoon at $1933/oz., up $7. Overnight, platinum is sharply lower.

Silver closely tracked gold, but soared even higher after the Fed decision, closing at $16.84, up 32 cents. Overnight, silver is trending lower.

Metals investors apparently believed the Fed might hold interest rates steady, or indicate that a rate cut yesterday would be the last, and prices suffered accordingly. When neither happened, gold and silver were off to the races, leading many to suspect that the pre-Fed lows might represent something of a bottom.

Gold was certainly held back pre-Fed by a dollar that held up, and by easing oil prices, but nothing could restrain it after the decision.

As we have been saying, a Fed rate cut, and the lack of any firm indication that the FOMC will now be turning its attention to inflation, are dollar negative and thus gold positive. That doesn't mean the market will necessarily respond in the way that it ought to, but in this case it did.

For now. We shall have to see if this is the beginning of a prolonged uptrend for the precious metals, as it should be.

We did not get the impression that today's statement signaled a pause, albeit expectations now show a 75% chance of no cut, come June, said Kitco's Jon Nadler.

The Fed refused to close the doors on any policy options as it tries to ensure that the economy is first revived, Nadler added.

Zachary Oxman of Wisdom Financial concurred, saying that, The [Fed] statement was very economic neutral and still seemed to focus on the risk of inflation ... I'd watch for dollar weakness and gold strength off this report today.

Currencies and Economic News

In the currency market, the dollar slipped against the euro late in the session. Late Wednesday, the euro was trading at $1.5612 vs. $1.5566 on Tuesday.

Fed, Fed, Fed was all anyone wanted to talk about yesterday, as the Committee, although there had been speculation to the contrary, surprised few by shaving another quarter-point off of interest rates, to 2%.

Those scrutinizing the accompanying rhetoric for a sense of future direction were left wanting.

During the last several sessions currency traders have begun to question whether the Fed might serve up a warning that monetary policy is on hold. However, there was little in today's ... statement to signal that they are definitely on hold, said Andrew Wilkinson, senior market analyst at Interactive Brokers.

They were decidedly quite rightly concerned with the ongoing weakness in the economy, especially labor and housing. The takeaway feeling I get after this is that the Fed is reserving the right to deliver more stimulus at a later date if it's warranted, Wilkinson added.

Among the day's numbers, the Commerce Department said that growth in real gross domestic product for the first quarter was estimated at 0.6% for the second straight quarter. That was grim, but actually higher than the 0.2% growth rate projected by economists.

Despite the higher-than-expected reading, No one would confuse this with a healthy economy, wrote Douglas Porter, of BMO Capital Markets.

In fact, as Dow Jones Marketwatch wrote: With inventory building adding 0.8 percentage points to growth, the headline GDP figure was stronger than the details of the report. Final sales of domestic product fell 0.2%, while final domestic sales dropped 0.4% -- the first decline since the recession of 1991.

The economy produced more goods and services, but the extra output went into warehouses and on ships, not into current consumption or investment. With inventories building up, output in the second quarter could be much softer.


In the energy market Wednesday, crude for June delivery fell for the second straight day, dropping to $113.46/barrel, down $2.17. June reformulated gasoline declined 2.2 cents, to $2.9107/gallon.

In its weekly inventory report, the Energy Information Administration said that crude stocks rose 3.8 million barrels in the week ending April 25. That surprised analysts to the upside. They were projecting only a 1.6 million barrel increase.

This report should send the bulls to the barn and bring the bears out into the berry patch, said James Williams, of WTRG Economics.

Additionally, gasoline supplies fell by 1.5 million barrels, vs. predictions for a decline of 800,000 barrels, while distillate stocks rose by 1.1 million barrels, against a predicted increase of 150,000 barrels. Refineries were operating at 85.4% of capacity last week, down 0.2% from the previous week.

Base Metals

The base metals were mixed on Wednesday. Copper bottomed in the pre-dawn hours, then was up through most of the day, finishing at $3.9472/lb., up almost 2 1/4 cents. Nickel blasted back over $13.10 in the late morning, but then fell sharply to close at $12.8374/lb., down almost 5 cents. Zinc was up and down with little change, ending at $1.0024/lb., down less than a quarter of a cent. Aluminum sagged to $1.307/lb., down 1 2/3 cents, while lead was marginally higher at $1.2228/lb., up two-tenths of a cent.

The Fed's action had little effect on the industrial metals, with copper rising slightly on what analysts tabbed as primarily short covering.

Volume was light, as most of the trading came before the Fed weighed in.

Also factoring in was the slight rise in GDP, as expected, with speculators hoping that that signals a rise in future demand.

The strike against state-owned Codelco in Chile continued, but even down there, All eyes are on the Fed, said Bart Melek, global commodity strategist with BMO Capital Markets.

Melek went on to say that strike participants were mostly keeping their powder dry ahead of the interest rate announcement.

Supply data came in slightly bearish yesterday. Inventories monitored by the LME rose 875 metric tons, to 110,525 tons.

Had the Fed's rhetoric indicated a more hawkish stance on inflation is coming down the road, we wouldn't be surprised to see a bit of a correction here in copper, said Michael Gross, of Gross added that over the next month the metal could pull back to the $3 to $3.25 range.

But with no clear signal given, prices are likely to continue to move sideways within a $3.85 to just over $4 range, said Eric Wittenauer, analyst with Wachovia Securities.

In company news, Grupo Mexico said on Monday that its plans to ramp up output at its giant Cananea copper pit have been delayed indefinitely after a labor board declared a 9-month-long strike there legal.

Grupo Mexico hoped to have significant production by May but plans were stifled by new worker blockades this month. At this point, we are unable to provide a revised copper production guidance for the remainder of the year and the date at which we will resume operations is not currently foreseeable, said CFO Daniel Muniz.

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


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