Good morning …

Precious Metals

Gold rose from at the mid-point of the Hong Kong session through the first hour in New York, declined sharply to the late morning, but then took off again and advanced steadily higher through the Comex and Globed, finishing at $922.90/oz., up $9.60. Overnight, gold is little changed.

Platinum was up and down within a range from $1115 to $1130, and settled near its high point, ending at $1131, up $16. Overnight, platinum has been flat.

Silver followed pretty closely, peaking at $14.35, but fell off and then traded sideways through the day, closing at $14.22, up 28 cents. Overnight, silver is slightly lower.

Gold led the precious metals solidly higher yesterday, as the usual suspects lined up in its favor, with oil rising and the dollar declining, and perception that inflation may kick in also supportive.

The rally was general. The Reuters/Jefferies CRB Index of 19 raw materials climbed nearly 1%.

The optimism is beginning to seem a bit overblown, as some are thinking like this: “The global recession and the U.S. recession probably is over this month, maybe next month,” said Jan Loeys, of JPMorgan Chase & Co. in Hong Kong. “Commodities, materials in particular, are going to be benefiting right now as investors start to get a bit worried about future inflation.”

But whether or not the recession is coming to an end, Loeys is likely correct in saying that, “Over the next year or so, we think we are going to be crossing $1,000, probably go ultimately to $1,200, $1,300 just for inflation hedging and lack of supply.”

Loeys concluded that clients “are very worried about inflation in two, three years time … The buying we are seeing now in commodities is really hedging, hedging off the potential risk that we will see a spike in inflation.”

The real story of the year, of course, is with silver, which is up over 25% on the year vs. gold’s near +5% performance. It’s not explainable in terms of industrial demand, which is bound to be off in the downturn. More likely, investors are increasingly coming to treat silver as an investment, like gold, only cheaper.

But it’s come so far, so fast that some caution may be advisable. As Miguel Perez-Santalla, of Heraeus Precious Metals Management in New York, notes: “Silver can still see a correction to come.”

Currencies and Economic News

In the currency market, the dollar got slapped down against the euro. Late Tuesday, the euro was trading at $1.3644 vs. $1.3589 on Monday.

The buck is getting hit by the spreading, and probably wishful, thinking that an economic upturn is just around the corner, depriving the currency of its appeal as a safe haven in rotten times.

Many see the decline as short-lived. “We have warned that the current period of vulnerability for the buck could go on for several weeks, but at some point, it will all come back to relative growth rates, which gives the U.S. a distinct advantage over the longer term,” wrote strategists at Brown Brothers Harriman.

The Commerce Department reported that both imports and exports declined in March, with the former exceeding the latter, so that the trade deficit widened by 5.5% to $27.6 billion in March from a nine-year low of $26.1 billion in February. wrote that, “By some accounts, global trade has been contracting even faster than it did in the early 1930s during the Great Depression. That could be turning, however. ‘There are already anecdotal reports that trade flows are starting to stabilize,’ wrote Stephen Stanley, chief economist for RBS Securities.

“The narrowing in the trade deficit has been a major prop under the U.S. economy. However, ‘it will be difficult to narrow the trade deficit by much more going forward, especially if the vicious downturn in the economy seen in the fourth quarter and the first quarter has begun to abate,’ Stanley said.”


In the energy market on Tuesday, crude for June delivery pushed higher, closing at $58.85/barrel, up 35 cents. June reformulated gasoline fell 1.23 cents, to $1.6679/gallon.

Oil pulled back yesterday after advancing early 2.7% to touch a six-month high of $60.08.

Oil has rallied sharply, surging more than 70% from its mid-February low below $34 a barrel. Year to date, it has gained more than 30%, befuddling analysts who keep looking for the rally to turn around, as it “should” since demand still remains weak.

On the bullish side, China, the world's second-largest oil consumer, announced that it increased its imports by 13.6% last month, to 3.9 million barrels a day.

Production from the 11 OPEC members bound by quotas rose 130,000 barrels a day to 25.74 million barrels in April from 25.61 million barrels in March. 12th member Iraq does not participate in output agreements.

And the Energy Information Administration said yesterday in its monthly report that it now projects world oil demand to fall by 1.8 million barrels per day in 2009, or 400,000 barrels larger than the EIA had forecast last month.

Base Metals

The base metals were mixed on Wednesday. Copper rallied from the pre-dawn hours to mid-morning, but then gave it all back by day’s end to finish at $2.0599/lb., down just over a quarter-cent. Nickel followed copper closely but didn’t fall as far, closing at $5.8423/lb., up more than a penny and three-quarters. Zinc had the same up and down day, ending at $0.6842/lb., down a third of a cent. Aluminum was little changed, shedding a quarter-cent, to $0.6774/lb., while lead used a very late rally to push higher, adding almost 2 cents, to $0.6666/lb.

Copper set the tone for a day of sharp ups and downs among the industrial metals, showing strength early but fading inexplicably even as equities were recovering lost ground. The metal had benefited early on after a report that the US trade gap widened in March, putting downward pressure on the dollar.

China factored in on the upside, as investment in factories and property climbed 30.5% in the four months through April, bettering economists’ forecasts. Additionally, imports of copper in China rose 7% in April, to a record high.

“Continued evidence of global economic recovery is important for confidence,” wrote Derek Halpenny, the London-based head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. “China is expected to play an important role in bringing about some of that recovery and the data from China today signaled some more positive developments.”

China’s economy will expand 7.8% this year, compared with a 2.5% contraction in the U.S., according to economists surveyed by Bloomberg.

Stockpile data continued to be supportive. Copper inventories monitored by the LME fell by 6,150 metric tons yesterday, to 379,025 tons.

However, “It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Paul Krugman, Princeton University’s Nobel Prize-winning economist, said in Shanghai yesterday. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

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


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