Good morning …

Precious Metals

Gold began the day slightly higher in the far East on Tuesday, pushed slowly upward from there through the first half of the Globex, but then tailed off a bit to finish at $925.00/oz., up $7.60. Overnight, gold has edged higher.

Platinum spent most of the day consolidating gains in the $1130-$1140 range, ending near the high end at $1139, up $10. Overnight, platinum has pushed higher.

Silver was near-flat through Hong Kong trading, but turned in a fine day thereafter, moving higher straight through to the early Globex and peaking at $14.30 before easing in the last two hours to close at $14.15, up 39 cents. Overnight, silver is trending higher.

It was a good day for the precious metals, with silver leading the parade, tacking on nearly 2 1/2%. Equities were mixed, which likely helped, as did oil edging higher and the dollar falling again.

The Hightower Report wrote of silver’s continuing strength: “The silver market traded sharply higher with outside market activity providing spill over support. Initial strength in copper and the sharp decline in the Dollar likely gave the bull camp early leverage. But with both gold and equities trading firm, the silver market was easily able to discount today's bearish housing news. It also looked as if the sell off in the Dollar raised the appeal of physical commodities as an inflation hedge which benefited silver. But gains in silver appear partly to be chart based as the market pushed through several key levels.”

Kitco’s Jon Nadler commented on the commodities markets, saying that, “[Monday’s] stock market rallies managed to divert a fair amount of sidelined as well as committed cash, but there remain plenty of hedge funds whose bets on the commodities sector are keeping a floor under metals and energies.”

Nadler added that, “The time has arrived when more and more people are clamoring for inflation to make a real comeback.”

Looking ahead, analyst Roger Wiegand, in a Gold Report interview, addressed the “sell in May and go away” strategy, noting that gold generally “travels sideways for most of the summer. I would say that's probably our trading action in the next two to four weeks. If gold sells down again, and I think it will, you could see a base-bottom somewhere between $850 and $885 and then a lot of chop and mild rallies. These channeled markets are difficult to trade. And, then into the fall we're looking for the next larger, extended rally … [when] gold could run away to $1,150 and more, easily up to $1,260.”

Currencies and Economic News

In the currency market, the dollar declined further against the euro. Late Tuesday, the euro was trading at $1.3633 vs. $1.3535 on Monday.

The day’s big news yesterday was that optimism over an improving housing market was dealt a splash of cold water when the government reported that construction on new housing projects slowed to a record-low pace in April.

The Commerce Department said that new construction of single-family homes and apartments plunged 12.8% to a record-low annual rate of 458,000. That was far worse than the 519,000-rate predicted by economists.

It was also the weakest level since the government began publishing the data in 1959, and it pushed housing starts to 79.9% below their peak in January 2006.

Some economists believed the report was not as bad as it seemed, and were looking for sector improvement in the near-term. “We continue to see many necessary characteristics for a bottom falling into place, and see the bottom process a difficult struggle rather than far off,” said Stephen Gallagher, U.S. economist at Societe General.

Multifamily housing starts plummeted 46.1%, while single-family starts actually rose 2.8%.

What is likely happening,” wrote Richard Moody, chief economist at Forward Capital in Austin, Texas, “is that the single family segment of the market is forming a bottom, at an exceptionally low level, while the multifamily segment of the market is reflecting the impacts of the credit market turmoil and the deep recession.”

Energy

In the energy market on Monday, crude for June delivery edged higher, closing at $59.65/barrel, up 62 cents. June reformulated gasoline gained 5.44 cents, to $1.8125/gallon.

Traders reacted to expectations of the Energy Information Administration’s inventory report, due out today. Analysts surveyed by energy information provider Platts expect a 1.5-million-barrel drop in U.S. crude stockpiles.

Last week, the EIA reported that U.S. crude inventories fell for the first week in 10, as the country imported less oil.

The EIA is expected to report a rebound in imports when it releases the new report, “but the bounce will not likely be large enough to prevent another drop in stocks,” said Linda Rafield, senior oil analyst at Platts.

Also factoring in was a fire that broke out at a Flint Hills Resources refinery, curbing production. The catalytic cracker caught fire at Flint Hills’ Corpus Christi, Texas, refinery, which has a capacity of 300,000 barrels of oil a day. A catalytic cracker is used to make higher-value products such as gasoline and diesel.

Base Metals

The base metals were mixed on Tuesday. Copper was up sharply in the pre-dawn hours, peaking near $2.09 at the New York open and, though it then gave up most of its gains, stayed just in the green to finish at $2.0442/lb., up three-quarters of a cent. Nickel also took losses during the day but remained upright, closing at $5.6321/lb., up 7 3/4 cents. Zinc’s swoon took it just under break-even at $0.6739/lb., down less than a tenth of a cent. Aluminum fell to its intraday low of $0.6634/lb., down nearly a penny, while lead also dropped to its intraday low of $0.6648/lb., down three-quarters of a cent.

Copper somehow held in positive territory even as the weak housing data suggested a decreased demand for the metal going forward.

“There is still weakness in the economy and housing that will pressure copper prices,” said Gijsbert Groenewegen, of Gold Arrow Capital Management in New York. “We need to see signs of sustainable demand for copper.”

Stocks may have helped put a floor under it, however. “Copper's losses were limited in part by the slightly positive tone in equity markets,” said Sterling Smith, of FuturesOne in Chicago.

“Copper is having a hard time finding direction and is trying to find a comfort zone at this point,” said Donald Selkin, of National Securities Corp. in New York. “It’s been following the stock market to a great extent. It’s a mixed picture right now.”

Weighing in on the brighter side was Cochilco, Chile's state copper commission, which raised its average copper price outlook for this year to $1.75 per lb, from $1.60 previously, due to greater-than-expected Chinese demand for the metal.

“China is the swing factor and everyone is focused on what growth there will look like,” Groenewegen said. “If the copper is being used up for industrial production, then that would be sustainable demand. If it’s just going into stockpiles, then it’s completely artificial and the prices will come down.”

Stockpiles also contributed positively. Copper inventories monitored by the LME were off 4,725 metric tons yesterday, to 348,825 tons, the lowest level since early January.

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


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