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Precious Metals

Gold hung in at $900 until London opened, then declined modestly until about an hour into the New York session, after which it was hammered, falling as low as $873 before making a small comeback during the Globex to finish at $877.00/oz., down $22.90. Overnight, gold has been flat.

Platinum was off sharply in Europe, falling well below the $2000 mark, but clawed its way back in New York to almost retake the level, ending at $1999/oz., down $70. Overnight, platinum has edged lower.

Silver got whacked from London straight through the NYMEX, only leveling off in Globex trading into a close at $16.60/oz., down 81 cents. Overnight, silver has edged higher.

It was a third straight down day for the precious metals, and it was a bad one as gold tumbled to a two-week low.

That it would be a down day was no shocker, considering that falling oil prices and a firming dollar aligned the stars against gold and its sisters. But the extent of the damage may have caught some by surprise.

There was also strength in the equities markets to deal with, as well as an avalanche of selling across the board in commodities.

But analysts were mostly abandoning talk that gold will follow oil, and focusing instead on the role of the dollar, which has been buoyed of late by suggestions that an interest rate hike might come before the end of the year.

With the dollar stabilizing, gold could fall quite a bit, said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. There's a lot of talk about inflation, which works both ways for gold. If the Fed does start tightening, that will strengthen the dollar and could really pop the commodity bubble.

It's an interesting equation, for sure. Inflation is dead certain to pick up as the effects of record-high oil and gasoline prices work their way through the economy. One sign of things to come arrived on Wednesday, with the announcement by Dow Chemical that it was raising prices of its products by 20%. Everyone uses Dow products.

So, will gold emerge in its traditional role as a hedge when inflation really starts to pick up? Or will the Fed's response, which has to be tightening interest rates, hurt gold by propping up the dollar? Stay tuned.

Currencies and Economic News

In the currency market, the dollar firmed for a third straight day against the euro. Late Thursday, the euro was trading at $1.5501 vs. $1.564 on Wednesday.

The direction of interest rates was on everyone's mind.

Dallas Federal Reserve President Richard Fisher, who has voted against the Fed's three most-recent rate cuts, hinted in a Wednesday speech that the central bank is done cutting interest rates and is prepared to raise them.

If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario, Fisher said.

Those remarks made it more evident that the Fed's propensity to take the overnight funds rate below 2% [is] smaller and ever smaller, wrote Dennis Gartman, publisher of the Gartman Letter.

The job market continues to be difficult. The Labor Department reported that initial claims for state unemployment benefits rose 4,000 to 372,000 in the week ended May 24. While, according to Bear Stearns economists, claims haven't moved into recession territory ... they continue to bounce around close to the 375,000 level that we believe is consistent with mildly recessionary conditions.


In the energy market Thursday, crude for July delivery retreated, closing at $126.62/barrel, down $4.41. June reformulated gasoline lost 5 cents, to $3.40/gallon.

The day's action was more than a bit counterintuitive, since the Energy Information Administration's weekly inventory report had crude supplies plummeting by 8.8 million barrels for the week ended May 23, the biggest drop since 2004. Analysts were looking for a 750,000 barrel gain in stocks.

However, Lower oil stocks were due to problems offloading oil in the Gulf of Mexico, and this week's deficit will show up in next week's report as the tankers offshore are unloaded, wrote James Williams of WTRG Economics.

Meanwhile, the Commodity Futures Trading Commission said that it started a wide-ranging investigation of U.S. oil markets six months ago, with a focus on possible price manipulation. The CFTC said it took the unusual step of publicizing the probe because of today's unprecedented market conditions.

In OPEC news, the United Arab Emirates says that current crude prices are going too fast too high, according to a Reuters news report Thursday, and that the UAE is willing and well prepared to raise output if there is a supply shortage, according to the report. And Indonesia, struggling to keep up with its oil production quotas within OPEC, said it will withdraw from the cartel by the end of the year.

Base Metals

The base metals endured a serious bloodbath on Thursday. Copper fell off a cliff at the open of the New York session and never recovered, finishing at its intraday low of $3.6416/lb., down 10 1/2 cents. Nickel followed suit, sinking below the $10 mark, but recovered slightly to edge back over it and close at $10.0115/lb., down 22 cents. Zinc was pounded, barely coming off its intraday low to end at $0.8951/lb., down 5 1/4 cents. Aluminum wasn't spared, shedding 3 1/4 cents to $1.2899/lb., while lead cratered as well, giving up nearly 4 1/2 cents, to $0.8629/lb.

The base metals took an absolute hammering on Thursday, as traders cast an eye on the relationship between rising stockpiles and potentially diminishing demand, and came away with a lot of negative thoughts.

The stock increases are seemingly happening across the board.

Copper inventories monitored by the LME were up 600 metric tons (0.5%) yesterday, to 126,400 tons. It's the highest level since March 13, and the metal has gained 14% just this month. Analysts are also expecting Shanghai to report an increase of some 7,000 tons this Friday.

Among the other metals, lead inventories showed an increase of 1,550 metric tons yesterday, while zinc was up a hefty 7,850 tons.

Lead is also weaker at present in part because demand is seasonally soft, said Lehman Brothers analyst Michael Widmer.

Factor in currency as well. The stronger dollar is of course undermining [copper], said Ron Goodis, of Equidex Brokerage Group in Closter, New Jersey. The bond market is heading down, which means interest rates are going up.

And Ed Meir, of MF Global, cited the sluggish pace of recent imports into China.

In company news, Rio Tinto remained on the offensive against BHP Billiton's takeover bid. Rio CEO Tom Albanese predicted seven years of near-double-digit annual production growth as he argued that BHP's bid is too low.

Rio can expect compound annual output growth of 8.6% through to 2015, and the company is well placed to take advantage of an expected doubling of world demand for metals and minerals by 2022, Albanese said.

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


First Majestic Silver Corp is committed to building a senior Silver producing mining company based on an aggressive acquisition and development plan with a focus on Mexico. The Company presently owns or operates three silver mines in Mexico: The La Parrilla Silver Mine; The San Martin Silver Mine and the La Encantada Silver Mine. Annual production from these three mines is anticipated to be 5 million ounces in 2007.

Learn more about First Majestic.

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