Good morning …

Precious Metals

Gold was higher in the far East on Monday, peaking there at $988, then fell off into the late morning, rallied one last time to just past the noon hour, then fell into the red and stayed there, finishing at $974.60/oz., down $2.00. Overnight, gold has edged higher.

Platinum pushed higher in the far East and remained there, trading within a $15 range all day and, though ending at the low end, still added $21, to $1209. Overnight, platinum is slightly higher.

Silver peaked at $15.95 in London, declined sharply into the late morning, then followed gold with a brief rally and another pullback, to close at $15.59, down 20 cents. Overnight, silver is trending higher.

The precious metals were probably looking to start June with a bang, as a follow-up to May’s strong finish but, with the exception of platinum, it didn’t happen. Aficionados had to be disappointed, considering that the usual suspects were generally supportive, with the dollar falling and oil rising.

Probably, however, some money was sucked away by the rally in equities.

Julian Phillips, of Goldforecaster.com, analyzed recent market action thusly: “As we approach the four figure barrier [$1,000] we have no doubt that [the] short-term players will pause again and then the big question has to be asked. ‘Will gold break up and out to higher levels in a new bull phase, or will it tumble back to $850 as some believe?’ Silver will follow gold in a more dramatic way.

“Long-term investors have openly been small buyers of late and they are the ones that really have driven these markets. They are more than capable of buying 100 tonnes a month should they believe that the long-term macro-economic and currency scene warrants it. They hold over 1,300 tonnes at present, a quantity that is larger than Switzerland's holdings and are the fifth largest holders of gold after the four largest central bank holdings of gold. If they perceive that the levels of uncertainty and soundness of the monetary system are suspect, then gold will evolve back into a role it has not seen for 35 years but was part of the fabric of life for the previous 6,000 years. If they believe that a recovery will help us all to 'live happily ever after' then they will hold back and the gold price will drop back to $850 or less.

“Gold is like the thermometer in an ailing patient and the question is, ‘Will a real recovery take place’ or ‘is the sickness incurable’?”

Phillips answers his own question with another question, namely, “have the monetary authorities repaired the monetary system properly?” You probably know what we think about that.

Currencies and Economic News

In the currency market, the dollar prolonged its slide against the euro. Late Monday, the euro was trading at $1.417 vs. $1.4126 on Friday.

“What we've seen is a continued rally in risky assets -- equities, commodities and emerging markets,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

It’s “the green-shoots rally that has really perpetuated the dollar sell-off in recent weeks,” Woolfolk added. “It's not being driven by fundamentals but market sentiment.”

The buck was strong as long as economic turmoil and fear dominated market thinking, with the currency seen as a safe haven. Now, however, the appetite for riskier investments is on the rise “across the board,” notes Kenneth Broux, of Lloyds TSB in London. “It certainly looks like there is a great acceleration in recent trends.”

Among the day’s numbers, the Institute of Supply Management's national manufacturing index rose to 42.8 in May from 40.1 in April. That bettered economists’ expectations for a reading of 42, but anything below 50 indicates that industry is still contracting.

Meanwhile, the Commerce Department reported a 1.1% rise in disposable incomes in April, which mostly went into savings rather than spending. The personal savings rate jumped to 5.7% in April, a 14-year high.

Real consumer spending fell 0.1%, the second consecutive decline and the 8th decline in the past 11 months. Inflation was relatively tame in April, with consumer prices rising 0.1%, and core prices -- which exclude food and energy – up 0.3%.

Energy

In the energy market on Monday, crude for July delivery continued its relentless climb, closing at $68.58/barrel, up $2.27. July reformulated gasoline rose 2.9 cents, to $1.9243/gallon.

Crude was up for a sixth straight session, and now sits at its highest level in seven months. Yesterday’s rally came on top of a 30% rise during May, the biggest monthly gain in a decade, as the weaker U.S. dollar and hopes for an economic recovery have bred a gang of optimists.

Many analysts, however, have become increasingly concerned that oil's recent upswing is overdone.

“What all these surging markets have in common is that their advances are occurring in spite of uninspiring fundamentals,” wrote Edward Meir, of MF Global.

“It seems that for the moment participants are not interested in the bearish dynamics of the market, and instead are pushing values higher on solid technicals and bullish exogenous variables, such as the weaker dollar, firmer equity markets, and improving macro data,” Meir added.

And a PetroChina official said gasoline and diesel prices in that country are going up by the equivalent of 19 cents a gallon, effective yesterday. The move represents increases of about 6% to 7% over current average gasoline and diesel retail-ceiling benchmarks.

Base Metals

The base metals were all gushing green on Monday. Copper had another strong day, pushing steadily higher from the pre-dawn hours through the day and finishing at its intraday high of $2.2858/lb., up 12 2/3 cents. Nickel also moved strongly higher, closing just off its intraday high at $6.5559/lb., up 32 3/4 cents. Zinc was a solid gainer, ending at $0.71/lb., up 2 3/4 cents. Aluminum was higher, tacking on 2 1/4 cents, to $0.658/lb., while lead soared, adding 4 1/3 cents, to $0.748/lb.

Copper led the industrials stoutly higher for the third day in a row, and began June in fine fashion, jumping to a seven-month high as traders responded to the declining dollar and some encouraging news out of China.

China’s official Purchasing Managers’ Index came in at 53.1 for May. It was the third straight reading of more than 50, which indicates expansion, the Federation of Logistics and Purchasing said yesterday.

The Chinese data, on the surface, indicate the stimulus package, which includes fiscal and bank lending, has an effect in stimulating the economy,” said James Parsons, a portfolio manager at London-based BlueCrest Capital Ltd., which manages about $12 billion. “The question is, how sustainable that is.”

That seems reasonably cautious. But the three banner days for the base metals have other analysts exhibiting what might easily be called irrational exuberance.

“People are really pouring into copper and the commodities overall right now on the dollar weakness and the thinking that there is an end in sight for the recession,” said Matthew Zeman, of LaSalle Futures Group in Chicago. “A lot of these commodities can go a lot higher from here.”

Interestingly, the stockpile data were not as striking as usual. Copper inventories monitored by the LME did decline yesterday, but only by 300 metric tons, to 311,975 tons. That’s well below the freefall of recent weeks.

Among other developments, there has been considerable short covering of late. Hedge-fund managers and other large speculators reduced their net-short positions by 5.8% in New York copper futures in the week ended May 26, according to the Commodity Futures Trading Commission. And the Reuters/Jefferies CRB Index of 19 raw materials finished May up 14%, the biggest monthly gain since July 1974.

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


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