Good morning ...

Precious Metals

Gold was steady to higher through the far East and most of London trading yesterday, but at about 9:30 of the New York session it plunged, bottoming at $877 before it climbed through the NYMEX, only to sag again in the Globex and finish at $881.30/oz., down $9.00. Overnight, gold has fallen off.

Platinum was up, peaking at $2040 in late Hong Kong trading, but it slid in Europe, and plummeted in New York before recovering most of its lost ground to end at $2003/oz., down $4. Overnight, platinum has been trending lower.

Silver tracked gold, skidding from $16.90 in London to as low as $16.50 in New York, but it staged a better turnaround than gold, moving sharply higher to close at $16.77/oz., down just 2 cents. Overnight, silver has declined.

It was a predictable day for the metals, since the usual suspects moved against them, with the dollar rising and oil prices coming off.

But one didn't have to look far for the main reason for either the buck's strength, crude's drop or gold's early weakness.

The proximal cause of today's drop in gold was ... Bernanke's comments regarding commodities and the dollar, wrote Brien Lundin, editor of Gold Newsletter.

The fact that he broke ranks with tradition and addressed the status of the dollar -- which is the Treasury Secretary's bailiwick -- was remarkable enough to send a shudder through the gold and currency markets, Lundin added.

Equally remarkable, perhaps, was the fact that gold did make at least a partial recovery from the plunge brought on by Big Ben's remarks, while silver was barely down at all by day's end.

But, no surprise, Kitco's Jon Nadler accentuated the negative, writing that comments by the Fed chairman echoed the sentiment that an unwelcome rise in inflation had raised the central bank's levels of concern.

Bernanke has drawn 'a line in the sand' as to the amount that the dollar could or should fall by, [and] effectively obviates the 'death plunge' in the currency that oil and gold had been eagerly awaiting since September, Nadler said.

Thus, the risk to the downside for gold has now been significantly augmented once again, Nadler concluded.

But Mark O'Byrne, a of Gold and Silver Investments Ltd., might have been countering that very argument when he said that no amount of jawboning by Bernanke or anyone else will help rectify the huge fundamental headwinds facing the U.S. economy in the face of a housing crash, huge deficits, huge credit and systemic risks and the increasing reality of stagflation.

Currencies and Economic News

In the currency market, the dollar was sharply higher against the euro. Late Tuesday, the euro was trading at $1.5434 vs. $1.5536 on Monday.

As noted, Bernanke's words gave a big boost to the buck. The weak U.S. currency has contributed to the unwelcome rise in import prices and consumer-price inflation, Bernanke told an international bankers forum.

The Fed is attentive to the implications of changes in the value of the dollar for inflation and inflation expectations, and will continue to formulate policy to guard against risks to price stability and sustainable growth, Bernanke said.

Bernanke's defense was about as strong as he could make it, given the U.S. policy of letting only the U.S. Treasury Secretary speak about matters concerning the dollar, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.

However, as Peter Schiff, president of Euro Pacific Capital, points out, only imposing sharp interest-rate hikes and curbing the rate of growth in the money supply will strengthen the dollar and cut inflation. And those could kill off any economic recovery.

That leaves the Fed to walk the tightrope between the rock and the hard place. Some observers were speculating that the tough talk could be followed with Washington intervening in currency markets by buying dollars and selling other currency, a prospect one analyst believes could happen as early as today.


In the energy market Tuesday, crude for July delivery collapsed, closing at $124.31/barrel, down $3.45. July reformulated gasoline fell 3.75 cents, to $3.3525/gallon.

Again, the Fed Chair's remarks were the determining factor. It looks like Mr. Bernanke has acknowledged that his policies have created a bit of a commodity bubble, said Phil Flynn, of Alaron Trading.

But Neal Ryan, of Ryan Oil & Gas Partners, warned that the dollar trade has a much greater impact on the metals sector than the energy pits.

Bernanke and [Treasury Secretary Henry] Paulson can talk down the precious-metals sector anytime they're in front of the mike -- they don't have that power over the energy market, Ryan wrote.

Base Metals

The base metals were mixed again on Tuesday. Copper peaked at $3.68 in the pre-dawn hours, then fell in stutter steps through the day, finishing at its intraday low $3.6363/lb., down 3 cents. Nickel about-faced, regaining some lost ground and pushing back over the $10 mark to close at $10.0834/lb., up 18 1/4 cents. Zinc sagged again, ending just off its intraday low at $0.8693/lb., down a penny and a half. Aluminum was tightly rangebound, finally adding less than a tenth of a cent, to $1.3073/lb., while lead rallied for a second straight day, tacking on nearly a penny and a quarter, to $0.9224/lb.

The blahs seem to have taken firm hold of the industrial metals, with yesterday being a day of little change, just like Monday.

Copper eased primarily on concerns about China, whose apparent consumption of copper concentrate was 438,600 tons in April of this year, down 3.73% year on year, according to the latest statistics from the China Mining Association. That's the first drop since 2007.

In addition, the country's import of copper concentrates dropped 31% in April to 128,000 tons. For the first four months of 2008, imports declined 517,100 tons, down 23% year on year.

Manufacturing growth in China also eased in May, according to the CLSA China Purchasing Managers' Index, released yesterday. The gauge declined to a seasonally adjusted 54.7 last month from 55.4 in April.

Supporting the idea of a sagging market, copper inventories monitored by the Shanghai Futures exchange have surged by 85% so far this year.

Ben Bernanke played in, with a comment that, Commodity prices will level out, which is consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials.

Reacting to the chairman's words, John Kemp, an analyst at RBS Sempra Metals in London, rang the hallelujah bell, writing that, Bernanke has finally admitted the central bank's cheap-money and cheap-dollar policy is partly responsible for fueling the rise in commodity prices.

The selloff was widespread, with the UBS Bloomberg Constant Maturity Commodity Index, a gauge of 26 raw materials, falling as much as 0.7% yesterday.

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


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