Good morning …

Precious Metals

Gold pushed to $990 at the open of London trading on Wednesday, but that was all she wrote, as the metal declined almost $15 from there to the noon hour and then really plunged, selling off to below $965 by the end of the Comex, and finally ending at $962.60/oz., down $18.50. Overnight, gold has poked higher.

Platinum was rangebound between $1240 and $1250 until the noon hour, then it fell off, drifting to a close at $1235, down $4. Overnight, platinum is trending higher.

Silver followed gold’s path pretty closely and with even greater volatility, bursting past $16.20 in late Hong Kong trading, but then swooning by nearly a full dollar before some late buying action on the Globex led it to a finish at $15.31, down 65 cents. Overnight, silver has fallen off.

The precious metals were probably due for a hammering, and that’s what happened to gold and silver, although platinum held up fairly well. It was perhaps to be expected on a day when the dollar reversed its recent trend and scored a solid gainer vs. the euro, while falling oil prices also played in.

With silver off about 4%, twice as much as gold, the Hightower Report had this to say: “The silver market seems to have made even a more definitive failure pattern on the charts than the gold market. Clearly silver and a host of physical commodity markets were undermined by the recovery in the Dollar but given the sharp slide in equity prices, it seemed as if a number of markets were feeling the influence of a dip in economic sentiment. Like gold, it is possible that overbought technicals prompted a number of silver longs to exit ahead of an anticipated volatility event in the financial markets at the end of this week.”

What that “volatility event” might be, we’re not sure, but it perhaps refers to the unemployment numbers for May, due out tomorrow. There’s a lot of fear that if the newly-jobless exceed the expected 520,000, that will be strong evidence that the economy hasn’t bottomed yet. Those who bought silver recently because of green shoots could easily be persuaded to pare back their positions.

Tom Pawlicki, of MF Global, is unfazed concerning gold. “The market is certainly overdue for a downside correction,” he wrote. But, “Longer-term, we still see the market as being supported, with an advance above $1,000 an ounce possible over the next few weeks. Support will come from weakness in the dollar and from ongoing inflows of investment to commodities.”

And James Turk’s opinion is unchanged. The founder of GoldMoney.com said yesterday that, “Gold has traditionally done well during periods of inflation and I believe we are entering a period of hyperinflation … We are going to see clear signs of inflation by the end of the year. The Federal Reserve is trying to destroy the dollar to save the economy.”

Currencies and Economic News

In the currency market, the dollar abruptly reversed field and rose against the euro. Late Wednesday, the euro was trading at $1.4138 vs. $1.4323 on Tuesday.

According to Marketwatch.com, “the dollar got a boost after a Reuters report said central banks still sought the safety of dollar investments. Citing unnamed sources, the report said central banks in China, Japan, India and South Korea would likely shrug off portfolio losses stemming from any potential cut in the U.S. sovereign credit rating, opting to continue buying dollars because there are no alternatives in terms of the liquidity afforded by the currency.”

Among the day’s numbers, the most closely analyzed was the ADP’s employment index, which indicated that the private sector eliminated 520,000 net jobs in May. Although “still terrible, undoubtedly, but a bit less terrible,” as Ian Shepherdson, of High Frequency Economics wrote, it was the lowest job loss total since November.

“Despite some recent indications that economic activity is stabilizing, employment, which usually trails overall economic activity, is likely to decline for at least several more months, although perhaps not as rapidly as during the last six months,” said Joel Prakken, of Macroeconomic Advisers, the economic consulting firm that crunches the numbers for ADP.

Now all eyes turn to the Department of Labor’s unemployment report, out tomorrow.

Also yesterday, the Institute for Supply Management said business improved slightly in May in the nonmanufacturing sectors of the U.S. economy. The ISM index rose to 44% from 43.7% in April. Although worse than the 46% expected by economists, it was nevertheless the highest reading since October's 44.6%.

Readings under 50% indicate that most firms said business conditions worsened in May compared with April. Among the mixed results, “Some respondents indicate that there are signs of stabilization, while others continue to have a negative outlook on the economy,” ISM said.

Energy

In the energy market on Wednesday, crude for July delivery declined, closing at $66.12/barrel, down $2.43. July reformulated gasoline fell 2.43 cents, to $1.9252/gallon.

In its weekly inventory report, the Energy Information Administration said that crude stocks rose 2.9 million barrels for the week ended May 29, surprising analysts, who had been expecting a falloff of 2 million barrels.

Gasoline supplies dropped by 200,000 barrels on the week, while distillates increased 1.6 million barrels. Refineries operated at 86.3% of capacity vs. 85.1% the previous week, marking the highest level since the first week of December.

“This was really a very bearish report across the board with that one exception of gasoline,” said James Williams of WTRG Economics.

“While there are some positive signs in the economy, there’s not enough to justify $70 crude,” said Adam Klopfenstein, of Lind-Waldock in Chicago. “The key is [Thursday]. If we can get another negative move, then you’ll start to see the liquidation taking hold.”

The EIA also said U.S. fuel demand fell 900,000 barrels to 17.7 million barrels a day last week, the biggest decrease since the week ended January 9, and a 10-year low.

Base Metals

The base metals were red-soaked on Wednesday. Copper was higher in the late pre-dawn hours, but hit the skids, falling straight through the day to finish barely off its intraday lows at $2.1849/lb., down nearly 8 1/4 cents. Nickel mirrored copper, except that it failed to escape its intraday low of $6.2422/lb., down 30 2/3 cents. Zinc dropped to its intraday low, ending at $0.6765/lb., down more than 2 cents. Aluminum was modestly lower, closing at $0.6464/lb., down a quarter-cent, while lead plummeted, shedding 3 cents, to $0.7163/lb.

Tuesday’s cooling-off day turned into a rout for the base metals on Wednesday, as copper led the sector lower across the board, falling the most in six weeks on the rallying dollar and demand concerns.

“With the dollar due for a consolidation period and possibly heading higher, it does make copper vulnerable,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. “Given the levels of slowing economic growth and weak demand, copper could be due for a setback.”

O’Neill added that, “In the U.S., Europe, Japan and elsewhere in the world, there’s still an economic malaise … Even if we’re bottoming, we’re still in a very weak period for growth.”

The bloodletting might have been worse, but stockpile data may have helped put a floor under prices. Copper inventories monitored by the LME fell by 2,700 metric tons yesterday, to 306,525 tons.

Looking ahead, Bret Clayton, the CEO of Rio Tinto noted that while higher copper prices have “not necessarily been supported” by demand, the company is still “bullish” on copper’s outlook over three to five years, citing supply constraints and a lack of new discoveries.

But Clayton added that copper is vulnerable, and could fall over the next nine months as the global recession creates an “uncertain” outlook.

Meanwhile, aluminum stocks came off a little, 1125 metric tons, but still stood at a near-record level over 4.2 million. That led Adam Rowley of Macquarie Bank to comment that, “Aluminum is still a market in substantial surplus … We are getting to a position where stocks are getting so high that they could take years to wear off, even with demand recovering.

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


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