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Precious Metals

Gold declined from the far East into the first hour of the New York session on Thursday, bottoming at $857 before rallying after the noon hour to finish at $868.40/oz., down $11.70. Overnight, gold has fallen off further.

Platinum dropped below $1990 in Hong Kong, then rode a roller coaster through the day, to end at $2013/oz., down $24. Overnight, platinum is slightly higher.

Silver declined gently until the New York open, after which it fell off a cliff, dropping 40 cents in less than an hour, but it too pushed higher after noon to close at $16.44/oz., down 41 cents. Overnight, silver is sharply lower.

The precious metals' rally lasted all of a day, as they reverted to a downtrend yesterday with a pickup in the dollar.

Gold was also pressured early in the session by oil prices that were off sharply and a stock market that rallied strongly. Even though both reversed trend later in the day, gold was unable to recover.

The market's roller-coaster pattern continued amid the high-noon standoff developing between the Fed and the U.S. dollar's morticians, said Kitco's Jon Nadler.

The tension between the dangers of letting inflation run vs. raising rates in order to head it off does seem to be ramping up. Observers are watching the dollar's relationship to the euro as an indication of market sentiment.

At the moment, The perception ... is that there will be higher interest rates, said Frank McGhee, of Integrated Brokerage Services in Chicago. Another break in the euro, and you'll just see the world step on gold.

Currencies and Economic News

In the currency market, the dollar rallied against the euro. Late Thursday, the euro was trading at $1.5421 vs. $1.5548 on Wednesday.

The buck was supported by better-than-expected retail sales, which boosted expectations for a Fed rate hike.

The Commerce Department reported that retail sales rose by a surprising 1.0% in May, the best increase in six months. Excluding autos, sales rose 1.2%. Economists' expectations had been for a 0.6% rise in total sales, 0.8% excluding autos.

That report was serious and raises risks of earlier and more pronounced rate hikes from the Federal Reserve, wrote Stephen Gallagher, economist for Societe Generale.

The strong retail sales figures were shocking in that they show that consumers are continuing to shop, in the face of the lowest consumer confidence figures in decades. Where they're getting the money is an open question, although it's possible that the rebate checks are playing in.

Consumer spending projects to 2% annualized growth for the second quarter, and that would be enough to keep the economy safely away from negative growth, Gallagher said.

Traders shrugged off a more distressing report from the Labor Department showing that initial claims for jobless benefits rose by 25,000 last week, to 384,000. Continuing unemployment claims gained 58,000, pushing the number up to 3.14 million for the week ending May 31. That was the highest level since early February 2004.

Meanwhile, the euro weakened after European Central Bank executive board member Juergen Stark said the ECB isn't planning a series of interest-rate hikes beyond July. Earlier remarks by ECB President Trichet had raised hopes of just such a sequence.


In the energy market Thursday, crude for July delivery recovered from an early selloff to close at $136.74/barrel, up 36 cents.

On the supply front, Nigeria's president said the country's state-owned oil company will take over operations in the Ogoni district of southern Nigeria from a Royal Dutch Shell joint venture. President Umaru Yar'Adua made the announcement after talks with French President Nicolas Sarkozy, saying that the move will calm down unrest among local residents.

Violence has shut about 20% of Nigeria's oil production since early 2006.

The market is so concerned about supply that just about any headline can unnerve traders, said Phil Flynn, of Alaron Trading. Once prices began moving higher, there was a massive move to purchase futures.

Also yesterday, the International Energy Agency said it will attend talks convened by Saudi Arabia on June 22 between producers and oil-consuming countries in an environment of record oil prices.

We would welcome an opportunity to act collectively to reassure the market about future demand and supply balances in order to change the perception of extended tightness, said IEA Executive Director Nobuo Tanaka.

Base Metals

The base metals were mostly in the red on Thursday. Copper declined from the pre-dawn hours through to mid-morning, then rallied to finish at $3.6157/lb., down just more than 2 1/3 cents. Nickel prolonged its recent resurgence, rising steadily to push back over the $11 mark, closing at $11.0873/lb., up 61 cents. Zinc declined the whole day, barely coming off its lows to end at $0.8363/lb., down 2 1/2 cents. Aluminum was modestly lower, shedding a bit more than a third of a cent, to $1.3145/lb., while lead's freefall shows no sign of ending as it dropped another penny and two-thirds, to $0.823/lb.

Copper was weak in the wake of the rising dollar.

The stronger dollar is impacting prices for copper today, said Patrick Chidley, an analyst at Barnard Jacobs Mellet in Stamford, Connecticut. Copper looks set to continue to fall.

Traders are taking note of all the talk about the possibility of increased interest rates in order to support the dollar and fight inflation.

The Fed should be much more willing to act to keep the economy going and prevent it from entering a recession, Chidley said. If they go ahead and start raising rates, that's not going to happen. They run the risk of putting the U.S. into a recession, and that's going to affect copper very negatively.

But nickel rose to a three-week high after BHP Billiton, the world's third-largest producer of the metal, said it will shut down an Australian smelter and refinery that produces about 2% of world supply.

BHP announced that it will rebuild of the Kalgoorlie smelter furnace, reducing nickel sales by 28,000 metric tons.

It's a positive driver for the market, said Adam Rowley, an analyst at Macquarie Group in London. With the disruption in Australia, nickel is moving to a balance from a surplus.

The Kalgoorlie closure followed word from Minara Resources, Australia's second-largest nickel producer, that it was cutting its output forecast by as much as 23%.

Supply may be an ongoing concern, as nickel inventories monitored by the LME have fallen 8.2%, to 47,220 tons, since April 30.

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


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