Good morning …

Precious Metals

Gold sold off from early Hong Kong trading straight through to mid-morning in New York on Friday, then went flat for the rest of the day, finishing an uninspired performance at $938.30/oz., down $16.20. For the week, gold dropped 1.6%.

Platinum declined until just after the Comex open, but then regained a good bit of the lost ground, ending at $1250/oz., down $12. For the week, platinum was off 1%.

Silver also tailed off to mid-morning, rebounded back to the $15 mark by noon, but then eased through the rest of the Comex and the Globex, closing at $14.83/oz., down 57 cents. For the week, silver skidded by 2.9%.

After waiting several days for the precious metals to break out of their flat trading patterns, market watchers got what they were looking for, albeit to the down- rather than the upside.

That it was a weak day across the board was perhaps expected, as oil slipped and the dollar rallied. But the changes were modest, and the magnitude of the gold and silver selloff seemed a little excessive.

A lot of attention was focused on the Iranian election yesterday. Gold fanciers will have to face that while a defeat for Ahmadinejad will undoubtedly be good for the world, a victory by the moderate candidate would mean a ratcheting down of geopolitical tensions, which is gold bearish.

Overall, analysts seem about split these days on gold’s prospects.

“It’s getting increasingly tough to hold onto its gains beyond $965-$966 levels,” wrote Pradeep Unni, an analyst at Richcomm Global Services in Dubai. “Repeated failures to break and hold above this zone have triggered selloffs.”

However, “The outlook is still generally positive, as we must not lose sight of the forest through the trees,” said Tom Pawlicki of MF Global. “Commodity investment is still relatively strong and the outlook for the dollar isn’t favorable.”

Currencies and Economic News

In the currency market, the dollar rallied against the euro. Late Friday, the euro was trading at $1.4022 vs. $1.417 on Thursday.

The buck rose, as Marketwatch.com wrote, “gaining ground ahead of a meeting of Group of Eight finance ministers at which officials may seek to outline strategies to exit from their massive fiscal stimulus efforts.”

Ministers from the G-8 industrial nations are talking yesterday and today in Italy as they attempt to lay groundwork for the meeting of G8 heads of state at their summit, scheduled for next month.

“We are confident that nothing will be said at the G8 to the effect that U.S. dollar's decline has been excessively rapid in recent weeks,” said Christian Lawrence of RBC Capital Markets. “Indeed, with central bank governors absent from this G8 meeting it would be a huge surprise to the market if we were to see any explicit references about sharp currency appreciation.”

Strategists at UniCredit MIB added that the meeting probably won't “offer fresh clues on the [foreign exchange] front, but whether an exit from stimulus plans may start being discussed is an issue that may spur further risk appetite and thus weigh on the U.S. dollar.”

Among the day’s numbers, the Labor Department said that prices paid for imported goods and services jumped 1.3% in May, the largest gain since last July. Much of that was due to the advance in crude oil prices of 8.3%.

Also weighing on the common currency, April industrial production in the eurozone showed a larger-than-expected 1.9% month-on-month drop, and a record 21.6% decline compared to April 2008.

The data suggests “that the severity of the ongoing economic recession had not diminished at the beginning of the second quarter in the euro area,” said Steve Englander, of Barclays Capital.

Energy

In the energy market on Friday, crude for July delivery pulled back, closing at $72.04/barrel, down 64 cents. July reformulated gasoline fell 2.18 cents, to $2.0431/gallon.

OPEC, which now accounts for about one-third of the world's oil production, said in its monthly report that its May output averaged 28.27 million barrels a day, up 135,000 barrels from a month earlier.

The report also said of the world economy, that “the worst appears to be behind us.” Nevertheless, OPEC said that 2009 global demand is expected to drop 1.6 million barrels a day from 2008.

“At these prices there is a lot of incentive to cheat [on OPEC quotas],” said James Williams, of WTRG Economics. “We still have very high oil inventories, and OPEC over production painted a fundamentally bearish picture.”

In the natgas arena, the fuel was nearly unchanged on the week, with July futures tacking on just over a penny, to $3.877 per million British thermal units

Base Metals

The base metals all sank back into the red on Friday. Copper sagged straight through the day, just coming off its intraday lows late to finish at $2.3442/lb., down 6 1/2 cents. Nickel had a series of sharp ups and down, and when all was said and done, ended at $7.0118/lb., down 10 1/4 cents. Zinc held up until late morning but then swooned, closing at $0.7449/lb., down 2 cents. Aluminum was weak, shedding nearly 2 cents, to $0.7303/lb., while lead rounded out the down day by dropping more than a penny, to $0.7962/lb.

Copper led the downswing among the industrial metals after Thursday’s big gains, as the seesaw tipped in the direction of economic fears and questions as to whether real demand can support current prices.

The strengthening dollar also played in.

Many still believe in the rally, though. “Further gains will be much harder in the very short term, however, the global recovery seems on track and metals should pick up through the second half of 2009 and 2010,” said Citigroup analyst David Thurtell.

Stockpile data was supportive, with copper inventories monitored by the LME down 2,900 metric tons yesterday, to 290,275 tons. In addition, inventories monitored by the Shanghai Futures Exchange shot higher by 15,167 tons, or 33%, to 60,647 tons in the past week, the most since March 20, 2008.

The numbers from China reflect the action in canceled warrants – metal earmarked for delivery – which rocketed to 127,775 metric tons on Thursday, the highest level since March 2005.

In company news, Rio Tinto and BHP Billiton have signed a non-binding agreement to establish a production joint venture covering the entirety of both companies’ Western Australian iron-ore assets. The joint venture, formation of which is expected to be completed around mid-2010, will be owned 50/50 by BHP and Rio. It will operate as a cost center and deliver iron ore to ships designated by the companies to sell independently through their own marketing groups.

The companies said they expect the joint venture to unlock significant value from their overlapping resources, estimating the net present value of those synergies to be in excess of $10 billion. They added that the synergies would result from combining adjacent mines into single operations, which would result in shorter rail hauls and more efficient allocations of port capacity.

That’s what’s happening … have a great weekend and see you Tuesday!


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