Good morning …

Precious Metals

Gold pushed steadily higher from the far East through to the New York open on Tuesday, but the $939 peak was the high for the day as it sold off in fits and starts to just after noon, before regaining some lost ground over the final hours to close at $934.80/oz., up $6.80. Overnight, gold has fallen off.

Platinum moved slowly higher, to $1230 just before noon, but got taken down from there to end at $1216/oz., up $11. Overnight, platinum is sharply lower.

Silver had a series of gentle undulations between $14.10 and $14.40 and, though it closed nearer the lower end, was still in positive territory at $14.18/oz., up 16 cents. Overnight, silver is trending lower.

With the dollar off a bit and oil slightly lower, one might have expected the precious metals to turn in a blah day, and that’s about what happened. That there was a positive tint to the action was a bonus, considering the beating that the sector has recently taken.

“The U.S. currency continues to dictate direction,” wrote Andrey Kryuchenkov, an analyst at VTB Capital in London. “We expect gold to start consolidating” this week “as the dollar retreats.”

The Hightower Report analyzed the day thusly: “The gold market might have surprised the trade on Tuesday morning as the market was showing some minor strength overnight but as the trade moved toward the US scheduled report slate, prices began to firm. However, the gold market was unable to sustain the early strength through the US Housing Starts and inflation reports. With the gold market showing some downside momentum in the early afternoon trade in sync with the weakness being seen in the US equity markets, some traders are suggesting that the direction of equity prices is becoming more important than the action in the US Dollar. But in the end, the weak Dollar seemed to give the gold bulls a slight edge.”

Looking ahead, Kryuchenkov called it significant that finance ministers from the G-8 have agreed to consider steps to scale back economic stimulus measures once global growth resumes, and have asked the IMF how that might be accomplished without exacerbating the financial crisis.

“Provided this talk from policy makers intensifies towards the end of the year, we might see another strong rally in gold,” Kryuchenkov said. “Your average investor knows that G-8 finance ministers are already pondering rising inflation.”

And Kitco’s Jon Nadler threw a wet blanket on platinum’s recent gains, writing that, “Based on fundamentals, and based on the auto sector’s lack of vital signs, there is little to compel people to run out and buy the noble metals.”

Currencies and Economic News

In the currency market, the dollar slipped against the euro. Late Tuesday, the euro was trading at $1.3846 vs. $1.378 on Monday.

The buck slid after two days of strong gains, as the data released yesterday tended to suggest a potential recovery in the US economy.

First up, the Commerce Department reported that housing starts jumped 17.2% to a seasonally adjusted annual rate of 532,000, after plunging to a post-World War II low in April. That exceeded economists’ expectations for a rise only to 485,000.

It may have been a surprise to the upside, but the fact remains that, “While bottoming is an important step, there is little upside evidence in housing to suggest recovery,” wrote Stephen Gallagher, of Societe Generale.

Then, the Labor Department said that producer prices rose only 0.2% in May, after seasonal adjustments. The core PPI, which excludes food and energy prices, fell 0.1%. Economists' expectations were for the overall PPI to rise 0.5% and for the core to gain 0.1%.

Despite May’s little ray of light, the producer price index has dropped 5% in the past year, the biggest year-over-year decline since August 1949, and has ignited some deflationary fears.

All things taken into account, “With inflation concerns eased, and perhaps a nascent housing recovery in the works, risk appetite has blipped higher following the data, and has largely unwound Monday's bout of risk aversion,” said analysts at Action Economics.

Energy

In the energy market on Tuesday, crude for July delivery was little changed, closing at $70.47/barrel, down 15 cents. July reformulated gasoline rose 1.81 cents, to $2.0711/gallon.

Oil followed the pattern of most of the other markets, posting early gains and then giving them all back.

“Commodities in general are seeing pressure as funds and individuals seem to feel that everything is overbought at this point,” said Zachary Oxman, managing director at TrendMax Futures. And, “Oil specifically seems strongly overbought.”

Commerzbank analysts concurred, writing that, “As the market was pricing in a rapid economic recovery, we think that the probability of a significant correction, taking place as early as in the coming weeks, is very high.”

But, of course, analysts have been saying that for weeks now, and crude has stubbornly resisted any big move to the downside.

Today brings the Energy Information Administration’s closely-watched stockpile report, and inventories are apt to decline again, says Linda Rafield, Platts senior oil analyst.

Base Metals

The base metals were mostly a bit lower on Tuesday. Copper climbed from the pre-dawn hours to mid-morning in New York, peaking north of $2.30 before falling as steeply as it rose and finishing $2.2426/lb., down a bit less than 2 1/4 cents. Nickel followed a similar path but didn’t sell off as much, and held in positive territory at $6.7094/lb., up nearly 8 1/2 cents. Zinc had a succession of very sharp ups and downs, resulting in a close at $0.6904/lb., down 2/3 of a cent. Aluminum also negated its strong early gains, ending at $0.7062/lb., down the better part of a penny, while lead was modestly lower at $0.7418/lb., down less than a half-cent.

Copper failed to hold onto its early gains and led most of the industrial metals in a modest retreat yesterday, as traders flip-flopped and turned suddenly negative in the middle of the session.

“Copper is following the stocks and the general outlook” for the economy, said Frank McGhee, of Integrated Brokerage Services LLC in Chicago, and that was certainly true with regard to the broader markets, which began moving into the red around mid-morning.

However, McGhee added that the day’s housing data should give copper prices a “short-term” boost and that, while it might seem obvious given the need for copper in new houses, failed to come to pass.

The weakening dollar also should have been somewhat supportive, and wasn’t, perhaps because the buck was able to pare its losses over the course of the day.

On the positive side, London stockpiles continued to decline, with copper inventories monitored by the LME slipping a smallish 1,925 metric tons yesterday, to 285,050 tons, the lowest level since last November 24. Inventories are off almost 50% since this year’s high, notched on February 25.

In company news, we noted yesterday that BHP Billiton and Rio Tinto’s proposal for a joint Australian iron ore venture could run afoul of Chinese anti-monopoly law. To expand on that, Yao Jian, spokesman for China’s Ministry of Commerce, said that the law requires a company to get government approval before consolidation if its global revenue exceeds Yuan 10 billion ($1.47 billion) and its revenue in China exceeds Yuan 2 billion.

In the year ended June 30, 2008, BHP's revenue in China was $11.7 billion, Rio’s $10.8 billion, but Yao says the ministry has not received an application from either firm, and no one knows what actions China might take if the companies were determined to be acting contrary to the law.

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


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