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Precious Metals

Gold sank from an $885 high in the far East to a low of $874 in the first hour of the New York session on Tuesday, but then rallied through most of the NYMEX, easing slightly late in the day to finish at $882.10/oz., up 50 cents. Overnight, gold is slightly higher.

Platinum also spiked after the first New York hour, reaching nearly to $2070 before a late day selloff brought it back to end at $2053/oz., up $6. Overnight, platinum is trending higher.

Silver had a similar rally, but it was not as strong and was insufficient to keep the metal out of the red for the day, as it declined after noon to close at $17.02/oz., down 8 cents. Overnight, silver has edged higher.

It was a very blah day for the precious metals, with silver unable even to hold in positive territory despite further downward pressure on the dollar. Crude offered no support, by trickling lower.

Julian D.W. Phillips, of, wrote that the doldrums may be short-lived.

Gold, Phillips wrote, is reacting to the disappointment of the G-8 conference at the weekend where some sort of agreement was hoped for to ensure a strong $, but none came. Instead more words left the market in the air. Now the $ is slipping, while still in its trading range of $1.53 to $1.59 against the Euro. But with no action impending where to now? he asks.

His answer: With Joseph Lieberman about to reveal what regulations he proposes this week we are entering an environment where 'stability' is to come from regulation. That shows for sure we have entered crisis days. This can only be positive for gold and silver.

We don't know if Phillips has nailed it, but for certain we are equally skeptical whenever government proposes to stabilize volatile markets through regulation. That it has never worked well in the past seems a lesson lost on those with their itchy hands on the levers of power.

Brien Lundin, editor of Gold Newsletter commented that, It's true that some of the recent economic data are pointing toward a slowing economy, and some are predicting that the resulting lower consumption will act as a drag on the price of gold and other commodities.

However, he added, inflation is first and foremost a monetary phenomenon, and the market is now recognizing that the Federal Reserve will be unable to fully launch a tight-money campaign while the economy remains so weak -- and during an election year, he wrote.

Currencies and Economic News

In the currency market, the dollar slipped against the euro. Late Tuesday, the euro was trading at $1.5511 vs. $1.5476 on Monday.

Traders ignored an inflationary producer price index report. The Labor Department said U.S. wholesale prices increased 1.4% in May, after seasonal adjustments, bringing the gain for the past year to 7.2%.

On the other hand, the Commerce Department said housing starts fell 3.3% to a seasonally adjusted annual rate of 975,000 in May, the lowest level since March 1991.

That left those expecting the Fed to begin raising rates to duke it out with those who think the Fed will sit tight for a while, with the latter camp gaining the upper hand on a couple of news reports.

First, the Wall Street Journal wrote that the Fed is almost certain to leave interest rates unchanged when it meets next week, and is unlikely to raise rates before autumn unless the inflation outlook deteriorates considerably.

Then the Financial Times wrote that markets are in danger of getting carried away with their expectations for Federal Reserve interest-rate increases, citing senior Fed officials.

Any significant negative surprises would prompt markets to reconsider the current expectations for the three Fed rates hikes before the end of the year and thus weigh on the U.S. dollar, J.P. Morgan analysts wrote.


In the energy market Tuesday, crude for July delivery continued to ease off of record highs, closing at $134.01/barrel, down 60 cents. July reformulated gasoline fell 2 cents, to $3.4179/gallon.

Though options on the July contracts expired at the end of the trading session Tuesday, the predicted increase in volatility never materialized.

Prospects for an increase in Saudi production have weighed on prices most recently, wrote analysts at Action Economics. Various reports have said that Saudi Arabia plans to boost production by at least 200,000 barrels a day next month.

Members of OPEC, as well representatives from the world's oil consuming countries, will meet this weekend in Jeddah, Saudi Arabia, and an official announcement of an output increase is expected at the summit.

And traders are simply getting the jitters. With all the volatility the last week or two, I suspect the big risk takers are all that want to trade in this market, said Charles Perry, president of Perry Management energy consultants. In the back of everyone's mind is a possibility the crude [and other commodities] could crash if the traders rapidly moved out of commodities, and no one wants to be left holding the bag.

Base Metals

The base metals were mixed on Tuesday. Copper dipped early but recovered during the morning hours before easing into a little-changed finish at $3.7201/lb., down less than a half-cent. Nickel followed a very similar pattern, but made it back to positive territory, closing at $10.8068/lb., up 10 1/4 cents. Zinc traded with numerous sharp price swings, ending at $0.8299/lb., down less than a penny and a quarter. Aluminum pushed higher the whole day, just coming off its intraday high at $1.3566/lb., up 3 1/4 cents, while lead posted positive numbers for the second straight day, adding 3 1/2 cents, to $0.8362/lb.

What with the slide in crude prices the past two days having been limited, its effect on copper has been likewise muted. The next turn in oil would be expected to have a greater impact, but in which direction remains to be seen: inflation driving all commodities higher, or the threat of recession driving them lower? Hard to say.

Supply concerns persist in the wake of Peruvian violence. Protesters there battled police and blocked roads for a seventh day yesterday in an attempt to halt legislation that would cut mining-tax income for local governments. The protests have prevented workers from reaching operations owned by Southern Copper Corp.

Looking forward, metal inventories should remain well below historical averages this year following relatively healthy demand and insufficient supply additions, says a report from Lehman Brothers Holdings.

The long-term average for copper inventories is 3.01 weeks of demand, but that is expected to decline to 1.25 weeks by year's end, said Michael Widmer, the bank's director of metals research. Stockpiles monitored by the LME now stand at about 1.3 weeks of demand, Widmer wrote.

Even though the general macroeconomic backdrop may not be very strong, it is worth noting that China's industrial production expanded by 16 percent in May, Widmer said. In addition, the supply side remains problematic, which is reflected in sharply higher lead times for key mining equipment.

Other metals face similar stockpile stories, Widmer said. Aluminum levels will be 3.34 weeks of demand by the end of the year vs. a 5.43-week historical average; zinc 3.07 weeks vs. 6.2 weeks; lead 1.25 weeks vs. 3.82 weeks; and nickel 7.74 weeks vs. 9.32 weeks.

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


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