Good morning ...

Precious Metals

Gold had a day without any major ups or downs after Monday's sell-off, but with a slow upward bias back toward the $900 mark that led to a finish at $889.40/oz., up $5.70. Overnight, gold has drifted lower.

Platinum was strong in the overseas markets, but sold off a late morning New York rally and stayed down, ending at its intraday low of $2012/oz., down $23. Overnight, platinum has been trending lower.

Silver failed to follow gold, declining after holding in positive territory until the noon hour, and closing at $16.65/oz., down 13 cents. Overnight, silver has edged higher.

Gold posted the gains that should be expected as oil rises and the dollar sinks, but holders of silver and platinum had to be disappointed that their favored metals failed to follow the yellow metal's lead.

The natural conclusion would seem to be that the gold market is responding to flight to quality issues, while the more utilitarian precious metals markets may have been spooked by the unceasing flow of dismal US economic news. If gold is moving beyond concern about the prospect of slumping physical demand, that would be a very bullish development.

In addition, there may have been some buying ahead of [today's] Fed meeting, said Frank Lesh, of FuturePath Trading in Chicago. A lot of people don't think the Fed can raise rates in this environment. They're stuck between fighting inflation and the need to shore up the economy. The dollar is in a range, and that keeps gold trading in a range, Lesh added.

More ominous news is coming out of the Senate Banking Committee, where speculators, who are becoming the bĂȘtes noires of the investment world, are increasingly being targeted by proposed legislation.

Drafts of bills currently on the table would seriously curtail the activities of investors in commodities by: prohibiting private and public pension funds from investing in agricultural and energy commodities; establishing limits on the share of commodities markets held by investors; and imposing speculative position limits on anything not related to real hedging activities.

In and of themselves, steps such as these are bad enough, but anyone with a sense of history knows that once government opens a door a bit, it usually isn't long before it's kicked in.

In other words, while only large-scale speculation may be targeted today, everyone who invests in the sector may be targeted tomorrow. All commodity investors are cautioned to follow the path of this legislation closely.

Currencies and Economic News

In the currency market, the dollar declined against the euro. Late Tuesday, the euro was trading at $1.558 vs. $1.5525 on Monday.

Despite a spate of bad economic news, traders seemed little motivated yesterday.

The dominant theme in currency markets for now -- especially the dollar crosses -- is one of churning as traders bide time ahead of the FOMC meeting, said James Hughes, of CMC Capital Markets.

There's no real belief that we'll see a rate hike, but ... a hawkish tone could easily see the greenback lock in the latest gains on a more permanent basis, Hughes added.

Treading water must have been tough in the face of some dreadful numbers. First, Standard & Poor's Case-Shiller home price index released yesterday showed home prices in 20 major U.S. cities have dropped a record 15.3% in the past year, and are now back to where they were in 2004.

Then the Conference Board reported that its June consumer confidence index fell to 50.4 from a May reading of 58.1, revised up from a prior estimate of 57.2. That blew away economists' expectations for a June reading of 56.0, and represented the lowest level since 1992.

And that's despite those 'stimulative' rebate checks. (Who's gotten theirs? I haven't.)

This is incredibly awful, wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics. Even as some people spend their tax rebates ... the majority appear to be overwhelmed by the surge in gasoline and food prices, and the drop in stock and home prices.


In the energy market Tuesday, crude for August delivery pulled back from a peak near $139 in electronic trading, but finished higher, closing at $137.00/barrel, up 26 cents. July reformulated gasoline rose eight-tenths of a cent, to $3.4635/gallon.

As with other markets, traders were waiting to see what the Fed does.

But, analysts said, concerns about disruptions to oil output in Nigeria, disappointment over Saudi Arabia's output increase and weakness in the U.S. dollar all helped lift oil prices.

Some are just throwing up their hands. The market volatility is off the charts, lamented Dale Doelling, chief market technician at Trends In Commodities. This kind of volatility is lopping the heads off of the less-seasoned traders and creating a windfall for the professionals on the floor.

It didn't help any that OPEC Secretary General Abdalla Salem el-Badri said yesterday that other members of the cartel don't want to lift their oil output, after the Saudis committed to a modest hike in output over the weekend. That led James Williams, of WTRG Economics, to write that, Unless more oil is forthcoming, many will say it confirms suspicions that even the Saudis are powerless to halt the relentless rise in oil prices.

Base Metals

The base metals were all in the red on Tuesday. Copper rallied twice in the pre-dawn hours, then again around mid-morning, but got sold off each time and finished flat at $3.8422/lb., down less than a quarter-cent. Nickel was up during the pre-dawn hours, but descended through the day in choppy trading to close at $9.6993/lb., down 6 1/3 cents. Zinc was off sharply at the open after a slow pre-dawn decline but recovered nicely to end at $0.8479/lb., down less than two-tenths of a cent. Aluminum touched $1.40 but fell steadily from there to just off its intraday low at $1.3736/lb., down 2 cents, while lead dropped a penny and two-thirds, to near its intraday low, at $0.8068/lb.

Traders were wary ahead of the opening of today's FOMC meeting.

While few are predicting a change in interest rates, the market is still nervous about policy language, and in particular, about how forceful the Fed's inflation wording would be, said MF Global analyst Edward Meir.

Stronger language could send the dollar higher once again, creating more downward pressure on metals. Language about flagging growth could, in turn, open the door to further rate decreases, pressure the dollar, and send most commodities higher, Meir said.

China is being closely watched.

The Shanghai [copper] price still is at a discount to London, which tells us the Chinese are not very active buyers, said Adam Rowley, of the Macquarie Group in London. Prices are high but without any real upward impetus.

With economic growth slowing in the US, Japan and the Eurozone, demand for the major products that contain industrial metals such as copper -- vehicles and new homes -- is on the decline as well. Any demand dropoff in China would be poison for the market.

Former market darling lead continues to be the worst performer among the industrial metals. With demand for the metal used in car batteries sagging, stockpiles have more than doubled this year. Inventories monitored by the LME rose another 1,100 tons yesterday, to 96,750 tons.

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


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