Good morning …

Precious Metals

Gold traded mostly flat through Hong Kong but jumped way up after things got going in London and rode the gains through to the Globex close. The yellow metal ended the day at $939.50/oz., up $14.20. Overnight, gold is trending lower.

Platinum shot higher in Hong Kong and continued on an upward trend from there on, ending the day at $1157/oz., up $28. Overnight, platinum is little changed.

Silver began its rise in Hong Kong too but really heated up after the London open, shooting to an intraday high above $13.30. When the Comex opened things slowed down a bit and it lost ground but still managed to post a strong gain through the Globex close, ending at $13.25/oz., up 38 cents. Overnight, silver hasn’t moved much.

Gold rose for the fifth straight day and posted its largest one-day gain in more than a month as a sinking dollar, higher crude prices, and worse than expected CPI data stoked fears of price inflation.

“The money pumped into economies by governments around the world is likely to support various asset price bubbles across global markets in coming years,” said Bill O’Neill, portfolio strategist at Merrill Lynch Global Wealth Management.

“The fact is that gold is a good hedge against the legacy effects of governments throwing vast sums at the [crisis] issue,” O’Neill added.

Meanwhile, reported holdings of SPDR Gold Shares (GLD) remained unchanged yesterday at 1,094.54 metric tons. The fund’s holdings have declined 3.3% over the past month.

“Some of the declines in the SPDR last quarter were associated with switching gold exposure, rather than selling,” John Reade, UBS AG’s head metals strategist in London, said. “More of this activity will take place.”

What Mr. Reade means is that a number of investors have moved out of the gold-backed ETF and into bullion. One example of this is Greenlight Capital, the $5 billion hedge-fund run by David Einhorn, which told investors it switched all of its holdings in GLD (4.2 million shares worth) into bullion during the second quarter.

And finally, here’s what may prove to be a prescient gold-related quote from Philip Klapwijk, the executive chairman of GFMS Ltd: “The next wave of gold investment, which will take the price well above $1,000, may follow a rise in Fed purchases of long-term government debt securities… Before the end of the year, we will see that type of evolution,” Klapwijk said in a Bloomberg Radio interview from Madrid.

Currencies and Economic News

In the currency market, the dollar fell against the euro. Late Wednesday, the euro was trading at $1.4107 vs. $1.4058 on Tuesday.

As the greenback slid for the third straight day against the euro, one technical analyst said it could get much worse.

According to Ralf Umlauf, head of floor research at Helaba in Frankfurt, the euro may rise toward $1.46 should it breach so-called resistance at $1.4122.

“Exchange rates of around $1.46 should then be reckoned with… This would still be within the upward trend corridor that became established in Februrary,” Umlauf wrote yesterday in a report.

In economic news, U.S. industrial output dropped 0.4% in June after a 1.2% decline in May. Production has now fallen for eight straight months and 17 of the last 18 months.

The drop in production was slightly smaller than the 0.6% forecasted by economists.

During the second quarter, industrial production fell at an annual rate of 11.6%, which reflected a more moderate contraction than the 19.1% rate in the first quarter. Output is down 13.6% in the past year.


In the energy market, crude oil for August delivery climbed $2.02 from Tuesday to close at $61.54/barrel. August reformulated gasoline rose a little more than 6 cents to finish at $1.7081/gallon.

Increased demand from refiners, which triggered an unexpected drop in available supplies, pulled crude out of its three-day slump on Wednesday.

The volume of crude oil flowing to U.S. refineries rose to the highest level in almost a year, according to the Energy Information Administration’s (EIA) weekly report on oil inventories.

The EIA’s report also indicated that U.S. crude inventories fell 2.8 million barrels in the week ended Friday, July 10. Gasoline inventories rose 1.5 million barrels, while distillate stockpiles, which include diesel and heating oil, rose 600,000 barrels.

Analysts surveyed by Platts had expected a drop of 2.1 million barrels in crude, a gain of 1.6 million barrels in distillates, and an increase of 750,000 barrels in gasoline.

The drawdown in crude inventories came as crude-oil inputs in U.S. refineries rose to 15.105 million barrels a day last week, the highest level since late August.

Base Metals

Base metals posted big gains on Wednesday. Copper climbed 8.79 cents to close at $2.3742/lb. Nickel added more than 15 cents to finish at $7.1569/lb. Zinc gained a penny and three quarters, ending at $0.6811/lb. Aluminum tacked on more than 2 cents, closing at $0.7316/lb., while lead moved to $0.7325/lb., up two and one-third pennies from the previous session.

Bloomberg reported that copper prices jumped the most in five weeks as signs of stability in U.S. manufacturing bolstered prospects for the metal used in pipes and wiring.

Manufacturing in the New York region shrank this month at the slowest pace in more than a year, and the decline U.S. industrial production in June was the lowest in eight months, data showed yesterday. This year, copper has soared 70%, the most among major U.S. commodities, as imports surged in China, the world’s biggest metal buyer.

“The market is booming on expectations of better demand,” said Michael Pento, the chief economist at Delta Global Advisors Inc. in Holmdel, New Jersey. “The demand for the base metals has been driven by China and their stimulus efforts to boost consumption.

While we’re certainly long-term bullish on commodities, don’t be surprised if a short-term correction pulls copper below $2.00 per lb. in the coming weeks.

A separate report from Bloomberg notes that nickel open interest climbed to the highest level since at least 2005 as factories that make stainless steel ramp up production.

The total open interest was 98,672 contracts on July 10, the most since at least November 2005, according to Bloomberg data. European stainless steel makers have “entered a re- stocking phase,” driving demand higher in the second half of 2009, according to a J.P. Morgan report published on July 13.

“It is quite possible that the stainless steel mills are rushing into buy nickel now on the expectation that nickel prices are going to rise,” said David Wilson, an analyst at Societe Generale SA in London. “Everybody is expecting higher prices” next year, he said.”

In company specific news, Freeport-McMoRan Copper & Gold ordered its employees in Indonesia to stay home Wednesday after five days of attacks on the only road to the huge Grasberg copper-gold mine in Indonesia's Papua province have left three people dead and another nine wounded.

The Papua Council Presidium has called on the central government to form an independent team to investigate the shootings, which began Saturday, which have now killed an Australian contractor, a Freeport security guard, and a police officer, who was found dead at the bottom of a ravine Monday.

The police have accused Free Papua Organization (OPM) leader Kelley Kwalik of being the mastermind of the attacks. However, Indonesian Defense Minister Juwono Sudarsono suggested rogue elements in the military may be behind the unrest.

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


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