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The Daily Resource 8/29/08:

08/29/2008
Good morning …

Precious Metals

Gold was slightly higher to the mid-point of the London session yesterday, when it rose sharply to its intraday high of $844, but the rally was abruptly capped in the second hour of New York trading, with sellers driving the price back to $825 before the metal showed a little late strength into a finish at $833.70, up $7.50. Overnight, gold has edged higher.

Platinum had a second strong day in a row and, though it came off its highs around $1480, still ended with a nice gain at $1455/oz., up $26. Overnight, platinum is trending higher.

Silver followed gold’s pattern pretty closely, with its bounce coming off of the $13.50 mark, as it moved upward from there to close at $13.66/oz., up 20 cents. Overnight, silver is sharply higher.

(Click here for charts)

Precious metals bugs had to be pleased with the day’s results, as the usual suspects were lined up solidly against the metals, with the dollar strengthening, crude dropping and equities on the rise.

Yet they all still posted gains.

Gold probably got some support from its safe haven status, as geopolitical tensions “are not doing much to help confidence in already nervous markets,” said Mark O'Byrne, executive director of Gold & Silver Investments.

Tensions rose yesterday on a report out of France that the European Union is considering sanctions against Russia following its recognition of independence for the Georgian territories of South Ossetia and Abkhazia.

Also factoring in was the perception that the dollar, despite yesterday’s gains, may start to fall again against the euro. “Gold looks very strong,” said Matt Zeman, of LaSalle Futures Group in Chicago. “The dollar is very vulnerable and stalling out.”

UBS put out a “strong tactical” buy recommendation, its first such in a year. UBS analyst John Reade said gold is poised to rise now that hedge funds and large speculators have sold off their positions.

“Substantial long liquidation has occurred in the Comex, Tocom, and over-the-counter markets although exchange-traded fund holders remain resolute,” Reade wrote yesterday. The latter statement was backed by action in the bullion-backed SPDR Gold Trust, whose assets have declined only 7.7% over the past month and a half, while the metal has dropped 13%.

“Over the past three weeks,” Reade added, “we have noted unprecedented physical gold demand from India, some European consumers and other Asian clients. Finally, the dollar appears to have topped out for now.”

Reade last recommended investors buy gold when the metal traded around $660 in August 2007.

Currencies and Economic News

In the currency market, the dollar rose against the euro. Late Thursday, the euro was trading at $1.4696 vs. $1.4727 on Wednesday.

The buck strengthened as crude pulled back from highs notched on the back of hurricane fears.

“The foreign exchange market continues to track the oil market closely,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The dollar was also buoyed by a Commerce Department report giving revised second quarter GDP figures. The report said that the economy grew 3.3% in the quarter, as compared with the previous estimate of 1.9% growth. That exceeded economists’ expectations that the revision would show the economy growing at a 2.7% pace in the quarter that ended in June.

However, “There were some cracks in the foundation revealed in the details of the report,” said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. “With the G7 economies now slowing sharply, which threatens U.S. exports, and stressed credit markets colliding with weak U.S. labor markets, which threatens consumer spending, the second half of this year is likely to be weak.”

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Energy

In the energy market Thursday, crude for October delivery reversed course after pushing past $120 and ended with a loss, closing at $115.59/barrel, down $2.56. October reformulated gasoline lost 4.6 cents, to $3.0214/gallon.

Traders were wary of the potential of soon-to-be Hurricane Gustav, but in the end apparently minimized the threat.

As James Williams, of WTRG Economics, pointed out, the impact of hurricanes on oil can be minimal. For example, “During the back-to-back hurricanes in 2005, spot oil prices only moved 7% on Katrina and 3% with Rita --- and in both cases ended lower in less than two weeks,” Williams wrote.

Traders were also reassured by word from the International Energy Agency and the U.S. government said they stand ready to release oil from emergency reserves if Tropical Storm Gustav disrupts U.S. oil production.

And Phil Flynn, of Alaron Trading, said that, “If demand for oil was strong right now, I think the markets would be more nervous” but “the oil that is expected to be shut [from Gustav] is 1.2 million barrels -- which is about the same amount demand is off from a year ago.”

However, as the Labor Day holiday looms, “Given the thin trading conditions that are bound to set in over the next two days, we could see a rather substantial move higher, as both fresh buying and short-covering sets in ahead of the long weekend,” wrote Edward Meir, of MF Global.

Base Metals

The base metals were all in the red on Thursday. Copper fought a seesaw battle all day, with the ayes having the final word but not enough of one to overcome the nays, as it finished at $3.4757/lb., down 2¾ cents. Nickel sagged in the pre-dawn hours, then traded sideways in New York to close at $9.1922/lb., down 15 1/3 cents. Zinc was up and down all day, just coming off its lows late to end at $0.8042/lb., down a penny. Aluminum held up until mid-morning but then dropped to $1.2153/lb., down a penny and two-thirds, while lead gave back some of Wednesday’s gains, shedding more than three-quarters of a cent, to $0.926/lb.

Copper declined as traders’ concerns about rising stockpiles overrode any other considerations.

Inventories monitored by the LME shot up by 2,200 metric tons, or 1.3%, to 170,500 tons yesterday. That’s the highest level since February 6. Copper stocks have gained 19% this month.

Prices were also weighed down by a report from RBC Capital Markets, which speculated that copper stockpiles in Shanghai will rise about 6,000 tons. China is the world's biggest buyer of metal, and the expectation had been that its consumption was going to increase after the Olympics.

There is “significant demand weakness” out there, said Catherine Virga, an analyst at CPM Group in New York, after signs this past week that the U.S. economic slowdown is spreading to the eurozone.

Nevertheless, there are also supply concerns. Chile, the world's largest copper producer, said its production of the metal fell 5.5% in July, year over year.

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

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