Casey's Daily Resource Plus - Apr 28, 2009

In Today's Edition

• Gold off, but silver steady - China gold stockpiling dominates market talk.
• Dollar bludgeons euro - Safe haven status amid flu fears cited.
• Oil declines - Pandemic possibility seen threatening world economy.
• Base metals plunge - Worried traders looking for excuses to sell.

Precious Metals

Gold declined from Hong Kong through the first hour of New York trading on Monday, shedding about $15, rallied back until the noon hour, but then fell right through the Globex to finish at $906.20/oz., down $6.80. Overnight, gold has fallen off.

Platinum really hit the skids, plummeting straight through with little interruption, ending at $1140, down $35. Overnight, platinum is sharply lower.

Silver fared much better than its sister metals and, even though it too peaked in early far East trading, it managed to hold above $13 all the way through the Comex, before easing on the Globex to close at $12.90/oz., up a penny. Overnight, silver has fallen steeply.

The Price of Things Resource Last 1 Week Ago 3 Months Ago 1 Year Ago Gold 905.70 884.90 896.80 886.00 Silver 12.84 12.08 11.91 16.84 Platinum 1142.00 1157.00 945.00 1957.00 Palladium 224.00 224.00 189.00 442.00 Copper 1.97 2.06 1.45 3.95 Nickel 5.02 5.38 5.03 13.25 Zinc 0.50 0.50 0.50 1.03 Uranium 42.00 40.50 51.00 65.00 Oil 50.29 49.83 44.15 116.65 Gas 3.26 3.54 4.52 10.96

Precious metals fanciers couldn’t have been too disappointed with yesterday’s action, given that silver held steady and gold fell only modestly in the face of both a rising dollar and slumping oil.

Most of the market talk yesterday centered on China’s surprise announcement late last week that it has been quietly building its gold reserves for years. And though officially it has bolstered stockpiles by 34 million ounces, many observers believe that the actual figure could be much higher than that.

Even if we’re getting the straight dope, “The Chinese government's decision further demonstrates the leadership it is increasingly taking and its public recognition of gold's proven role as a store of value and portfolio diversifier,” wrote Aram Shishmanian, CEO of the World Gold Council.

Julian Phillips, of Goldforecaster.com, went further: “By publicizing this information one has to ask, are they going to buy local supply in larger quantities? Will they take all the local production? If so this will mean a drop in supplies to the open market of a substantial amount. This will be extremely gold positive!

“It will also mean that not only is Russia buying around 4 tonnes a month for reserves but China is effectively buying over 6 1/2 tonnes of gold a month for reserves. Now add to that that the Central Bank Gold Agreement signatories are selling around 1 tonne of gold a month, with one signatory buying gold now, then it shows that Central Banks of importance are favoring gold far more than before. This does reflect [as the Bundesbank President said] that ‘gold is a useful counter to the swings in the $.’

“Certainly if the I.M.F. is to sell gold [not a foregone conclusion!] at an auction as they did in the past, then I would expect a central bank like Russia or China to be a buyer, at market prices. The implications for gold returning to a monetary role [reserve asset in support of currencies] are tremendous and gold price positive.”

Phillips then cautioned that, “If [gold] has such a role in the future then the possibility of governments taking over the gold market rears it ugly head.”

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Currencies and Economic News

In the currency market, the dollar pounded the euro. Late Monday, the euro was trading at $1.3039 vs. $1.3247 on Friday.

The main driver was the “growing concern that the Mexican swine flu could turn into a global pandemic,” said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets.

With Mexico at the epicenter of the flu scare, it was no surprise that the peso suffered the most against the buck yesterday, dropping 4.7%.

“Clearly there's a lot of uncertainty at play right now,” said James Hughes, market analyst at CMC Markets, and “any change in guidance over the outbreak from the likes of the WHO will be closely watched.”

Elsewhere, “We need a new resolution regime for large financial institutions,” said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. “Creating such a resolution authority would be very bold, but needed.”

The authority would be responsible for providing funding to an imploding institution so it could pay off its counterparties and creditors, and Bair wants lawmakers to hand the job to the FDIC, but granted that it could also go to the Fed or some newly-minted entity.

And GM saw its shares surge after the automaker asked its bondholders to exchange $27 billion in debt for equity or risk taking an even harder hit in bankruptcy court.




Energy

In the energy market on Monday, crude for June delivery fell off, closing at $50.14/barrel, down $1.41. May reformulated gasoline dropped 3.92 cents, to $1.4083/gallon.

“Fear is dominating the cyclical commodity markets today, as investors are concerned that the spreading of swine flu in Mexico may severely damp hopes of an economic recovery,” wrote analysts at Commerzbank.

However, “we consider these concerns premature and expect the oil price to move sideways, with some volatility between $45 and $55,” they added. “Given that oil market fundamentals are still weak, downside risks prevail at the moment.”

Edward Meir, of MF Global, concurred that, “The Mexican situation is resurrecting fears of the chilling impact that the SARS epidemic had on economic growth,” but also cited “nervousness about another batch of U.S. earnings reports and macro reports.”






Base Metals

The base metals were all bloodied on Monday. As quickly as copper regained $2 on Friday, it gave it back yesterday, falling hard in the early pre-dawn hours, then trading sideways through the rest of the day to finish at $1.9656/lb., down more than 7½ cents. Nickel fell below $5 at mid-morning, but rebounded to close back above the mark at $5.0205/lb., down 10½ cents. Zinc was a steady decliner, ending at its intraday low of $0.5998/lb., down 3 cents. Aluminum was weak, shedding more than three-quarters of a cent, to $0.6351/lb., while lead plunged to its intraday low of $0.6075/lb., down 3¾ cents.

Copper’s turnaround was a one-day affair, as it led the industrial metals lower on Monday, dropping to a two-week low. Analysts cited concern that a potential swine flu epidemic (or threat thereof) will harm chances for an economic recovery.

With the US government declaring a national public health emergency after more than 100 flu-related deaths in Mexico, there was a sector-wide selloff. The Reuters/Jefferies CRB Index of 19 commodities sank as much as 1.7%.

Traders are “getting more worried about the global economy and pulling their money out,” said Michael K. Smith, of T&K Futures & Options in Port. St. Lucie, Florida. “I expect further pullbacks.”

Smith added that, “It’s a little crazy that everything has been falling on swine flu, but when people get worried about the state of things, they look for any excuse to sell.”

Flu fears also played a part in the rush into the dollar yesterday, after four days of declines. The stronger dollar hurts commodities denominated in the currency.

Nevertheless, on the stockpile front, copper inventories monitored by the LME continued their decline yesterday, falling by 4,275 metric tons to 425,275 tons. LME stocks have fallen for 10 straight sessions and are now down 14% just this month.

In other news, the China Mining Association wrote that that country “is expected to own rights in more than 100 million tonnes of overseas iron ore assets next year, according to estimation of the country's leading steel information provider,” the Beijing-based Lange Steel Information Service.

Lange added that “about 80 percent of China's overseas iron ore supplies are in Australia, which have been obtained through stake purchases, purchases of assets, joint ventures and joint development.”




Resource Stock Roundup

The Canadian Markets started the trading week in a sour mood with the bears coming out of retirement to rain on the bulls’ parade during Monday’s session. For the tale of the tape, the TSX Exchange fell 1.62%, while the TSX Gold Index lost on 1.8% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, gave back 0.38% with the decliners beating out the advancers by a 439 to 355 margin on volume of 159 million shares traded.

Indian mining company Lakomasko BV has purchased 9.5 percent of HudBay Minerals, which announced late last week that it is evaluating its strategic options. HudBay ended the day up C$0.77 at C$8.35.

In the midst of a merger, Motapa Diamonds and Lucara Diamond recovered 715.79 carats from a 15,390 dry tonnes sample at the Mothae project in Lesotho. The sample produced 48 stones greater than two carats, 13 stones greater than five carats and one stone greater than 20 carats. Motapa ended the day up C$0.06 at C$0.31, while Lucara closed at C$0.50 for a C$0.02 gain.

Rubicon Minerals continued to hit the goodies at its F2 zone on the Phoenix gold project in Ontario’s prolific Red Lake mining camp. The latest results included 3.62 ounces of gold per ton over 9.8 feet and 6.96 ounces of gold per ton over 3.3 feet. Rubicon ended the day up C$0.05 at C$1.90.

Not to be outdone, Alamos Gold cut 12.2 metres grading 43.7 grams gold per tonne at its Mulatos gold project in Sonora, Mexico. Alamos ended the day up C$0.03 at C$8.25.

The junior board continues to straddle the crucial 1,000 point mark. Will it hold? We shall see what Tuesday trading has in store.





And then there's this... From Ed Steer:

There was a brief flurry of excitement in Globex trading on Sunday evening's New York open. Both gold and silver were up right out of the starting gate...silver especially so. The U.S. bullion banks [the only ones allowed to trade at that time of day] were either going long or covering shorts. This rally continued through the Sydney open in gold...and into the beginning of trading in Hong Kong for silver. At those two points, a not-for-profit seller showed up...or the buying/short covering stopped. Those were the highs of the day in both metals. It's quite unusual for the not-for-profit sellers/price cappers to hit the metals at two widely separated times like this. Almost without exception, they hit both metals at precisely the same time. I should quickly point out that trading volume in New York on Sunday night...and in Sydney and the Far East early Monday morning....was basically air in both metals. Probably no more than a few hundred contracts in silver and not a lot more than that in gold.

Anyway, the balance of Monday's trading through the rest of the Far East, London and New York, was down. Both gold and silver closed Monday's electronic trading session virtually on their lows of the day. There was light volume in both metals yesterday...even when you add in London and New York.

Before continuing further, I must admit to an error in my commentary virtually every day last week. Friday, as it turned out, was not options expiry in gold and silver...it was yesterday...Monday. I was reading the CFTC's 2008 chart. I won't make that mistake again. My apologies to you.

Open interest for Friday's trading showed the following changes. In gold, o.i. rose 2,010 contracts to 346,636. And silver o.i went the other direction...down 1,467 contracts to 95,610. As I've been pointing out for the last week, it's very difficult to read anything into these numbers because of the switching that traders are doing right now. Those that hold contracts for May [both in silver and gold] are switching them into future months [or closing them out] to avoid having to take delivery when first day notice arrives on Thursday. Today [Tuesday] is the last day that the April contract in gold and silver can be traded on the Comex. Tomorrow [Wednesday] is the last delivery day for the April contract. And, as I mentioned a couple of lines back, first day notice for delivery into the May contract is Thursday, April 30th...the last day of the month. If they haven't switched their contracts by then...they have to stand for delivery...which requires them to come up with a lot of money.

While I'm discussing Comex deliveries, there were 460 gold contracts delivered on Monday. The big deliveries [issuers] were Bank of America [again!] with 311 contracts and Goldman Sachs with 95 contracts delivered. The big stopper [receiver] was the Bank of Nova Scotia [321 contracts]...with a raft of smaller stoppers picking up the rest. So, with those 460 contracts delivered on Monday, there are 523 gold contracts left to deliver in the next two trading days...plus whatever contracts are purchased today...the last trading day in the April contract [which I mentioned in the previous paragraph].

In other gold and silver news, I note that silver inventories over at the Comex-approved warehouses on Monday, declined by 573,422 ounces. Over in Europe at the Zürcher Kantonalbank in Switzerland, their gold ETF was up a smallish 9,996 ounces last week...and their silver ETF was up a respectable 298,534 ounces. I thank Carl Loeb for those updates. This week, the U.S. Mint decided to update their eagles early...and they are very nice numbers. The 1-ounce gold eagles showed an increase of 27,000 last week...now up to 147,000 for the month, while the 1-ounce silver eagle mintings were up 611,500 for the week that was...for a monthly total of 2,479,500. There are still four more production days in April. The U.S. Mint may [or may not] update them one more time this month...or, as they frequently do, they'll just include the rest of this month's production in next month's. There were no changes in either GLD or SLV yesterday.

Because of the weekend, there were a lot of stories that are worth your time. I've narrowed it down a bit...with the hope that there is no news today that is worth mentioning...so I can run the balance of these weekend stories tomorrow.

The first is from Ambrose Evans-Pritchard at The Telegraph in London. As Ambrose says..."The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere." The story is entitled "The capital well is running dry and some economies will wither." and the link is here.

Today's second offering comes from James Turk over at goldmoney.com. James has analyzed the gold price chart and finds a reverse head and shoulders pattern that he finds very bullish. Turk's analysis is headlined "Gold's Strong Technical Position" and you can find it linked here.

The next essay is from Michael Kosares at usagold.com in Denver. The title says it all..."China turns IMF gold sales into a wet noodle". The story is contained in a GATA dispatch, and the link is here.

The next story is from the hallowed pages of The Wall Street Journal. It's written by Judy Shelton. Ms. Shelton, an economist, is the author of Money Meltdown: Restoring Order to the Global Currency System. The commentary is entitled "The IMF's Gold Gambit: The fund's misuse of bullion reserves is crucial to its plan to use the financial crisis to expand its power". The link is here.

And lastly...silver market analyst Ted Butler's new commentary notes the recent scandal involving Bank of America, the U.S. Treasury Department, and Federal Reserve and wonders aloud what many of us may have been thinking. That is, if the U.S. government is intervening surreptitiously in the financial stock market, why is it so wild to suggest that the government is doing the same thing in the precious metals markets? Butler also examines the current structure of the silver futures market and concludes that the chances for a sharp rise are good. Butler's commentary is headlined "Dangerous Parallels" and you can find the story linked here.



I note that the S&P futures aren't looking too good for the Tuesday open right now. Of course they weren't great on Monday either...and it looked like there were 'gentle hands' in the equity markets for a while yesterday...and that dollar rally looked suspicious as well. In early Tuesday morning trading in Sydney, I see that we had a discontinuous event in gold...and nearly the same in silver, as the not-for-profit seller was driving the price down in both metals. Only a handful of contracts were being traded at the time. Let's see how things look in gold and silver on Friday once first day notice for the May contract is out of the way.

See you on Wednesday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.


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