Aluminum moved steadily higher, adding 2 cents, to $1.0129/lb., while lead gave up a lot of its gains after mid-morning, but still managed to tack on more than three-quarters of a cent, to $0.7326/lb.

Copper bounced off its 19-month low as traders tiptoed back in on a weakening dollar and broader rebounds in commodities.

There was also a good bit of “dollar-driven short-covering,” said LaSalle’s Zeman.

But Zeman added that the copper market “will likely have trouble moving considerably higher given the dim economic outlook and lack of supply threats. Prices are likely to remain in a sideways trading pattern, near-term.” Meanwhile, the Fed’s actions buoyed some investor’s spirits.

“There’s some hope that the Fed is going to add some liquidity to these markets and help the credit situation ease a bit,”said Ron Goodis, of Equidex Brokerage Group in Closter, New Jersey. “The credit markets are now unbelievably important for copper, because of the impact it has on the economy.”

On the supply side, inventories monitored by the LME surged 9,600 metric tons yesterday, to 208,350 tons. That marks their highest level since February 2007. However, between 80-90% of stocks are held by one entity.

Still, Barclays Capital (BARC) analysts wrote that “the supply side is extremely problematic,” with output expected to remain “weak well into next year and that does suggest that when demand prospects brighten, there is the potential for a very strong price recovery.”

Source: Base metals mixed -  Copper rises as buck declines.

The Fed was asleep at the wheel by letting these institutions get this deep into trouble in the first place. Everything was great as long as the real estate market kept moving higher. But the real estate market couldn’t keep moving higher at the pace it was going in 2005.

With the unwinding of the mortgage mess, all things financial have been affected. Banks are going under, brokerages are filing for bankruptcy or being sold, and insurance companies are being forced to restructure. The financial landscape as we know it has changed forever.

We know the background and the outcomes, but I still go back to the true source of the problem. The Gramm-Leach-Bliley Act is at the root of all of this in my opinion. The GLBA was passed in 1999 and it repealed the Glass-Steagall Act. The result allowed commercial banks, investment banks and insurance companies to operate under one roof. As I wrote in my article on July 28:

Tearing down the walls between these entities allowed banks and brokerage houses to operate in the same markets. Commercial bankers could now be licensed to give investment advice. Brokerage firms were now allowed to make mortgage loans. Never mind that neither had experience in these areas.

So now the government is brokering deals between JPMorgan Chase (JPM) and Bear Stearns, Bank Of America (BAC) and Merrill Lynch (MER) , and they tried to get Barclays (BARC) to buy Lehman Brothers(LEH), but that failed to work out. You can bet they are in the talks with AIG, trying to find a partner for them. Since when is it the job of the federal government to serve as a matchmaker? Isn’t the federal government supposed to prevent monopolies, not create them?

Regardless of how many deals the Feds put together, it isn’t going to fix the problem. The can serve as the minister and read the matrimony vows to as many financial companies as they want, but they are not solving the problem. They are providing temporary solutions to prevent a liquidity crisis.

If the Fed wants to solve the problem for the long term, they need to work on a repeal of the Gramm-Leach-Bliley Act. The lending institutions, depository institutions, insurance institutions and investment institutions need to be separated again. If our financial system is so frail, that a collapse of a brokerage house would cause an all out panic and potential collapse of the entire system, there is a problem. The power is too concentrated if this is the case.

My advice to the Fed is to stop applying band-aids and start working on a true solution to the problem. They can start by giving up the role of matchmaker.

Rick

Source: The Way The Fed Is Using Them, Your Best Investment Might Be Band-Aids

We had a good response to yesterday’s piece on gold. One reader wrote in:

‘Gold clearly seems to be moving contrary to the direction that received wisdom would suggest as “normal” given the calamitous economic situation the world finds itself in. So what is providing the downward pressure and what might cause it to reverse?’

To answer this, let’s start by looking at the mechanics of making money from gold. For simplicity, I’m going to assume you just buy physical gold. Your profit or loss depends solely on what happens to the gold price between the time you buy and the time you sell.

By buying gold you are, in effect, buying in the belief that in future, more people will buy it than will sell it. This is true of making a gain on any exchange traded asset. The tricky part is working out whether or not said asset will be more attractive in future than it is today.

That’s the tricky part with buying a share too. But with a share, you tend to have a bit more to go on. For a start, you can undertake fundamental analysis. You can look at balance sheets, earnings forecasts.You can hazard a guess at what profits might be in the future, and what that will mean for the share price (after all, as the name suggests, a share is your entitlement to share in a company’s fortunes. Higher profits, for example, could translate into higher dividends, attracting more investment in the shares and pushing up their price).

Of course, fundamentals are not the only factor that affect share prices. But we look at them because we know everyone else is. If our view about what they tell us turns out to be right — and others agree with us after we’ve bought in — then, other things equal, we make a profit.

Let’s now contrast this with gold. Gold does not pay a dividend. Gold does not issue statements to the stock exchange, or publish annual results. Of course, gold does have its own fundamentals. We have the physical users of gold on the demand side and the gold miners on the supply side. Studying these can give you clues about where the price is going in the long run.

The trouble is, the gold price is heavily affected by investment demand, as opposed to physical demand (from, say, jewellers). And investors tend to look less at gold’s fundamentals and more at macroeconomic and monetary factors. This holds the key to understanding the recent movements in the price of gold.

For much of this year the gold price has appeared to be inversely related to the perceived fate of the US economy (the key word in the sentence is ‘perceived’). This is hardly surprising since gold, like most commodities, is priced in dollars.

For the first few months of 2008, the US was — according to world opinion — Economic Disaster Zone Number One. The outlook for the dollar was calamitous. Gold, meanwhile, soared, smashing through the $1,000 mark.

But as spring moved into summer, doubts about other economies grew louder. Global investors cottoned onto the fact that the economic hardship would not be confined to the US. Britain and the eurozone looked, to some eyes, even more shaky than America. A bit later and it became official that Britain’s economy had stalled, while the eurozone’s had gone into reverse.

Meanwhile, earlier dollar weakness was causing a mini export boom in the States. New economic data were not as bad as many had feared. The perception shifted — perhaps the dollar wasn’t all that bad… and other currencies not all that good… As a result, one of the earlier upwards drivers of the gold price — the perception that it was a crucial hedge against the doomed dollar — was weakened. I believe this has played a part in why gold has been falling. However, as I’ve written before, I do not believe the long run outlook for the greenback is strong.

There are, of course, other factors in play. As Garry White noted yesterday, the falling oil price has played a part. There will also be indirect causes behind recent weakness — such as investors selling gold to cover losses from other investments.

The broad Fleet Street consensus, though, is that gold’s current weakness is temporary.

For more on this read our mining specialists Erin and Isabel on why the tide will turn for gold.

Lehman Brothers: Bear Stearns 2?

Non-controversial prediction of the week: the bigwigs at the Fed will make another Sunday announcement à la Bear Stearns. Barclays (BARC) and Bank of America (BAC) are in the frame as potential victims, sorry, buyers of Lehman. But they’ll probably want some kind of Fed guarantee…The Fed is involved in a game of tiggy (you may know it as ‘tag’) with the US Treasury. Last week it was the Treasury who stepped in to rescue Fannie (FNM) and Freddie (FRE). In doing so they ‘tagged’ the Fed, whose turn it is now to get out the mop and clean up the latest mess.

So on Monday morning we could be waking up to the details of yet another taxpayer-backed mercy mission…

Time for the May sellers to come back?

Doncaster Racecourse will tomorrow host the St Leger, one of the most famous races in the calendar.

So it’s time to take stock of one of investment’s most well known adages: Sell in May and go away… don’t come back ‘til St Leger’s Day.

Did this turn out to be good advice?

As Theo Casey wrote back in May:

If the market is going to fall this summer, which it probably will:

Blame the deteriorating property market;
Blame the deleveraging investment banks;
Blame the volatile debt markets;
Blame the stingy UK consumer;
Or blame HM Revenue & Customs’ ill-conceived proposals.

But leave St Leger out of it.

Today’ Theo revisits this, to see if tomorrow’s horse race means it’s a good time to invest in shares again… and if not, when will be?

This company could be invaluable to China

There’s just time to tell you about a new report that’s coming out next week. I only got a draft copy this morning, and haven’t had a chance to study it properly.

So I’m afraid the details are a little sketchy for now. But what I have read is exciting. The report relates to a “Company X”, which could turn out to be the biggest profit play on the boom in China.

The report describes this as “one of those rare investment situations that simply don’t occur that often”.

Like I say, I don’t have many details right now. But I’ll have more for you next week…

Until tomorrow

Ben Traynor, Editor

Source: Why Gold’s Weakness Is Temporary

Nickel fell, but not that dramatically, as it closed just off its intraday low at $9.1822/lb., down less than 4¼ cents. Zinc pushed to near $0.86 in the pre-dawn hours, but faded, ending at $0.8263/lb., down just over a penny. Aluminum slipped to $1.3505/lb., also off just over a penny, while lead shot straight up in the pre-dawn hours, then held its gains, adding better than 4 cents, to $0.9708/lb.

Copper was sluggish, but held its ground amid supply worries.

Demand exceeded output by 108,000 metric tons through April of this year, as mine production fell in Australia, Indonesia and Chile, the International Copper Study Group said.

Additionally Freeport McMoRan, the second-biggest producer, said copper sales this year will be 2.4% less than projected in April, citing output declines. The company cited production delays at its new Safford mine and output at the Morenci pit that trailed expectations. Both sites are in Arizona.

Richard Adkerson, Freeport’s CEO said that the “copper market continues to be tight” and that mining companies are “challenged” to meet production targets. Adkerson claimed that higher production costs, especially for fuel, have created a “barrier” to increasing mine output.

Small wonder that analysts at Barclays Capital (BARC) in London were writing that, “The picture for copper supply growth remains bleak.”

Meanwhile lead, which had been in the doghouse for ever so long, has been showing definite signs of new life on supply concerns and some sentiment that the selloff may have been overdone. Lead inventories monitored by the LME fell 650 tons yesterday, to 91,375 tons. They’re down about 10% since July 9.

Chinese exports of refined lead dropped 96% in June and 80% over the first half. “Net lead exports to the west from China were at their lowest this decade in June,” said Nick Moore, of ABN AMRO. “China is the largest producer and consumer of lead so anything out of there tends to feed in quite quickly.”

And Alex Heath, of RBC Capital Markets noted that, “Lead consumption is growing on demand for batteries in both India and China … The car industry as a whole, in terms of western producers, is flagging, but people still need new batteries for their old cars.”

Source: Base Metals Mostly Lower, but Lead is on a Tear as Inventories Skid

Nickel poked through the $10 barrier at mid-morning, then fell off steeply before closing with a meager gain of 5¾ cents, at $9.6812/lb. Zinc had another strong day and, though it pulled back nearly 3 cents from its highs, still ended at $0.8711/lb., up more than 4 cents. Aluminum went vertical in the pre-dawn hours, continued higher until mid-morning, then eased to $1.4466/lb., up more than 3 cents, while lead was smoking, adding another 7¼ cents to Wednesday’s 6 cent gain and finishing at $0.8616/lb.

Aluminum hit its highest level ever, breaching the $1.50 mark at 10:30 before subsiding later in the session.

The metal was the talk of the sector as it took off after the Aluminum Corp of China (ACH) and its peers – a group of 20 companies which produce over 70% of the country’s aluminum output – signed an accord that will cut output by 5-10% , the China Nonferrous Metals Industry Association said .

That may remove as much as 1.2 million metric tons, RBS Sempra Metals says, which would go a long way toward easing the current supply glut. The global supply surplus was 458,000 tons in the first four months of this year.

The gang of 20 “also call for other producers in the country to cut output, showing support for the Beijing Olympic Games and creating an easier market condition for the industry,” the Association said.

The move was seen as an attempt to curb energy use (aluminum being the most electricity-intensive of the metals) ahead of the Olympics. Authorities eliminated preferential power rates to smelters in January this year, and have also been cutting rebates for aluminum end-products.

But analysts at MF Global (MF) cautioned against irrational exuberance, writing that “while today’s price reaction may be justified, the situation is very fluid, and may not necessarily be sustainable given the uncertainty about the time-line of the reductions, and more importantly how demand, exports, and duties, all play out against this production decrease.”

Taking an opposite tack, Gayle Berry, of Barclays Capital London (BARC), said that, “We think these cut-backs in production will be a long term issue, and is not going to last for only a few weeks. They will continue to categorize the market going forward and could intensify in nature.”

Source: Base Metals Strong for a Second Day – Aluminum Hits All-time High

Too Late to Buy Gold?

It’s hard to be bullish on gold when there’s so much bad news in the world.

After all, gold offers a refuge against bad times ahead. Like all good insurance, it’s best bought before trouble arrives — not during or after.

And just how much worse can the news get from here?

1. The Dow’s on track to close out its worst June since the Great Depression, down almost 10 percent for the month.
2. GM’s stock is trading at a 54-year low, taking it right back to when CEO Charles Wilson declared “what was good for the country was good for General Motors (NYSE: GM) and vice versa.”
3. U.S. Dollars — the bedrock of world forex reserves — now buy one-third less against the rest of the world’s money compared with 2002.
4. The price of crude oil has risen more than five times over since U.S. and U.K. troops liberated the oil fields of Iraq in 2003.
5. Libya is threatening to cut its oil production in protest at U.S. anti-terrorism laws; Tehran just pulled $75bn worth of investments from Europe to avoid sanctions against Iran’s nuclear program.

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6. Global inflation has risen from three percent last June to more than 5.2 percent per year today; analysts at Barclays Capital (LON: BARC) believe U.S. inflation will hit 5.5 percent by August.
7. Real estate prices have turned sharply lower in the U.S. (down 15 percent year-on-year), Ireland (down 13 percent) and the U.K. (down 3.6 percent) as well as in Spain, Australia, South Africa and the emerging economies of east-central Europe. Price in Riga, Latvia dumped 38 percent in the year to May.
8. Western consumer confidence has sunk to multi-year lows; emerging-market consumers face the worst rates of inflation in more than two decades, rising 25 percent year-on-year in Vietnam and more than 13 percent in India; surging fuel and food prices have sparked protests and riots in Asia and now unionized strikes across Europe.
9. Investment and lending banks are being forced to take back “securitized” debt onto their balance sheets, destroying their capital adequacy ratios and halting new lending as pension & insurance funds try to flee risk. In the U.K. alone, new lending fell 95 percent in May after allowing for such “de-securitization.”

Watch out below! It’s every man for himself — women and children included! Or so the financial pundits now claim.

Makes you wonder where they’ve been during the bull market in gold starting in 2001. But with inflation surging and new credit shrinking, “we’re in a nasty environment,” said Tim Bond, head equity strategist at Barclays bank in London, this week.

Above all, “there is an inflation shock underway,” he said in Barclays’ latest Global Outlook. “This is going to be very negative for financial assets. [So] we are going into tortoise mood and are retreating into our shell.

“Investors will do well if they can preserve their wealth.” And investors who choose to buy gold are usually looking to achieve just that.

Indestructible, un-inflatable, and instantly priced in the world’s only true globalized market, gold bullion stands apart from all of those boom-time investments. Stocks, bonds, securitized debt, real estate…you can keep ‘em when the end of the world strikes.

These happy assets promise to pay you income. They also rise in value as the economy grows. Whereas gold, in sharp contrast, just sits there — neither smiling nor frowning, and never paying an income. Its value comes from, well, from its gold-ness alone.

And as the spike above $1,000 an ounce showed in mid-March — just as Bear Stearns collapsed — you need the end of the world to make buying gold worthwhile.

Right?

Well, perhaps not.