FYI | May 23 2007
By Greg Peel
It is a brave soul who tips a base metal price collection. The streets are scattered with the corpses of resource analysts who have tried just that. But as base metals have continued their extraordinary run recently there have been some more than tentative suggestions along pullback lines.
One conundrum has been the bounce in the US dollar. Base metal prices are globally benchmarked in US dollar denomination so like gold, they are meant to trade in the opposite direction to the greenback- all things being equal. This is certainly one reason why the metals have been strong over the first quarter of 2007, as the US dollar has slid significantly against the euro.
Buy recently the US dollar has bounced, sending gold down around US$40/oz from its recent highs. Base metals, on the other hand, have not tanked. Perhaps there has still been a feeling that the US dollar bounce was still just a correction in a downward trend.
If that’s been the case, then last night patience ran out. There was no fundamental reason base metals should tank – in fact inventories are still tight. But tank they did.
Copper and nickel were down around 5% in New York while zinc lost 4% and lead 2%. Aluminium was down close to 1%.
Gold also slipped precariously again, down US$4.30 to US$658.30/oz. There is a general feeling that gold may still need to go lower before it can go higher again, and that the US$650-655 region is critical. A breach of that region could open up some serious technical selling as it would break below a significant trendline. The next major trendline support is at US$500/oz (not a typo). Gold guru Dennis Gartman has been warning of this for a few days now, although other gold watchers are not quite so apocalyptic in their views. Gartman is not necessarily suggesting this is where gold is heading, he’s just pointing out the technicals.
The slip in gold last night has been mostly blamed on a retracement in the oil price. Oil has been pushing higher these last couple of days due to concerns over US refinery maintenance shut downs. Nymex oil for July delivery (June has now rolled off) fell 2% to $65.51/bbl. The point is that refinery shut downs should actually be bearish for crude, as inventories will pile up while not being used. However, it is curious that a clear acceleration of tensions in the Lebanon/Israel/Palestine region, once again with accusations of insidious support from Syria, have not seemed to have registered on the oil-watchers radar. It was the Lebanon-Israel battle that helped oil up to US$78/bbl last year.
The weekly spot uranium price has traded higher once more – to US$125/lb – up from TradeTech’s last registered trade of US$122/lb and bringing the weekly rise to US$5/lb, according to market watchers Ux Consulting. Both UX and TradeTech set weekly spot prices at different times each week, which probably explains the differences that occur occasionally.
Uranium oxide is now up over US$50 for 2007, although the big moves have given way to more incremental shifts of late. Getting toppy? UX Consulting’s “two-week forward indicator” is at US$125-140/lb. One thing is for sure, little direction is being provided by the much anticipated futures market, which is now lucky to trade at all during a session and stands at an open interest of only 17 near-month contracts.
In the meantime, rumours of a takeover bid for Paladin Resources (PDN) by French company Areva had that stock running yesterday. Areva denied everything, but rumour mongers are suggesting the Gauls will make their move once Paladin has completed its takeover of Summit Resources (SMM).
The Dow was directionless last night despite more M&A talk, closing down 3 points. There is more interest currently being given to the widely indicative S&P 500, which has this week finally breached new highs since the dotcom bubble burst. Investors are getting a little wary at these lofty heights, and are looking for some new direction from upcoming economic data.
The SPI Overnight was down 18 points, which may yet prove underdone if there is any resource sector panic setting in today. Despite the constant railing from local analysts that the big diversifieds are cheap, Rio Tinto (RIO) has been enjoying a bit of buying on as yet speculative takeover rumours of late.