Money and Metals

Reuters reports on currencies. "The yen rose against the dollar and euro for a second straight day on Tuesday, as worries about fallout in the U.S. subprime mortgage sector prompted investors to unwind some trades funded by low rates in the Japanese currency. Volatile stock markets, in part stemming from concerns about the exposure of U.S. lenders to subprime mortgages in a declining housing market, have prompted some reduction in risk appetite around the world."

"Further helping the yen's cause was a warning from Japanese Finance Minister Koji Omi about the weakness of the country's currency."

"'The risk appetite in the market is starting to wane a little bit given anecdotal evidence of what is going on in hedge funds and equities,' said Joe Francomano, vice president for foreign exchange at Erste Bank in New York."

"'We're into the summer months, we have a U.S. holiday next week and we've got the quarter-end. This a pretty good opportunity right now to take some profits off the table especially in carry trades,' he added."

"In early afternoon New York trade, the dollar was down 0.2 percent against the yen at 123.37. It fell as low as 122.81, its lowest in about two weeks. The euro slipped 0.2 percent against the yen to 166.15, well off a record high hit last week."

"Foreign exchange officials from South Korea and New Zealand also said they were worried about the harm caused by the yen's weakness, compounding concerns about carry trades."

"Against the dollar, the euro was little changed on the day at $1.3468. The dollar was also little changed at 1.2282 Swiss francs. Sterling edged up against the dollar at 1.9989."

"Finance Minister Omi's comments follow similar warnings from the Bank for International Settlements in its annual report on Sunday that there was 'clearly something anomalous' about the yen's recent weakness."

"Adding to market talk around the yen, the International Monetary Fund's chief economist, Simon Johnson, said building global inflation pressures should provide room for the Bank of Japan to raise interest rates, which in turn would gradually reduce the yen carry trade."

"In other markets, key precious metals such as gold and silver -- the recipient of some carry trades, were weaker on Tuesday amid declining risk appetite and expectations of higher global interest rates. Oil prices were also down, tracking weakness in other commodities."

From MarketWatch. "Gold futures dropped more than $9 an ounce Tuesday to close at their lowest level since mid-January, and silver futures sank to their weakest level in eight months, pressured by the options expiration on the July contracts and weaker oil prices as traders awaited a Federal Reserve decision on interest rates due later this week."

"'This erosion was in the making for some time now [certainly since the scary June 8 drop],' said Jon Nadler, an analyst at Kitco Bullion Dealers. 'People ignored the subtext of risk aversion becoming trendy, and now they are suffering the consequences. Technicals have converged with short-term fundamentals to yield a pivotal tone change in the market.'"

"Gold for August delivery closed 1.4%, or $9.40, lower at $645.30 an ounce on the New York Mercantile Exchange after tapping a low of $642.80. It is trading at the contract's weakest intraday level since Jan. 16."

"Silver futures followed suit, with its July contract dropping to a low of $12.15 an ounce, its weakest intraday level since Oct. 25, 2006. It closed down 4.6%, or 59.7 cents, at $12.28."

"'Expectations of a more hawkish stance on interest rates by the world's central banks looks set to keep gold on a back footing in the coming sessions,' said James Moore, analyst at TheBullionDesk.com.

"The expiration of options on the July gold and silver contracts in New York Tuesday was also likely contributing to the liquidation in the metals, according to Mark O'Byrne, director at Gold & Silver Investments Ltd."

"The Federal Reserve will hold a meeting on Wednesday and Thursday, with its decision on interest rates expected on Thursday. The Fed is widely expected to leave rates on hold, but investors will be eager to see if the committee's accompanying statement hints at whether rate increases or reductions could be in store in coming months."

"There is lots of talk of a hawkish stance from the Fed [and] higher rates are negative for gold, said Charles Nedoss, an analyst at Peak Trading Group. And 'we are through many technical levels, it's going to take a while for the dust to settle.'"

"Other metals prices declined. July platinum fell $23.40, or 1.8%, to close at $1,268.30 an ounce and September palladium closed down $4.35 to end at $371 an ounce."

"For now, 'gold remains in a tight range between $640 and $670 and support is at $640,' said Gold & Silver Investments Ltd.'s O'Byrne. 'Any liquidation below $640 is likely to be brief and shallow as the fundamentals will reassert themselves and there is strong physical demand internationally at these levels,' he said."

"Steven Jon Kaplan, a senior editor at TrueContrarian.com, points out that the strongest physical buying of gold comes from countries such as India, where most of the buying is done for festivals, holidays, and other special religious and family events."

"But 'there are very few such holidays scheduled between now and September, so I think it is likely that gold will continue to decline for at least the next two months,' he said. Kaplan expects gold prices to fall below $600 an ounce within a few months."

"Overall, the gold market has been seeing a couple of 'changing investment psychology factors' since at least this past February, according Kitco's Nadler. 'Gold pundits have not considered large-scale situations, such as severe stock market setbacks, in any other context than an immediate ostensible run-up in gold prices,' he said."

"But 'in the aftermath of such events, for investors who are trying to meet margin calls [which have no patience for tardiness], the precious metals portion of a portfolio is among the first to be liquidated,' he explained. 'Such a phenomenon should not come as a surprise to those who signed on to the concept of gold as an insurance hedge to be placed in one's portfolio precisely in order to mitigate losses incurred in other sectors,' he said. 'Gold is bought for the 'rainy day.' Well, those rainy days are now here.'"