The dollar index extended its sharp 2-month downtrend and fell to a new 3-month low. The euro rose to a new 3-month high while the dollar/yen is consolidating above its recent 8-month low. The dollar continues to fall as safe-haven demand ebbs with the reduced concerns about the European debt crisis and bank risk. In addition, the 750- billion euro "European Financial Stability Facility" is now in business and can sell debt after Italy's parliament approved the plan. That means that there is a standalone rescue facility that can provide funding to troubled Eurozone countries such as Greece without any additional approvals required by European governments that could provide obstacles. 10-year yield spreads for Portugal and Spain against Germany have fallen by 64 bp and 36 bp, respectively, in the past 2 months since the stability fund was first approved in early June. The only question now is whether the fund will receive the expected AAA rating. European bank risk also declined after new global bank capital requirements were softer than expected. The euro was also supported by a 2-year high in European confidence and by the 13th consecutive month of declines in German unemployment.

Fundamental Outlook-Near-term bearish-The dollar remains on the defensive due to reduced safe-haven demand and a drop in US interest rate differentials. The euro is being boosted by reduced concern about the European debt crisis and European banks. Also pressuring the dollar is the widening of the US trade deficit this year with $1.3 billion per day of dollars still flowing out of the US. The dollar may continue to fall until either fresh crisis news emerges, or until the US economic data substantially improves.

GOLD

Gold prices continued lower to post a new 3-month low of $1155.60 on Wednesday and are now down by a total of $109.20 (8.6%) from the record nearest-futures high of $1,264.80 posted on June 21. Gold prices recovered mildly later in the week due to the sell-off in the dollar to a new 3-month low. Bearish factors include soft economic data and the receding European sovereign debt crisis. Gold also continues to be hit by heavy long liquidation pressure following the $200 per ounce rally seen this year from February to June. Gold holdings in ETF funds have so far fallen by 1.5% to 65.83 million ounces from the record high of 68.81 million ounces on July 19.

Fundamental Outlook - Near-term Bearish - Gold continues lower as the European sovereign debt crisis recedes, as the global economic data remains uninspiring, as disinflation continues, and as hedge funds light up on their long positions. However, the long-term bull trend remains intact due to the likelihood that central banks will be slow to remove the massive amount of excess liquidity, and the long-term threat of significant bubble and inflation pressures.

Gold Supply/Demand Summary

Gold Council-With gold prices up 22% y/y n Q1, gold demand fell -25% y/y in Q1 to 760.2 MT, although Q1 jewelry consumption was up +43% y/y and Q1 industrial demand was up +31% y/y. Q1 gold supply fell -24% y/y to 949 tones and Q1 mine production climbed +5% y/y to 611 tones.

COPPER

Copper prices extended the sharp 2-week upside breakout and posted a new 3-month high. Bullish factors include (1) technical short-covering and new buying on the upside breakout, (2) the sharp 16% upward rebound in the China CSI 300 stock index seen in the past month, which has reduced worries about the Chinese economy, (3) the comments by Chinese officials to IMF officials that they are in no hurry to raise interest rates, which is positive for the Chinese economy and industrial metals demand, (4) the 25% decline in LME copper inventories from the peak in February, and (5) the ongoing weakness in the dollar index.

Fundamental Outlook-Bullish-Copper has broken out to the upside mainly due to an improved view of the Chinese economy and the 16% rally in the Chinese stock market. The market still remains nervous about softer global growth. However, the long-term picture for copper remains bullish when the global economy regains its balance and as strong global industrial demand reemerges.

Copper Supply/Demand Summary

International Copper Study Group (Apr-2010): 2010 forecast: production 18.515 MMT (+0.6% y/y), consumption 17.937 MMT (-1.5% y/y), and surplus 578,000 MT. 2011 forecast: production 19.094 MMT (+3.1%), consumption 18.851 MMT, surplus 243,000 MT.

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