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-- Posted Tuesday, 4 February 2003 | Digg This Article
1415 Sherman Ave. #504 Ph: (847) 733-8400 Evanston, IL 60201 Fax: (847) 733-8958 E-mail: lkaplan@prospectorasset.com February 02, 2003
For markets of February 3rd
CLOSES
FEB GOLD 369.10
MAR SILVER 4.870
APR PLAT 658.9 | INDICATIVE LEASE RATES
Based on 30 day maturities
GOLD 0/.50%
SILVER 0/.50%
PLAT 12.00/24.00% |
MARKET COMMENTARY
GENERAL COMMENTS: The past trading week saw most of the precious metals markets take a bit of a respite, as prices for gold, silver, and palladium remained rather flat, while platinum rocketed to 17year highs as major shifts in the fundamental supply/demand characteristics fueled an explosive rally. These markets remain very much a "one way street" with investors and speculators continuing to pile on the long side of the market. The bullish fervor in gold in now unmatched since 1980, with gold’s successes being touted by mainstream publications and by the financial news stations. We will see the statistics later on in this commentary, but speculative interests on Comex have now amassed the largest net long position in history, perhaps as much as 13 million ounces as of this date. And, with the drums of war beating loudly, and the imminence of conflict approaching, no one cares much for short positions in gold. This newsletter has been commenting for months and months that this is a "new" gold market, that the price is being determined not by the actions of the users or producers in their purchases/sales of physical product, but by the psychology of the investor/speculator in their purchase/sale of derivatives and futures. Physical product remains completely unloved and lease rates, in gold, remain at virtually zero, while the price of gold screams higher and higher. This is neither good or bad, it is simply the driving feature of the market at this time. But, since investor psychology can turn instantly in response to geopolitical events, it is important to understand that more short-term risk is now more intrinsic in this market than we have seen for decades. Gold is, in my opinion, most certainly in a long-term secular bull market , for ALL the right reasons. As the USD continues to falter, as the equities markets continue their slide, as the paradigm shift from "paper" assets to "hard" assets builds a bit of momentum, as the budget deficits of the USA swell, it becomes apparent that gold must rise in response. But these fundamentals, and others too lengthy to present here, do not convince me that we belong at $365+ in gold, at least not yet. There is most certainly a "war premium" built into the price and a peaceful solution to the Iraqi war, whether it comes as a result of a quick and decisive war or by other means, will turn investor psychology around very quickly and a vicious drop will be seen. Or, on the other hand, if the Iraqi situation becomes worse than the market believes, the gold market will scream higher. All depends on the news at this point. The question now arises as to how big or how small is the "war premium" currently built into the price of gold. Some analysts are claiming that it could be as high as $50 per ounce, while some estimate it as only about $20. There are very few that claim it is non-existent. My view is that it is quite high, and that IF the world reverts to some sort of normalcy (and that is a very big IF), that the price of gold MUST fall low enough to reinvigorate physical demand, which is almost vaporous at present. Actual physical buying of the metal creates a "floor" for the gold price, and brings a reality to the marketplace not evident in the wild swings of hope, fear, and greed engendered by the psychology of the speculative concerns. While it is true that we may see a sharp decline in the gold price if the world straightens out, it is also true that this discussion could be simply academic, as gold may go much higher if the bonfires of fear grow larger. Again, all depends on the news and the headlines. As a trader in this market you are NOT trading a commodity, you are not trading gold as a currency or as a "monetary metal", you are trading the ebb and flow of the news reports and the headlines. And, recently, the news just keeps worse and worse and the gold price has continued higher and higher. OK, we have talked about the current psychology of the market, and pardon me for bringing in some fundamental realities, as they seem to be rather unimportant. India, the world’s largest demand market, has seen gold demand drop by at least 50% in 2002, to about 267 tons and prospects are strong for another sharp decline in 2003. In 1997, Saudi Arabia demanded about 250 tons of physical gold, while in 2002, this number fell to about 150 tons. Physical gold imports into Japan remain at levels unimaginable given their financial and economic morass. I have heard the gold market being called a "speculative bubble" by some in the Wall Street Crowd, and this characterization is laughable given the irrational exuberances seen in the stock markets over the past 5 years. Gold is up some 10% since the middle of December, and has risen in what could be called a most placid and determined manner, and has rallied for VERY good reasons. We have not seen much irrational exuberance, we have not seen volatilities shoot skyward, and the market has been very well supported on any dips. Yes, there is risk in this market at this point in time, but I would shout that, at worst, it is perhaps 10%-15%, at most. Conservative investors in the gold market, who bought at our recommendations over the past years, should be rather comfortable with such risks balanced against the future probabilities of higher prices. As a short-term trader, which is a very different thing from the classical investor, these are dangerous times. If you are long, use close stops. If you get long the gold market, use tight stops. With this market dramatically overbought, with speculative concerns carrying record long positions, there is the distinct possibility of a gut-wrenching and vicious drop if the headlines turn peaceful and investor psychology reverses. Longer term investors, who are not leveraged to any great degree, should just sit and enjoy the show, and be aware of the risks. Silver continues to be a complete dog in this market. It is basically the same price it was when gold was some $65 lower and acts, completely and totally, as an industrial metal. Silver has a much higher correlation to the price actions of copper and the other industrial metals than to the gold price. The gold/silver ratio is now about 77 to 1 and shows absolutely no sign that it wants to turn around. The $4.90 to $5.15 technical resistance level appears unshakeable. As mentioned in earlier commentaries, if you want to get short the precious metals, sell silver. I remain unfriendly to the silver market at these levels, and still view silver as a trading vehicle, bought on dips and sold on rallies. Platinum continues to just scream higher, as forecast by this newsletter, on fundamental developments that appear to constrict supply while expanding demand. The market now is beginning to understand that the South African producers plans to greatly expand production are not realistic, that the supplies of this metals originating from Norilsk, in Russia, are now longer certain due to labor unrest, and that demand for this metal may greatly increase due to increased interest in its use as a catalyst in fuel cells. Lease rates in platinum have remained in excess of 20% for well over a week and this market has risen for all the right reasons. Yes, over the past few days, we have seen the Japanese general public pile into this precious metal as war concerns grow, and as the Japanese Yen has declined. We now have 17-year highs and we could easily go higher in price, especially if gold continues to rally. Platinum has dramatically outperformed gold, and, in my opinion, offers a bit of less risk due to its superb fundamentals and the fact that it is probably not carrying a huge "war" premium. Palladium continues to edge higher, partially in sympathy with it’s sister platinum, and partially due to the fact that it has been beaten down so decidedly. From a fundamental perspective, those users of palladium, who shifted to platinum when palladium went over $1000 per ounce, will begin, albeit slowly, to shift back to palladium, creating definite demand for the physical product. I continue to recommend the accumulation of palladium for larger, more conservative, investors willing to take on a long-term commitment of perhaps a year or so. This is not a trade, but an investment. Perhaps my age is showing, but I do feel more comfortable with markets that have strong fundamentals and excellent prospects, rather than follow the speculative crowd. As an "old-timer", I remain more centered on the risks rather than the rewards when I trade. Before we look at the Commitment of Traders reports, lets just scan the Bullish Consensus, as of January 28th GOLD 89% from 88% as of January 21 st SILVER 65% from 62% PLATINUM 87% from 94% Almost 90% of analysts are still bullish on the price of gold and platinum. Everyone is standing on the same side of the boat . I am most decidedly NOT saying that they are wrong; all I am saying is that it is dangerous when any market is so one-sided. To reiterate, all depends on the news. Gold
Long Speculative
95552
-543 |
Short Speculative
30900
+2470 |
Long Commercial
70697
-6646 |
Short Commercial
195965
+1027 |
Small Spec Longs
94775
+13169 |
Small Spec Shorts
34158
+2484
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During the reporting week, large speculative concerns gently pared their positions in this market, selling into the higher prices. In fact, large speculative short positions were increased by about 8%. So, the professional speculators were just lightening up their positions a bit. The huge increase in long positions was bought, not by the professionals, but by the small speculator, who seems to be entering the party more than a bit late in the game. Their purchases were accommodated, to some extent, by the long commercials, who, also being seasoned professionals, took this opportunity to unload hugely profitable positions. In a "normal" world, I would be getting very, very nervous about the potential upside due to these changes of ownership of contracts on the exchange as the small speculator is rarely ever right. But, this is not a normal world and standard analysis of these statistics is probably not appropriate at this time. However, it does show the risks IF the geopolitical situation undergoes a sudden "peace" threat. Again, use close stops when going long. Silver
Long Speculative
47975
-35 |
Short Speculative
6743
-1377 |
Long Commercial
19607
+131 |
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Short Commercial
92720
+4081 | Small Spec Longs
39781
+2953 | Small Spec Shorts
7899
+346 |
The silver market is simply not seeing the interest of the gold market , as speculative interests continue to ignore this market almost completely. If we use traditional analysis of this market, which appears to be justified, then the statistics above would strongly indicate a sell, as short commercials (the large bullion banks and dealers, seasoned professionals) were selling to the small speculators. As we remain near historic technical resistance, such actions are certainly understandable. The speculators are betting that silver will regain its "monetary" status, that silver will "catch-up" to gold, and that prices will soar through price levels that have, so far, restricted the price. The professionals in this market just don’t see it happening, as the market has not proven its merit these past years. Neither do I. But all changes if we get over $5.15. So, if you insist on being short, do it in silver. GOLD RECOMMENDATIONS: Expected trading range $360.00 to $380.00 Good technical support exists around the $360-$365 price level with resistance at the $377 to $380 price level. Look for excessive volatility and dangerous conditions and all that matters is the news. Day traders should pick their points carefully and use rather tight stops. Staying on the long side makes a whole lot more sense and watch the foreign exchange markets carefully. These are dangerous times for day traders especially if you take the short side. And, of course, the news is all-important. For position traders, the times are difficult to judge. I would like to start buying gold in the $342 range, building a position all the way down to $328, but that may never happen. Lets try to buy a dip to the low $360’s and use a $5 stop on the position, but do it lightly. Also, sell some out of the money puts at $325 or $330 to replace the positions lost to the options we sold. And, now is the time to buy some insurance, buy some bull call spreads, but only in smallish quantities as buying options is rarely a good idea. SILVER RECOMMENDATIONS: Expected trading range $4.74 to $4.95 Day traders should be playing the range here. Short positions in silver are a lot less dangerous than short positions in gold it would seem, so when you want to be long, buy gold, and when you want to be short, do it in silver. Position traders, and traders who follow our recommendations, are now delta neutral on silver, waiting to reestablish long positions at lower prices. On dips, sell out of the money puts. Large accounts could be just slightly short. PLATINUM RECOMMENDATIONS: Expected trading range $650 to $700 Clients of the firm, and traders who follow our recommendations, are now out of the platinum market as risks have increased as prices have gone higher. I would be a buyer on a retracement in prices. I am long term bullish on palladium and continue to recommend adding, carefully, to positions for a long-term move. Call our offices for recommendations. Prospector Asset Management, and its sister company, Prospector Metals LLC offer the following services: *Brokerage of commodity futures and commodity options *Managed and directed speculative accounts in commodity futures and options *Brokerage of physical precious metals *Consulting Services *Daily Newsletter and Special Reports on the Precious Metals A complimentary subscription to the newsletter, with specific recommendations and positions, is available upon request for a one-month period. Futures Trading is for individuals willing to accept a higher level of risk for the opportunity of greater returns. This information is obtained from sources considered reliable, but its accuracy is not guaranteed by Prospector Asset Management. The recommendations reflected are those of Prospector Asset Mgmt. and are based upon circumstances it believes merit such recommendations. It is possible that other brokers or analysts may disagree with our opinions based upon their current commodity research or the analysis of commodity trading advisors. Expressions of opinion are subject to change without notice. Reproduction or rebroadcast of any portion of this information is strictly prohibited without the written permission of Prospector Asset Mgmt. There is a risk of loss trading futures. You should carefully consider the risk associated with futures trading in light of your specific financial position. Past performance is no guarantee of future performance.
-- Posted Tuesday, 4 February 2003 | Digg This Article
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