In our last commentary, we wrote of the danger and risk inherent in the gold market and strongly recommended using tight sell-stops on all long positions. Such advice was well given as the gold market has experienced a violent, vicious sell-off with speculators and large commodity funds bailing out of long positions, pushing gold prices under the $350 price level in the Far East today. We now have fallen over $40 per ounce from price levels reached just 5 days ago.

This technically driven long liquidation was simply the result of a complete imbalance in the market, creating great risk. The bullish consensus was quoted in the last commentary as being 89%, shouting to all would listen that virtually everyone who wanted to buy gold already had done so. Open interest, the number of contracts outstanding on the exchange, had reached levels not seen in a decade and the physical marketplace was simply awash in gold. All it took was slightly lower price levels, and the gold price started snowballing down, in an avalanche of selling, as speculative long positions starting being liquidated. The lesson to be learned here is when everyone is on the same side of the boat, it is best to move to the other side, with a firm grip on the railing.

Please note that this major decline in the gold price occurred even as the global geopolitical conditions worsened. The news and headlines in regards to Iraq and North Korea heightened investor tension as the drums of war beat louder and louder. Terror alerts in the United States and Britain also fed the fires of fear. But, even the news could not deter the natural waterfall of the gold price, as the inherent technicals of this market became the dominant influence. It is most difficult trading gold at this point in time, as a trader must determine the various influences on gold, and determine their worthiness and influence upon prices. And, it gets even harder when a speculator is forced to trade only one side of the market. As an example, even though I strongly believed that gold prices were headed sharply lower, I could not bring myself to get short this market, as that risk is simply unacceptable.

As the fundamental supply/demand considerations of the gold market are almost unimportant at this juncture, it is investor and speculative psychology that still rules the market. And, such psychology can turn around in seconds, as we have seen over the last 5 days. The important question to ask is…is the decline over? Have we "washed" out the weak speculative hands? The answer is probably not, baring the release of news that would force "new" buyers into the "safe-haven" of gold. There are three rationale for this opinion. One is that that gold price went up far too fast and far too high, and that when a pendulum is pulled too far in one direction and then released, it swings too far in the other direction. The second is that there still remains a large sheaf of sell-stops in the "decks" of the gold traders on the floor, with oodles of sell-stops just under the $350.00 price level. And the third reason is my pet theory, which I entitle the "Kaplan Theory of Market Perversity". This hypothesis contends that the market always does what will hurt the most people at any point in time, and as such, a continued decline would force losses on the multitude of speculative interests. But, and an important but, it is impossible to accurately determine the turnaround in gold prices, and speculators and investors should NOW begin to "nibble" at long positions, carefully and slowly building long positions. Look to begin such activities at the first "up" day that we see, as that may determine the end of the downward momentum. Do so lightly, and I would recommend that speculators should start by selling a few out-of-the-money puts. With volatilities quite high, these puts are paying quite well.

The silver market is now down some 43 cents in just 6 days, and seems to be basing, or bottoming, in the low $4.50 price range. I would believe that the downside to this market is now rather limited, maybe another 10 cents or so, at most. If gold continues to crash through technical support levels, silver prices may decline a bit in sympathy. Clients of the firm and traders who follow our recommendations have been selling out of the money puts in this market, to begin to accumulate long positions. As noted before, silver is simply a trading market. Go back and look at the charts over the past years, and count how much money could have been made by buying silver in the $4.30’s and $4.40’s, and selling in the $4.70’s and $4.80’s.

The platinum market remains very strong of late, and prices are still in the 23-year high range, just under the $700 price level. This market remains the darling of the Far East, with speculative demand emerging in that time zone. As noted in this commentary, it has proven to be a far less risky endeavor than the gold market. Clients of the firm are no longer long this market, but are awaiting some retracement in prices to reenter. IF gold continues to wash out, platinum will have to come down a bit and large speculators, with a higher degree of risk tolerance, should consider SMALL short positions in this market. Call our offices for specific recommendations for your account.

Blissfully unaware of the outside world, palladium continues to build a technical base near the $250 price level. It seems totally unaffected by all exogenous factors and is trading as a true "industrial" metal, with its supply/demand fundamentals being the only factor upon price. For some reason, I like this, a lot. It seems to me that the downside risk in palladium is rather minimal at the present time, and that the long-term upside could be quite "tasty", but patience is going to be needed here. This market is extraordinarily thin and is very volatile, and is certainly not suitable for small accounts or those who wish to trade actively.

Finally, let us all hope for peace.

Prospector Asset Management, and its sister company, Prospector Metals LLC offer the following services:

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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 Thursday, 13 February 2003 | Digg This Article