MARKET COMMENTARY

GENERAL COMMENTS:

In a blazing vindication of our recently stated opinion that the gold and silver markets were strictly and solely moving at the whim of speculative psychology, and that danger was imminent, the last week’s trading saw the gold price collapse at just the HINT that all might go well in regards to the Iraqi war. Even though the rumor that the CIA was in secret discussions with the Iraqi military for their surrender was denied by the State Department on several occasions, speculators exited their long positions en masse, forcing prices down by $14.30 for the week. Volatility was quite extreme, with the price of gold, basis the April contract, ranging from $358.70 on the 7th, to a low of $332.00 on the 13th. Please note, that at the market lows seen, we have retraced the entire move from the technical breakout at $330.00 to the emotionally driven irrational highs seen at $390.00. And yet, there has been little change in the geopolitical picture, and in many respects, could now be considered more ominous.

Much of the downward move of the past weeks has been the result of the very "structure" of the gold market, where all the speculative interests have always been long. Spec shorts have been as rare as hen’s teeth and, as such, when prices begin to decline, it becomes quite easy for an avalanche of selling to develop, overwhelming the market and cascading ever lower. In a "normal" market, where speculative shorts are evident, such declines in price encourages the shorts to cover their positions and book profits, providing some price support. As physical demand in the gold market was very poor at higher prices, there was really nothing to prevent the almost $60 retracement in the gold price seen over the past weeks.

In my opinion, the gold market has now been through a complete cycle where the pendulum got pulled way too far to the right, to its highs of $390, and has moved viciously way too far to the left, near its support at $330-$332. I would think there is very little "war premium" built into the current market price. While it is indeed possible that we could see the gold price descend in the low $320’s, I think it less than probable. With the price of gold at current levels, it looks quite advantageous for purchase, but all strategies to take advantage of a soon to be resumed bull trend must be constructed with the framework of the enormous volatility of the current market. These are dangerous times, and the gold market will certainly react dramatically as the news and headlines ebb and flow. Recommendations will follow below.

The silver market was down 15 cents for the week, largely in sympathy with the gold price. However, from a technical perspective, it did not break any major support levels. Silver still seems very well bought in the low $4.50’s and very well sold at $4.75 or higher. In talking to my brokers on the floor of the exchange, there is a raft of sell stops at just under the $4.50 level basis the May contract, and as such, presents a most tempting target for the professional traders in this market. If they can sell the market into the stops, they can cover their shorts quickly and pocket excellent short-term profits. If gold has a bad day, and if conditions are right, look for the market to take out these sell stops and plummet quickly into the $4.40’s, only to rally back shortly thereafter. There are several strategies to take advantage of this possible movement, and are listed below.

With the gold and silver markets plummeting last week, it was most surprising that platinum managed to finish the week exactly unchanged from the previous week. I would have thought that the downward movement in platinum would have exceeded that of gold, but I was totally wrong. Palladium was down almost $5 for the week and tested its recent lows near the $225 price level, only to rally a bit towards the end of the week.

I still maintain my slightly bearish posture on platinum at this time, thinking it is a bit overvalued and also believing that palladium is undervalued. With palladium trading at 1/3 the price of platinum, instead of almost twice the price of platinum seen several years ago, it is just a matter of time that some commercial/industrial concerns will begin to substitute the cheaper metal for the more expensive one, if they are able, thus generating additional demand for one and lesser demand for the other. There have been reports in the industry that the scrap recovery of palladium will skyrocket in a few years due to recycling, and this has certainly helped to depress the recent price. However, a prominent analyst from Johnson-Matthey has come out this week to question such theories.

In gold, at the mining industry conference in Toronto, London-based Gold Fields Mineral Services issued a forecast calling for an additional 100 tons of gold to be repurchased by the gold producers in the first half of the year. While this is down very considerably from the levels seen last year, they believe it will add some support to the gold price. They are looking for gold to average $350 this year, with a range of $330 to $370. They also noted that investor interest in gold rose from 172 tons in 2001 to 417 tons in 2002, adding additional support. I must admit that I was quite surprised that investor demand was so poor, so as to rise only by about 250 tons, just a total of $2.8 Billion USD, in a year where the global geopolitical and economic urged the purchase of gold as in no period in my recollection. This fact dovetails nicely with my past conjectures and opinion that investors and speculators, the world over, have been playing in the derivatives, futures, and options sandbox, while ignoring the purchase of the actual physical product. As we have seen over the past weeks, this has had a profound effect on the gold market, with the market seeing rather high volatilities and acutely sensitive to the sometimes irrational psychology of speculators.

In another surprise for the gold market, it was reported that gold production in South Africa rose very fractionally in 2002 over 2001. The increase of only 1.7 tons is negligible, but marks the first rise in production since 1993. With quite a lot going on in that nation, it remains questionable that any production increases can be seen in the future.

The Chinese government continues to liberalize their marketplace, as now four commercial banks will be approved for the import and export of gold, rather than the Central Bank. Gold imports into that nation may enter through the Shanghai Gold Exchange. In the past, it has been a struggle to keep the prices of gold in China coincident with international prices, as there were really two markets, internal and external. Statistics from the Gold Exchange indicate that China is short 50 to 60 tons of gold per annum and the shortage has been rising year by year. While China is still very far from being an important demand center, the stage is being set where this could indeed happen. This bears a close and watchful eye.

On to the Commitment of Traders reports, as of 3/11/02, both futures and options:

Gold

Long Speculative 59428 +879	Short Speculative 26561 +1168	Long Commercial 97932 +2297
Short Commercial 177897 +2825	Small Spec Longs 75849 +30	Small Spec Shorts 28752 -787

During the reporting period, gold prices were down by under $3 (the very sharp decline in prices coming AFTER the reporting period, later in the week), and open interest increased by over 6,200 contracts. Please note that gold closed some $14 lower by the end of the week. As you can see, there was very little movement among the ownership of contracts during this period, as the world waited, with baited breath, to see just what would happen in the world. Speculative interests were rather content to hold their positions, while the commercials just lobbed the ball back and forth across the net with little net change. I am quite sure that if we were able to see these statistics after the deluge of late last week, they would be sharply changed. But just look at the "structure" of the market as of the close of business last Tuesday, as mentioned in the first few paragraphs of this commentary. Look at the ratio between the speculative longs and the spec shorts. There were 135,277 long contracts versus 55,403 shorts, about 2.5 to 1. The lesson to be learned here is that when any market is this lopsided in its speculative composition, that there is a danger that prices that prices can move dramatically against the speculators with the biggest position. Yes, there are a myriad of other very influential and important factors, but the morale of the story holds, at least a bit.

Silver

Long Speculative 29137 +992

Short Speculative 6753 -2822

Long Commercial 25638 -747

In the relevant time period, silver prices were up only a cent or two, and not many players bothered to change their positions. Short commercials added about 4% to their positions, as short speculators bought back their positions. Again, looking at what happened later in the week, the commercials were again right, while the belabored large speculative shorts again missed out on the opportunity for profit, by buying way too early. Oh well, this is a very common and often reported primary characteristic of the silver market and it makes very little sense to iterate that one must trade silver with the commercials and against the speculators to profit in this market. Hey, I think I just did.

Platinum

Long Speculative 5180 +804

Short Speculative 1073 +55

Long Commercial 1328 -128

-- Posted Sunday, 16 March 2003 | Digg This Article