MARKET COMMENTARY

GENERAL COMMENTS:

Over the past week, the gold market remains enslaved to the foreign exchange markets, dancing in complete lockstep fashion. With summer upon us, with physical demand for gold at a cyclical lull, and with little in the way of significant underlying fundamental news, the gold market has shadowed the USD/Euro like a well-practiced tango partner. The rhythm of this market has also included the traditional dance between the commercials, professional dealers and hedgers in the gold market, and the speculators, who continue to liquidate long positions. Over the past month, as noted in this commentary, the market was considerably overbought as speculators built one of the largest long positions in history during June, creating a most dangerous, a most vulnerable market internal. Gold was down $3.30 on the week, but fell another $4 on Tuesday, reaching 2 month lows.

The decline of both the Euro and gold has been, in my opinion, much greater than I would have anticipated several months ago, but, I continue to view it as simply as a retracement, a minor correction in price, that will inevitably prove to be a pause in the longer-term secular bull markets. There was ample warning of the decline in the gold price, as noted in this commentary, and clients of the firm were spared, at least partially, some of the pain, but not all.

Readers of this commentary that accepted our advice to move their precious metal holdings into silver have done very indeed, as silver prices rose by another 13 some cents last week. This market continues to see very "quality" buying from commercials, and some short covering by those speculators who sold short near the bottom. Prices have risen some 25 cents in just 7 or trading days and still look to go a bit higher. As silver is primarily an industrial metal, it has benefited from the new market "belief" that the economy may be set for a rebound, although the hard numbers do not corroborate such fanciful aspirations. Other industrial metals, such as copper and other base metals, have rebounded over the past week, and silver was no exception.

However, I still maintain the view that the silver market is sorely limited on the upside, and care should now be taken to develop exit strategies for any long position in this market. History has shown us, time and time again, that the silver price is almost certainly due to failure and generally tops in the $4.80 to $5.00 price range. Much, if not all, of the misery of the silver market is due to Chinese selling into the rallies, capping the price. Last year, Chinese exports of 1600 tons did not reach the official export permits of 2216 tons due to the continuing low price of silver. In 2003, it is estimated that, again, 2216 tons will be authorized for sale and export. The Chinese are known sellers into rallies, and I do not envision that things may be any different this time around. Please note that the Chinese sold less silver due to the low price, and not due to supply considerations. Silver remains a trading market, where the money is made buying dips and selling rallies, and as we approach those technical chart resistance levels, where silver has failed over and over again, exit strategies should be developed for all long positions. Yes, there are those in the market who shout, "This time will be different", but I think not. Traders must act on the probabilities, on the odds, and not on the fanciful dreams and hopes of a runaway bull market. Take a look at the long term chart of silver, and tell me how many times this market has failed at these levels, only to fall back to support at much lower price levels. Odds favor it will occur again.

Platinum prices rose slightly last week, up $2.50 as prices meander near the top of the recent trading range. Volatility in this market has been much less than expected, and perhaps the summer doldrums, and lack of interest in this market from both the speculators and commercials is the explanation. Certainly, the spotlight of the global financial "circus" has been shining on other venues. Palladium was down by $5.75 week, as it continues to trace out a long-term bottom, with prices generally ranging from $175 to the $190 price levels. Any movement within this prescribed range is rather meaningless from the long-term perspective.

I still see platinum as rather "pricey" at current price levels, but with the huge backwardation in forward prices making short sales a rather costly venture, I have changed my downside target on our small short positions. Recommendations will follow.

Canada continues to sell its gold reserves into the market with the announcement that it sold about 114,00 ounces during June, leaving total Central Bank reserves at about 300,000 ounces (less than 10 tons). This nation has been a seller of gold for over 40 years, having now sold over 1000 tons of gold. And in just a few months perhaps, the cupboard will be totally bare. I must admit that I do find it interesting that not much is made of this in the Canadian press and that it barely scratches the psyche of the populace.

As a long-term observer of the precious metals markets, I am continually entertained by how dreadfully wrong popular convictions and beliefs can be. These strongly held persuasions tend to swing wildly from one year or so to the next and, invariably, at just the wrong time in the market. As an example, lets take a look at hedging by the Austrailian gold producers. As a percentage of their production, these producers were the most hedged companies in the world, and please note that such forward selling was most egregious at or near the bottom in the gold price. Over the past year, gold has rallied mightily, and the cry of this market has been for producers to become unhedged, to buy back previously sold positions, which they did in a rather aggressive fashion. The sensibility swung from one extreme to the other in a most pendulum like fashion. And now, as the Australian Dollar has rallied sharply, the Aussy/Gold price has fallen some 20% since February of this year, causing great pain to the profit margins of the lightly hedged or non-hedged gold producers. Yeah, in traders jargon, they sold at the lows and bought at the highs. They over-hedged at the lows of the market, and then covered all of their short positions at the highs, only to be exposed to lower gold prices and rising costs as the gold market fell and as the Aussy Dollar rallied.

While I may be burned at the golden stake for heresy, it is most apparent that a conservative hedging policy would benefit all gold producers. After all, virtually every commodity producer who can, from copper producers to farmers, does indeed hedge. The rabid insistence of the stockholders and the persuasive pricing by the markets has encouraged gold producers to be hedge free, and so the management of these firms have done so, to a great extent. Popular convictions and beliefs demanded a complete reversal in tactics. And guess what, now that some producers are totally exposed to the gold price, their financial results has been disappointing, with gold falling in price and their local currencies rising against the USD. Hedging production is simply a tool, and can be used as an extraordinary benefit or be misused to extreme pain, it all depends on the user. Hammers are much the same, as when used properly, are most effective putting down nails, and when used wrongly, can bloody the fingers.

On to the Commitment of Traders reports, as of July  1st, for both futures and options:

-- Posted Wednesday, 9 July 2003 | Digg This Article