MARKET COMMENTARY

GENERAL COMMENTS:

The precious metals markets were widely mixed last week, with the gold price still firmly glued to the movements of the USD, especially the Euro. As the Euro fell 1.7 cents during the week (about 1.5%), the gold price fell by $6.20, or about 1.8% of its value. There was constant talk of the liquidation of long positions by the large and small speculators, and buying by the trade or the commercials, although such actions are not portrayed on the most recent, and very puzzling, Commitment of Traders reports. Anecdotally, gold physical demand for gold is becoming more evident at these price levels, as a good monsoon in India, and recent new highs for the Indian Rupee are encouraging purchases, even though it is not "high season" for such activities. Gold prices have indeed held, at least so far, the 200-Day Moving Average, which has historically been a superb spot to enter the market on the long side.

Perhaps the greatest negative influence on the Euro, and on the gold market, has been the recurring belief that the USA economy is now "on the mend", and as the equities markets strengthened on such viewpoints, generally all hedges against the USD, or "safe haven" investments were sold, and the funds redeployed. While hard evidence of an economic recovery has yet to emerge from the recent statistics, investors and speculators became enthralled with the "rationale de jour", and acted rapidly.

Although it is possible that gold moves slightly lower, my sense is that we are quite close to the lows for this move. Good physical demand, combined with some technical chart-based indicators, is screaming that gold is a most reasonable buy at these levels. But, absent any fundamental news, the gold market will still be strongly influenced by the foreign exchange markets more than any other external factor.

With the perception that the USA economy may be rebounding, and with short speculators ardently buying back their previously sold positions, silver prices were up over 11 cents for the week, reaching the $4.90 price level basis the September contract on Thursday morning, only to fall back by about 10 cents from the highs by the close of trading on Friday. In last weeks commentary, we were explicit about exiting this market and gave several strategies, both by selling futures beginning at $4.78 and scaling out until $4.88, and by selling shortterm near the money calls. Our forecast was right on the money, as prices reached the $4.90 level. For those who sold short-term near the money calls, recommendations will follow to liquidate the underlying futures. It appears that the upside of this market is now severely limited, as we expected. The Commitment of Traders reports will shed more light on our thinking.

As the ebullient notion of economic recovery was rumbled through the markets, the platinum market was benefited, as prices rose by $9 per ounce. Trading was rather mild for this rather volatile metal, but strong and persistent buying was seen by both speculative forces and physical users in the Far East. Price levels seem rather lofty, and rather expensive, at present, but much depends on the mood of the markets, as to whether or not the economy will, or will not, meet the optimistic expectations and psychology of the markets. Palladium, always a strange beast, was down $12.25 for the week, although it did hold technical support levels in the $170 range. Palladium seems bound, tied, and firmly leashed to its trading range.

One of the strangest phenomenon of the gold market over the past few years is the persistent low lease rate. The "interest rate" on gold appears unshakably low, whether the market rallies wildly or falls precipitously. Now, lease rates are just about zero, with one-month lease rates at .07%, rising a bit through the curve to .31% for one year, as per the LBMA website as of Friday. Think about that a bit, one can borrow gold for a year, on the interbank market, for about 1/3 of 1% annualized rate! While it does boggle the imagination, what is unusual is that these low rates have remained rather constant no matter what price the underlying metal achieves. In years past, the lease rate for gold was a fabulous leading indicator for what laid ahead for the gold price, and now, it seems useless.

The 5 year forward rate for gold is now only $30 per ounce, making forward selling most unattractive for the gold producers. With gold at $355 or so, gold producers should be most hesitant about forward selling at just $385, as this price level could easily be seen should we retrace to the old highs seen just several months ago. With forward selling now highly disadvantageous, and with "de-hedging" still responsible for the lion’s share of buying in this market, I would believe that the gold price will be very well supported in the $340’s and I still envision a year-end close between $380 and $420 per ounce.

On to the Commitment of Traders reports, as of July 8th, both futures and options:

Gold

Long Speculative 54403 -3038	Short Speculative 10241 +2023	Long Commercial 113586 +3789
Short Commercial 188548 -892	Small Spec Longs 50025 -1164	Small Spec Shorts 19224 -1544

Silver

Long Speculative 32399 +5242

Short Speculative 10333 -7565

Long Commercial 21160 -3075

During the reporting week, silver rose by 16 cents per ounce, open interest rose by a large 4,328 contracts, as large speculative forces were MAJOR buyers. Meanwhile, the commercials were MAJOR sellers. We have seen this, since time and time immemorial, where the specs were buyers at the highs and sellers at the lows. Such information makes me believe that this market is just about "cooked", and the chances for a protracted rally diminish each and every day. The only piece missing, that would make me totally confident, is that open interest still has not been declining, as it should at market tops. So, all in all, lets say that the silver rally may still have a bit of time left, but not much. If we can’t surpass technical resistance levels in the $4.90 to $5.05 price range in the next week or so, odds are that we fall rather sharply in price. Recommendations will follow.

-- Posted Monday, 14 July 2003 | Digg This Article