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-- Posted Tuesday, 9 March 2004 | Digg This Article
Sherman Ave. #504 Evanston, IL 60201 Fax: (847) 733-8958 Ph: (847) 733-8400 E-mail: lkaplan@prospectorasset.com March 7, 2004
For markets of March 8th Closes | INDICATIVE LEASE RATES
Based on 30 day maturities | | APR Gold $401.60 | Gold .00/.50% | | MAR SILVER $6.99 | SILVER .50/2.00% | | APR PLAT $887.00 | PLAT 5.00/12.00% |
MARKET COMMENTARY
GENERAL COMMENTS: Once again, the precious metals enjoyed the limelight with significant rallies over last week, but most, and in some cases more than most, of the sharp appreciation of price levels was seen as a reaction to a most disappointing jobs report on Friday, where job creation in the USA proved to be non-existent even as dozens of dozens of economic experts predicted the reverse. These markets were none too heady until the release of the statistics on Friday morning, and by the end of the day, gold has risen $8.40 on the day (up $4.80 on the week), silver rose about 22 cents per ounce (up 27 ½ cents on the week), and platinum lagged its beloved sisters by rising only $5 to close fractionally lower for the week. Perhaps because it is an election year, and perhaps that it is just the "flavor du jour" of the financial markets, but I find it amusing that the markets have given just so much importance to job creation in the USA. Yes, even medieval economics would dictate that an economic recovery without job creation is unsustainable, especially in light of the high debt structure being carried by both public and private sectors. But, with the USA doing quite well on most fronts, with GDP rising rapidly, with equity markets strong and vigorous even in the face of adversity, such total fascination with whether or not jobs are created seems overblown. On Friday, the bond market staged a huge rally reaching 9 month highs (and corresponding lows in the yields they offer), due to the lack of new jobs being created, which seems to me to of far lesser importance than the rapidly rising GDP in the USA, the huge twin deficits being accumulated by our government, and the sincerely negative inflationary outlook due to rapidly rising oil and commodity prices. These factors seem of little importance anymore. The markets are telling us that US interest rates are not going to rise until jobs are created, a rather tenuous position. Oh well, while they say that economics is the "imperfect science", recent financial markets must be labeled light years from perfect in their logic and science. The gold market remains inexorably enslaved to the foreign exchange markets, especially the value of the Euro, as it has for some 2 ½ years. In watching the "tape" go by, each wiggle in the Euro is immediately shadowed by the gold price. But, in the past weeks, the other precious metals have seen fit to end their love affairs with the gold price and have taken on their own lives, moving to their internal supply/demand characteristics, large speculative fund buying, and the flow of orders onto the floor of the Exchange. 
As portrayed above, the gold market remains in a downtrend, with prices edging lower since their peak early this year. And, perhaps more negative from a technically driven chart-based perspective, we have seen a string of lower lows and lower highs over the past month. This largely mirrors the Euro market, where values have fallen from in excess of $1.29, down to $1.20, with a closing price on Friday of almost $1.24. As noted in this commentary, gold has been acting as a currency, rather than a commodity, and this looks to continue. Perhaps the greatest illustration of the imperfection of the precious metals markets, and just how much influence the speculative community exerts, is silver. Prices have risen dramatically over the past months as speculators, both large and small, have piled into the market. Prices have risen over $1 per ounce per ounce over the past 3 months EVEN AS the fundamentals of the silver market deteriorate rapidly. I could wax for hours about the nuances of supply and demand fundamentals, but lets just look at a bit of historical (or is that hysterical) data.Recently, the doubling of copper prices in the past nine months was accompanied by sharply declining inventories in London and other locations, bearing full justice to the rally. In silver, however, inventories are RISING as the price moves higher. In New York, in million of oz: 2000 2002 2003 Feb of 2004 94 105 111 123 This is obviously backwards, in real bull markets, inventories should DECLINE as prices rise, not rise. This bears full evidence that it is the speculators and investors who are buying silver, and not the commercial/industrial users. Next, another major anomaly in the economics of this most strange precious metal.The chart below documents the rather significant expansions of the production of silver against the "real" price in USD, adjusted for inflation. As is evident, production has been increasing mightily; EVEN AS THE REAL VALUE OF SILVER has stagnated. In classical economics, and against all measure of rational thought, you would have to believe that low prices would CURTAIL production, not increase it. But, not in the case of silver.And, throw in the fact that silver usage in photography is waning, add to the pot that China has authorized the sale of over 3000 tons of silver in 2004, put in a dash of the realization that very high current prices of zinc, copper, and lead will greatly add to production in the coming years, and, after baking for the proper time, you arrive with deteriorating fundamentals. 
OK, now for the important question. Does it matter? (drum roll….). And the answer is no. While it is most certain the current rally in silver will end very badly, as history has shown on every occasion, speculative buying could propel prices very much higher FIRST before the fundamentals eventually (which could be days, weeks, or months away) drive prices back to where belong. In a market as small, as thin, as the silver market, speculative forces dominate short term trading, and the intrinsic fundamentals aren’t even sitting in the back seat, but blocks behind.The platinum market recently saw values in excess of $900 per ounce, as many of the Japanese public was forced to cover their short positions in the $840 to $860 price range, when terror alerts were announced. This rapid short covering shot prices higher, into fresh 24 year highs. On a fundamental basis, this market appears to way overdone, as the Chinese appetite for this precious metal, which could considered its prime "driver", looks to fall by 10% in this year. There are reports that Chinese jewelry buyers are switching to white gold, due to the price differential. When deteriorating automobile sales are considered, and the fact that many of the automotive companies are, or desire, to switch to palladium as the catalyst in their exhaust systems, current prices seem unjustifiable. But, as noted above, these markets are NOT about reality, they are about the flow of money into relatively small markets and the outsized effect such a flow can create. As predicted by this commentary, now it seems that Russia will not be changing its current law on declassifying previously secret data on the output, stocks, and reserves of the platinum group metals. It appears that such information will remain secret. You may draw your own conclusions from this information. Next, while I need to cogitate a good deal longer on the reasons, please note that lease rates for gold are at multi-year (or possibly multi century) lows presently. As per the information provided by ScotiaMocatta, 1 month leases in gold .06% 3 month .09 6 month .13 1 year .29 Yes, readers, on the interbank market, you could borrow gold for a year at just about 1/3 of 1% per annum. I don’t care how you wish to interpret this, how you wish to slice it, but it absolutely speaks of too much supply against not enough demand for leases. Perhaps this is just another vivid example that today’s markets are more about speculative buying of "paper" derivatives and futures rather than the improving underlying fundamentals of a market. Look, in reading the above commentary, some readers might come to the conclusion that I am overwhelming bearish on all metals. That is not the case. All I am trying to do is to demonstrate that the precious metals markets currently have little to do with economic value and everything to do with speculative fervor, emotion, and anxiety. Prices will go higher if the speculators are driven to buy, and prices will go lower if the speculators decide to exit their already large positions. Period. As an investor, it is important to understand just what is important in a market, and what is not.On Monday, the long-awaited renewal of the Washington Accord was announced, with the ECB and 14 European Central Banks as signatories. Official sales from this sector will be pegged at a maximum of 500 per annum, for 2004 through 2009. And, it was also agreed that the use of derivatives and options, and leasing, will not rise from the original levels of 1999. Great Britain, a signatory to the last agreement, is not a party to this renewal, but they did publicly announce that they had no intention of selling any of their gold reserves. The market reaction to the news was most muted, as the final data was very much in line with market expectations. The Commitment of Traders reports, as of March 2 nd, for futures and options combined:Gold Cot Report - Futures & Options Combined | Large Speculators | Commercial | Total | Long | Short | Spreading | Long | Short | Long | Short | 85,318 | 30,347 | 96,275 | 134,840 | 243,301 | 316,434 | 369,923 | -15,185 | 5,173 | 6,545 | 4,556 | -15,573 | -4,084 | -3,856 | Traders | 123 | 39 | 62 | 40 | 39 | 182 | 128 | | Small Speculators | | | | | Long | Short | Open Interest | Bullish | | | 77,037 | 23,548 | 393,471 | 80.42% | | | -3,799 | -4,027 | -7,883 | | | | non reportable positions | Change from the previous reporting period | | COT Gold Report - Positions as of | Tuesday, March 02, 2004 |
With the gold down $11 during the reporting period, large speculative traders were the active sellers as the commercials accommodated their trades. The commercials were buyers on the dip in prices as physical demand accelerated on the break under $400. All in all, this can be interpreted quite positively, and perhaps recommends the purchase of gold on price setbacks. The ratio of speculative longs to speculative shorts is only slight over 3 to 1, what seems to be a most historically manageable level, effectively demonstrating that the market is not significantly overbought and perhaps vulnerable. Recommendations will follow below.Silver Cot Report - Futures & Options Combined | Large Speculators | Commercial | Total | Long | Short | Spreading | Long | Short | Long | Short | 63,911 | 3,296 | 21,314 | 15,108 | 106,420 | 100,333 | 131,030 | 2,534 | 891 | 2,327 | 615 | -636 | 5,476 | 2,582 | Traders | 87 | 18 | 37 | 23 | 33 | 128 | 75 | | Small Speculators | | | | | Long | Short | Open Interest | Bullish | | | 44,467 | 13,770 | 144,800 | 69.29% | | | -7,292 | -4,398 | -1,816 | | | | non reportable positions | Change from the previous reporting period | | COT Silver Report - Positions as of | Tuesday, March 02, 2004 |
Silver prices rose by 8 cents during the reporting period, as speculative forces (no surprise there), lobbed the ball back and forth over the net. Speculative Longs are now a rather incredible 6.3 times the spec shorts, historically a very ratio. This market is quite obviously vulnerable to a sharp retracement in price, IF, for some reason the speculators lose their resolve in keeping and adding to their already heavy positions. It will most probably take some external influence to accomplish this, as they are comfortably sitting on large profits. This market seems totally momentum driven, I would only be a seller on weakness. GOLD RECOMMENDATIONS: EXPECTED TRADING RANGE: $392 TO $403 Short term traders should be playing the range lets say buying near support at $392 or so, and selling in the $402-$404 range. Unless the USD makes a convincing new low, I think gold is a fairly good sell at the top of the range. Continue to expect vicious and violent movements within these boundaries. At this point, I am neither bullish nor bearish on gold, I continue to expect range trading. Long term traders and investors should now be mostly out of this market or mildly short. Classic textbook treatises on trading and markets teach that when you see the sort of volatility that we have recently experienced, it is often a sign of a change of trend. With the USD near recent lows, the risks are to the downside. All of this not only changes, but totally reverses, should the USD make "convincing" lows under 85 on the March Dollar Index. But, the USD movements will continue to dominate all influences in this market. Selling out of the money puts, against SMALL short positions, seems most prudent at this time. I really like the June 380 puts, and would be rather aggressive selling these options. Call our offices for specific recommendations for your account.SILVER RECOMMENDATIONS: Expected trading range $6.40 to $7.10 Unlike gold, silver is portrayed above as being a trading range market with the lows seen around $6.50 and a double top at roughly $7.00 to $7.10. Volatilities are incredible high as the funds throw their weight (and billions of dollars) around. This is not a market for the feint of heart as last week we saw prices move over 10%. If gold falls, silver will fall more. If gold rallies, silver will rally more. My sense is that it is best to have very small positions in this market at present. Anything can, and will, happen. Probably, though, silver will simply follow, in exacerbated fashion, what occurs in the commodities markets in general and is, of course, at the whim and caprice of the large speculative funds that hold nearly record long positions. As per the Commitment of Traders reports, speculators now hold long positions worth almost one years total global production. If some external influence discourages the large spec funds, I assure you that they will have no one to sell to. Things are way too dangerous in this market, although if you have to play, I would be a seller on rallies to the top of the range, although very lightly. PLATINUM RECOMMENDATIONS:Expected trading range $860 to $900 Again, as this market is dominated by the large specs, there does exist the chance of a sharp sell off. But, I have no idea of what to do here. There is no rule that says I have to play in a market without a clear picture of where it may go. But, if you put a gun to my head, I would be a seller near $900, in small size. Prospector Asset Management, and its associated 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 *Market Commentary and Special Reports on the precious metals A complimentary subscription to the Market Commentary, 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 Management 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 Management.There is a risk of loss trading futures and commodity options. You should carefully consider the risks associated with futures and commodity options trading in light of your specific financial positions. Past performance is no guarantee of future performance.
-- Posted Tuesday, 9 March 2004 | Digg This Article
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