Kaplan:
GENERAL COMMENTS:
In the last week, the gold market saw only bullish fundamental news, but still declined in price by
$3.40 as a sharp rally in the USD tarnished global physical demand. This market remains
dominated solely by investor and speculative interests, with commercial and industrial
demand lurking below the market and unwilling to chase gold prices higher. Physical
demand for gold at prices above $315 per ounce is simply awful, as supported by various market
data. Lease rates for gold remain at incredibly low values, even in this time where cyclical
pressures should force these rates higher. While the very structure of the gold market dictates
that while we are most assuredly in a long-term secular bull market, it is certain that we will not
see a “runaway” bull market without the occurrence of some event that would force this upon us.
Gold will continue to be a “trading market”, where buying the dips and selling the rallies is the
most profitable strategy.
Looking at the physical marketplace over the past several years yields some interesting
information. Physical gold trading has been in a sharp decline, with the value of gold traded in
London, the largest global center for such activity, dropping from about $45 Billion USD in volume
during the first quarter of 2000 to about half of that amount at present. The number of transfers
during that period fell by more than 50%. We have also seen the exit from the gold market by
many of its most stalwart participants. Last year we saw Credit Suisse leave this marketplace
globally, and just recently HSBC holdings is discontinuing its operations in Hong Kong. Statistical
information available from market sources, such as the World Gold Council, demonstrates that
investor interest in physical gold has made very little improvement over the past two years, even
though gold remains at virtually the top of the list for capital appreciation, up some 25% off the
lows, and even though the world is now a much scarier place than it was 2 years ago, which
should have, but really has not, created interest in gold as a safe haven.
While I must admit that such structural changes in the gold market are rather surprising in a bull
market, it is not altogether unthinkable. After all, in the last two years, we have suffered a
downturn in the global economic environment, which deteriorates the demand for physical gold.
Any new interest, which has come from investors, speculators and some gold producers, has
appeared in the purchase of gold in derivative or “paper” venues. This is dramatically illustrated
by the sharp increase in volume seen on the futures markets at the New York Comex over the
last few years. All markets seek efficiency, and investors and speculators, instead of buying
gold coins or gold bars at rather hefty commissions and spreads, are moving to highly regulated,
highly transparent, and highly efficient markets such as futures and options. Such a
transformation of the gold market is neither good nor bad, it simply changes the landscape and
analysts, and traders, must be cognizant of these changes in their appraisal of the market. In
years past, it was most assuredly the cash market for gold that dictated the price, now perhaps it
could be said that the derivatives markets have a much greater say in determining value. Just
how much of an influence remains an academic pursuit but the trend is undeniable and
unmistakable.
As gold fell last week, all the other precious metals, having a great “industrial” component, rallied
nicely as the market looked, or perhaps hoped is a better word, for a revival in economic
conditions. Silver prices stayed with in a very well traveled trading range of $4.52 to $4.62 and
tallied up a gain for the week of 3 ½ cents. Large speculative traders keep selling this market and
all rallies are aggressively sold by one major NY Bullion Bank. I still see silver as a superb buy at
these levels for those traders with a longer-term perspective.
Last week, the Chinese government has issued a second batch of silver export quotas, totaling
480 tons, bringing the total issued for 2002 to 1,740 tons, about 60% HIGHER than last year. As
silver prices languish in the $4.50’s, I would not expect the Chinese to be aggressive sellers. But
bulls in this market should be cognizant that the Chinese will be selling into any major rallies. Yes,
silver seems rather cheap at current prices, but the danger of large Chinese selling becomes
more real as we approach, perhaps, the $4.80 to $5.00 price levels. This fact is probably the
reason that silver has not followed its nobler sister, gold, to higher price levels over the past year,
and that the gold/silver ratio remains at rather high historical levels. And, I see no reason for the
current trend to reverse itself, as global economic conditions do not call for a large increase in
actual industrial or commercial demand.
Aided by significant commodity fund buying, the platinum and palladium markets both saw nice
rallies last week, with platinum rising by $12.50 and palladium by $7. The general public traders
in Japan remain short this market, and USA-based funds have been attempting to force them out
of the market. While platinum looks to be capped near the $570 price level, palladium looks like it
really wants to test higher, with perhaps $380 as a medium term target.
The two largest commodity exchanges for precious metals in the world, Tocom and the Comex,
are attempting to lure investors and speculators back into the palladium market. Tocom has
recently decreased the size of its contract to ½ Kilo from 1 ½ as it struggles to recover public
interest, and confidence, after its move last year to “freeze” the contract. Comex, announced last
week, that it intends to lower the margin requirements for trading palladium by about half, which
may entice some added interest. As it is rather certain that new players in this market would have
a strong tendency to be buyers, such developments have the potential to move prices higher in
this most thin market.
Over the past few years, the Swiss National Bank has sold about 600 tons of gold, feeding about
¾ of a ton to the market, day after day. They have almost reached their halfway mark into their
total sales of 1300 tons. If you recall, the proceeds of this disposition of gold was originally
earmarked for “humanitarian” purposes, with perhaps a portion of it as compensation for the
crimes of the Swiss state in World War II. Next Sunday, the voters of that country will decide how
to use the Billions of USD. I would bet you dollars to donuts that the “humanitarian” purposes will
be quickly forgotten and the funds will be kept for internal purposes.
On to the Commitment of Traders reports, as of Sept 10th, both futures and options:
GOLD
Long Speculative Short Speculative Long Commercial Short Commercial
45,477 24,316 79,145 146,632
+15,262 +1,904 -7,214 +12,047
Small Long Speculative Small Short Speculative
65,597 19,271
+4,662 -1,241
During the reporting week, where prices ran up $4.50 and open interest exploded by 16,418
contracts, large and small speculators ramped up their positions by almost 20,000 contracts, a
huge amount, as the specter of an imminent war with Iraq loomed large, and virtually certain, on
the horizon. Such purchases were met, virtually ounce for ounce, by selling from the
commercials. This is not a happy circumstance for those who remain stubbornly bullish this
market. Statistically, the commercials are most often right this market and speculators most often
wrong, as the commercials do indeed know the market better. While I do not foresee the
possibility of sharply lower prices, I also do not believe that the gold market can go sharply higher
without some major event forcing it to do so. There is very heavy technical resistance between
$323 and $328 and it is not going to be easy to penetrate those levels any time soon. As
mentioned earlier, this remains a trading market, buying the dips and selling the rallies, and the
most profitable method of trading this market has been the sale of out-of-the-money puts.
I also find it interesting that my earlier discussion of the importance of the futures markets in
establishing the gold price is further justified by the statistics above. As investors and speculators
bought, prices moved higher. It was not the commercial or industrial interests who were the
“movers and shakers”, it was the traders.
SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
24,926 15,141 23,202 58,046
+725 +220 +289 +2,531
As silver prices remained in a very tight trading range, interest in trading this commodity just
simply died. Open interest was up about 3,000 contracts for the week amidst very quite trading
conditions.
Decades ago, silver most certainly possessed a greater “monetary” component; it traded with a
very high correlation to the gold price. Well, those days are assuredly history at this point in time.
While gold has rallied about 25% off its lows, silver is now only about 12% off its lows.
Historically, when gold rallied, silver outperformed it by a significant margin, now it is sharply
under performing. This commentary has said for years that this bull market will be different from
others seen; that it will be gold-based, due to its overpowering fundamentals, and such has been
the case. Silver does indeed seem cheap here, and the risk/reward profile is excellent, but don’t
expect it to shoot the moon.
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