UBS Warburg:
Based on the last few days of newsflow, the long expected war against Iraq looks likely to start within the next few days. This reduction in uncertainty is causing equities and the US dollar to rally, somewhat paradoxically. This has put some pressure on gold, however, the metal is holding up perhaps a little better than expected. In light of the rapid changes in the geopolitical environment expected in the short term, high volatility is about the only thing we feel confident in predicting for the precious metals market.
Gold: News: The amount of gold hedged by producers fell by 14.8 million ounces in 2002, more than offsetting sales by the European central banks. At the end of the year, producers had still hedged 80.9 million ounces, equivalent to 1.6 years of output. But this was a substantial drop from the total at the end of 2001 when hedging represented two years global production. The statistics were revealed today in the Gold Hedging Indicator (GHI) quarterly. The contributors claim the GHI gives a more accurate portrayal of the true size of a producer’s hedge book than other studies that concentrate on the number of gold ounces producers have either “committed” and/or “protected” at a result of their hedging activities. For example, in terms of “committed” ounces the global hedge book stood at 87.7 million ounces at the end of 2002 compared with 80.9 million ounces on the basis of net deltas. (Mineweb)
Trading: In New York, gold could not hold onto the gains made in Asian trading and edged lower through the day as the dollar and equity markets turned in a very positive performance. Large-scale long liquidation of Comex-held speculative positions kept the metal under pressure all day and this kept the market under pressure all day. Gold continued to fall for almost the whole day before rallying
a quick couple of dollars into the close on US and European professional buying. In Asia, gold rallied after Mr Bush gave his 48-hour ultimatum trading as high as $340/oz before slipping lower through the Asian session and this selling interest continued into early European trading as the dollar showed further signs of strength.
View: Based on the recent behaviour of the financial markets, investors are becoming less worried about the outcome for the apparently imminent Iraq conflict although gold has held up quite well considering the rally in the dollar. Further dollar and equity strength will see gold under further pressure.
Silver: Trading: Silver opened on the highs of the day and traded lower in line with gold. After some stops were triggered below $4.50 and whilst it initially bounced a couple of cents but then came under pressure to end on the lows . Silver found some support in Asia and one US bank was a direct buyer in early European trading.
View: Long liquidation, which has taken its toll on the silver price of late, has tailed off. While short term political developments will undoubtedly have a marked effect, the reduced speculative long position leaves room for upside when the trigger arrives.
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