Precious Metals Update for Markets of September 25th
By: Leonard Kaplan, Prospector Asset Management
September 24, 2002
MARKET COMMENTARY
GENERAL COMMENTS:
As the drums of war beat more loudly as Tony Blair and George Bush continue their push for war against Iraq, as global equity markets continue their downward trend, and as oil prices push convincingly over $30 per barrel, the gold market was easily able to surpass technical resistance levels of $325. As one obstacle has now been overcome, there still remains the “brick wall” of resistance at the old recent highs of about $330.00. While many gold bugs see this technical resistance falling quickly as gold prices spurt higher, I would believe that, perhaps, they are letting their hopes get the best of them. While I strongly believe that the gold price will indeed go higher, as we are most assuredly in a secular bull market, I do not see gold surpassing the old highs in the next few days or week. We need to continue chipping away at the brick wall of resistance, to weaken it. We need for the gold market to consolidate above $325 per ounce to gain the required strength, fury, and conviction necessary for the successful onslaught. Of course, my opinion would be immediately discarded if some “event” occurs which would necessitate higher gold values. And, in this world, at this time, such an “event” has rather significant probability.
Silver prices remain slavishly tied to gold fortunes, although with a much-muted demeanor. Each time the silver price pokes it head above previously recorded highs, trade selling emerges in size to push the price right back down again. With the base metals at or near yearly lows, with global economies still suffering, silver has vastly underperformed gold. And I look for this to continue. As trumpeted in this commentary for months or years, this rally in the precious metals is, and will continue to be, centered on gold, unlike the rallies of the past where all of the metals participated. But, while the upside potential for silver remains limited, a careful analysis of the risk/reward profile of silver strongly argues for long positions. Over the medium to longer term, I see the risk at perhaps 10 cents per ounce while the upside could be in the area of 40 cents. I like those odds a lot.
Platinum has remained quite strong as large speculative commodity funds continue to buy, and as short term borrowing has pushed short-term lease rates up to about 12% for 30 day maturities. We have not really made convincing new highs as of yet, and I still look for lower prices to come. Speculators in this market are almost always wrong, and the commercials are heavy sellers at these price levels.
One fact must be carefully weighed in the gold and silver at present, and that is that the market is simply awash in physicals. Physical demand has been horrible and the present rally has been caused by speculative and investment demand and such demand is NOT seen in the physical marketplace, but in futures, options, and other derivative instruments. This is neither a good thing nor a bad thing; it is simply the state of the market at present. Future movement of the gold price will solely depend upon the psychological perception of the market by investors and speculators and NOT the demand/supply fundamentals of the producers and users.
Investor interest in physical gold, while almost doubling in the first half of the year over year ago statistics, remains rather poor on a quantitative basis. According to GFMS, in a recently published report, shows investment demand rose to 182 tons (with a value of about $2 Billion USD), from 93 tons. Please understand that 182 tons purchased by investors is only about 2/3 of the amount of gold sold by Central Banks during the relevant time period and only helped the gold market marginally as physical gold demand by jewelers dropped a considerable 17%, or over 235 tons of gold. Please be aware that it would be a bad error to judge the gold market only by the physical demand/supply characteristics of THE PHYSICAL METAL. We are in the midst of a continuing trend, where the price of gold is determined to an ever-greater extent by the “paper” market over that of the physical market.
Even while economic difficulties continue to escalate in Japan, gold bulls must be sorely disappointed at their willingness to buy gold. Japans imports of physical gold in August was only a completely meager 5.5 tons, only about $55 Million USD. And of that amount, please understand that a goodly portion may have been for industrial, rather than investment, usages. This statistic is truly gut wrenching as gold has been one of the best performers of any asset class for the year, up about 16%, and yet……Japanese investors seemingly have no interest.
The World Gold Council acknowledges that it is working on a new investment vehicle to bring gold to the masses. They wish to “make it easy” to buy gold by creating a security, perhaps an exchange traded fund that would own physical gold and be traded on the floor of a major stock exchange. Again, it would appear that they are on the wrong track, as such an investment vehicle ALREADY EXISTS in a regulated, transparent, and historical vehicle. The commodity futures exchanges, which trade gold, will certainly have greater efficiency than an exchange-traded fund, which will need some active management, and have administrative and storage costs. I see no benefit in trying to reinvent the wheel, when the World Gold Council could be spending their promotional dollars to advertise what is already a well-oiled investment vehicle. The World Gold Council, and many noted analysts, complain that buying and owning gold is “difficult” for the investor, frankly…I just don’t see it.
In trading gold futures, investors have enormous leeway in the selection of the amount of leverage that they wish, anywhere from about 30 to 1 leverage (using exchange minimum margin requirements) to no leverage whatsoever. And changes to the “gearing” can be made at any time by the investor. This will most probably not be the case in an exchange-traded fund. Options, both puts and calls, are liquid and available to the investor in futures, and such may or may be available in the proposed security product. And lastly, I would venture a guess that brokers in commodities futures and options have a much greater understanding of gold, and of trading this metal, than stockbrokers.
The Bullish Consensus, as of September 17th,
GOLD 64% from 67% as of Sept. 10th
SILVER 59% from 57%
PLATINUM 62% from 62%
GOLD RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)
SILVER RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)
PLATINUM RECOMMENDATIONS:
(positions and recommendations are available to clients and subscribers only)
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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 Mgmt. 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 Mgmt.
There is a risk of loss trading futures. You should carefully consider the risk associated with futures trading in light of your specific financial position. Past performance is no guarantee of future performance.
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