Leonard Kaplan
Prospector Asset Management
For markets of Tuesday, January 7, 2003
>>As each year turns into the next, the financial press always solicits my forecasts for gold. Last year, I was fortunate to be right on the button, forecasting a high between $340 and $360 for the year.
Now, for 2003, I would guess that IF ALL GOES WELL IN THE WORLD, if Iraq and North Korea become only feared memories, if no major escalation of terrorism occurs, gold should visit the $400 to $420 price levels. If all does not go well, we could easily go much higher, dependent upon the severity of the news and events.
I remain rather bullish on silver prices, but have a most difficult time foreseeing prices over $5.50, unless gold rockets, due to the fragility of the global economic recovery and its effects upon silver demand.<<
GENERAL COMMENTS:
As the year rolled, over the past week, the precious metals skyrocketed in value as war fears enflamed investor and speculative demand. In rather low volumes (as is most typical for the last week in any year), gold reached 6-year highs of about $356, although it was up only $2.40 for the week. Silver, which has greatly lagged its precious cousin, was up about 19 cents on the week as both large and small speculators piled into the market. The fervor for precious metals was not lost on the platinum group, as platinum rose by over $18 and palladium prices rose by about $6.25.
As the news and events unfold, so go the precious metals. Fundamental analysis is simply worthless at present, as supply and demand considerations appear to make little difference. Technical analysis is, perhaps, just a bit more reliable than throwing darts. All that matters at present is the state of investor and speculative psychology. The gold and silver markets are simply incredibly overbought, in historic perspectives, but with the worsening geopolitical situation, with war imminent with Iraq, with dialogue and rhetoric deteriorating with North Korea, there is ample reason for the current structure of the market. Speculators could be long up to 7.5 million ounces of gold on Comex now, with nary a willing seller in sight.
These are dangerous times for speculators in gold, as prices could easily rapidly fall or speed upwards as the news and events unfold. Longer-term investors have much less to worry about, as gold continues in its secular bull market. As noted in my commentary, it has much more to do with leverage and approach to the market than anything else.
The greatest negative for the gold market at this time, is that actual physical gold demand is simply totally awful. Indian imports of gold have virtually ceased at present and no other region has taken up the slack. Investors and speculators have bid the price up, using futures and derivatives, but the actual metal goes wanting. As stated earlier, it all depends upon the flow of the news and events.
As each year turns into the next, the financial press always solicits my forecasts for gold. Last year, I was fortunate to be right on the button, forecasting a high between $340 and $360 for the year.
Now, for 2003, I would guess that IF ALL GOES WELL IN THE WORLD, if Iraq and North Korea become only feared memories, if no major escalation of terrorism occurs, gold should visit the $400 to $420 price levels. If all does not go well, we could easily go much higher, dependent upon the severity of the news and events.
I remain rather bullish on silver prices, but have a most difficult time foreseeing prices over $5.50, unless gold rockets, due to the fragility of the global economic recovery and its effects upon silver demand. I am also quite friendly to both platinum and palladium, with $660 being a relatively conservative target for platinum and perhaps $360-$380 for palladium, which has been relentlessly pummeled over the past two years.
At present, the gold price is carrying a rather large "war premium," and prices could fall some $20 or so if "peace" breaks out. The risks of being long at current prices are significant for the shorter-term speculator but rather immaterial for the longer-term investor utilizing minimum leverage.
I still maintain that gold is in a longterm bull market for all the right reasons... because of the bearish outlook on the USD... because of the shift from paper assets to hard assets in the financial cycle... because of the impending large deficits soon to appear in the USA... because of the excellent probability that inflation will soon visit us - and many others which have been recounted over and over again in this newsletter. In other words, we do not have to rely on the growing fear in the world to push prices higher. Yes, if peace breaks out, we will go lower, only to eventually see new highs, for perhaps more sound reasons.
The precious metals will also benefit in the coming year from the shift from "paper" assets to that of "hard assets." The stock markets in the USA have fallen for three years in a row, only the third time that has occurred in the last 100 years. Perhaps the broadest based index, the Wilshire 5000, has fallen some 43% over the past 3 years or so, losing investors a staggering $7.4 trillion USD. The Nasdaq has fallen over 73% in just 3 years.
With gold easily the leading asset class over the past three years, investors who have been pauperized by the rapid declines in the equities markets, should begin to warm up to the gold market and the precious metals. These shifts in investor focus, in investment "fashion," take longer than one would think, after all, gold has been very far off the radar screens of most investors for some 20 years.
But times are changing.
The Central Bank of Canada sold 1/8th of their total gold reserves in December, continuing their policy of the total disposition of their hard asset reserves. The sales totaled less than 3 tons and leaving the reserves now under 20 tons. They will soon the only major country in the world with no gold left in the cupboard. Purportedly, they are selling their gold to achieve better returns in the USD, the Euro, and the Yen. Obviously, they are very very wrong. Not to worry, we will ample opportunity in the coming years to poke fun at their errors.
The gold market is continuing to liberalize its rules and regulations in rather quick fashion. On Monday, the exchange noted that it is preparing the way for foreign bullion dealers and individual investors to trade on the exchange. Since Chinese gold demand now exceeds locally mined supply, there is room for foreign members, thereby allowing, for the first time in many decades, direct sales to Chinese consumers and investors. The growing demand in China may turn out to be determinant of gold demand in the next decade. It could be that important.
On to the Commitment of Traders reports, both futures and options, as of 12/31/02:
Gold
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
88,162 25,982 75,430 186,192
+1,672 -415 +3,168 +5,596
Long Small Spec Short Small Spec . .
74,225 25,642 . .
-2,539 -2,880 . .
All in all, there was little change in the ownership of contracts on the exchange during the holiday week, as one might expect. Speculative longs are now long 162,000 contracts against only 51,000 for their counterparts. Yes, there is "new money" that has entered the gold market on the long side, but their willingness to retain their positions, and their investment time frames, have yet to be tested.
As noted, all will depend on the news and events and there is little to be gained by the analysis of the above statistics during a holiday week. But just to give you an idea of how bullish the market is, the Bullish consensus as of 12/24 was a staggering 88%!!
Silver
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
37,101 4,795 14,109 73,970
+2,875 -476 -36 +6,434
Long Small Spec Short Small Spec . .
33,901 6,345 . .
+2,504 -615 . .
Speculative concerns added over 5300 long positions during the week, obviously forcing prices higher. Short commercials accommodated their desires by adding to their positions. This is quite obviously a dramatic negative to the future upside price potential. BUT, and a very important but, such information gets thrown directly into the trash if and only if (1) silver continues to take on a "monetary" character, instead of wearing it's "industrial" moniker, and if (2) gold prices move higher on news. But there is reason for worry in the coming week.
GOLD RECOMMENDATIONS:
Expected trading range $340.00 to $355.00
There is good technical support in the $339.00 to $341 price range and excellent resistance in the $352 to $355 price range. Day traders should pick their points carefully and use rather tight stops. All movement within this range is almost inconsequential and trades should only be taken against or through these numbers. Expect greatly enhanced volatility and watch the foreign markets carefully. And, of course, the news will make the market. These are dangerous times for day traders especially if you take the short side.
For position traders, the times are difficult to judge. I would like to start buying gold in the $334 range, building a position all the way down to $328, but that may never happen. Lets buy at the numbers listed above, OR buy a bit on a close over $355 using a $4 stop. If gold drops a bit, aggressively sell out of the money puts at $325 or $330 to replace the positions lost to the options we sold.
SILVER RECOMMENDATIONS:
Expected trading range $4.82 to $4.95
Day traders should be playing the range here. Short positions in silver are a lot less dangerous than short positions in gold it would seem, so when you want to be long, buy gold, and when you want to be short, do it in silver.
Position traders, and traders who follow our recommendations, are still long silver, now with calls against the entire position at higher prices, our most favored strategy. On dips, sell out of the money puts.
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