Leonard Kaplan
Prospector Asset Management
For markets of Tuesday, February 18, 2003
GENERAL COMMENTS:
There were many, both analysts and traders, who believed in the validity of the recent gold rally and vehemently argued against any notion of a significant "war premium" inherent in the gold price. Those who held such beliefs have been totally shamed by the market the last week, as prices fell by $18 per ounce, only to fall another $6 or so as of Monday afternoon. JUST THE HINT of a possible delay of a war with Iraq was enough to turn investor psychology negative and to create an absolute avalanche of selling pressure, taking gold from its highs on February 5th of about $390 to today's market value of $346.00.
This commentary was quite clear in warning of the lofty gold prices recently seen, and strongly recommended using very close stops on all long positions. Clients of the firm and traders who follow our recommendations were spared the financial distress of the rapid declines over the past week, and are now in an excellent position to re-establish long positions at levels that are more seemly. While I did foresee the tumultuous decline in this market, I must admit that I could never bring myself to recommend short positions, as the risks of being short gold in this most dangerous of geopolitical situations were unacceptable.
As the momentum is now definitively on the downside, and as the equity markets and the USD are rallying, I would venture a guess that we continue southward in price. There are still oodles of speculators with long positions that have yet to disgorge, both in the USA and the Far East. It is a truism in the markets that if prices go to an extreme on the upside, the next move will be to extremes on the downside. Physical demand will continue to be poor until some stability is seen in the marketplace, and if prices continue their rate of decline, physical buyers will just watch from the sidelines waiting for a more sedate environment. As noted in this commentary in the last weeks, the gold market was extremely overbought, and we are now seeing the results thereof, a technical long liquidation that has erased virtually all of the recent gains in price, from the technical breakout from $330 to the highs at $390 per ounce.
Long-term investors in gold should not be dismayed or disappointed with the market action of late. It is my opinion that we are still in a long-term secular bull market and that very "tasty" gains are still ahead of us. At current prices, gold is still under the 25-year average price of $362, making it a conservative buy at current levels. But, those who followed our advice of using close sell stops in the gold market just made a bit more than they deserved had the gold market continued its slow and steady upward moves. Those who kept buying all the way up, and did not utilize proper money management techniques just got buried by the ultimately fatal emotions of hope, fear, and greed. Trading and investing is not only a matter of knowing which way the market is going, as sometimes that is rather easy, but of knowing when and how to use money management techniques to either curtail risk or to maximize gains. I have never been an extreme proponent of the "buy-and-hold" philosophy and the recent moves in the gold market bear out my philosophy. Even long term investors would have been benefited had they used sell-stops in this market, as they would have exited their positions higher and now have the opportunity to buy at sharply lower levels.
The silver price continued lower last week, partially in sympathy with gold and partially in concert with copper, losing a bit over 13 cents. We are now some 45 cents off our recent highs and it would seem that the downward pressure is easing to some extent. Yes, I believe that we could go a bit lower, perhaps another 10 cents or so, but that is about it. We have been recommending the sale of out-of-the-money puts and will continue to do so, as I believe that the market is rather near its lows. We will wait to buy futures until the gold market settles down a bit.
Platinum and palladium, markets that were not heavily overbought with rampant exuberance, completely ignored the devastation of the gold market, and actually closed higher for the week. Platinum was up around $3.50 while palladium managed a rally of $1.40 for the week. I still am most friendly to the long-term upside of palladium but have recommended either the exit of long positions in platinum or very small short positions in this market for larger accounts with a greater risk/reward profile.
There is little benefit in rehashing the news and the headlines in regards to Iraq or North Korea, as my job is to not to comment on politics but only to relate those to the reactions of the precious metals. And, in these times, where investor/speculative psychology is now determining the price of gold and fundamental supply/demand news is almost irrelevant, one wonders if I should even bother with fundamentals. Oh well.
While a strike has not occurred at Norilsk, the giant Russian producer of platinum and palladium, there is yet to be a resolution of the workers demands for higher wages, longer vacations, and greater disclosures from the management. A hunger strike was begun last week that, now, is ending and management has scheduled a meeting for March 12th with their workers. The possibility of a major disruption to production schedules seems distant, and, as such, will provide just a tiny bit of support to the platinum and palladium markets. All in all, not that important.
Let's review the Bullish Consensus, as of February 11th,
GOLD 74% from 89% on February 4th
SILVER 45% from 62%
PLATINUM 83% from 91%
One can clearly see two very illuminating facts from these numbers. One, is that the bloom is off the rose in the gold and platinum markets as some analysts are no longer bullish, and Two, there is still a whole bunch of longs yet to sell. This information dovetails neatly with my opinions and shows just how valuable the bullish consensus can be in determining future market performance. By the way, please notice the numbers on silver; almost enticing us to buy as most analysts are now bearish, bearish after prices have fallen some 45 cents. As I said in a recent commentary, when everyone is standing on the same side of the boat, it behooves us to stand on the other side, with a firm grip on the railing.
The Commitment of Traders reports, for futures and options, as of February 11th.
Gold
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
90,719 32,032 82,583 189,977
-15,731 +688 +8,026 -24,829
Long Small Spec Short Small Spec . .
81,903 33,195 . .
-15,247 +1,189 . .
In the relevant week, long speculators, both small and large, sold an amazing 31,000 contracts of gold, about 3.1 million ounces. Open interest declined by over 24,000 contracts as serious long liquidation was the theme for the week. The commercials were buyers against the sales of the speculators as prices declined by $7 during the week. The market STILL appears to be heavily long as long speculators are long 171,000 contracts against a spec short position of 65,000 contracts. The way that I read it, there is still the possibility that there still exists a significant long position that could be sold into the market. If you take the approach that we overshot on the upside, then we will overshoot on the downside, and lower prices seem imminent. I feel strongly that if we can buy advantageously near the bottom of this decline, it will be the VERY BEST buying opportunity in gold that has been seen in years.
It is also interesting to note that the commercials were wrong last week, as they were buyers into a market that continued to fall. Reading the COTs is a most tricky endeavor, as different rationale must be used dependent upon the very nature of the market. Sometimes something is important, and sometimes it isn't. Usually the actions of the commercials determine the future of the market, but in this situation, I strongly believe that the actions of the speculative longs now determine the future.
Silver
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
36,770 7,479 22,257 83,029
-13,508 +1,041 +3,954 -12,627
Long Small Spec Short Small Spec . .
39,377 7,876 . .
-2,517 -485 . .
Very clearly, the sharp decline in price seen during the week was due to MAJOR long liquidation by the longs in the market, who sold 16,000 contracts or 80 Million Ounces. Commercials seemed quite pleased to buy all of the silver offered by the speculative crowd. I am not sure why, but I find such information comforting to my opinion that we are close to a bottom in prices in this market. It's strange, as I did not think the actions of the commercials that important in the gold market, but somehow feel their actions are important in silver. Maybe I am just "talking my book."
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