Precious Metals Report
Leonard Kaplan
Prospector Asset Management
>>Speaking of gold, China has now become the 10th largest official holder of gold in the world, now keeping 600 tons of gold as official reserves. This nation has been a rather aggressive buyer of gold of late, and the industry is watching this trend most carefully.<<
For week of Monday, March 31, 2003
GENERAL COMMENTS:
It has now been a week since the joyous adventurers in the gold market departed, some speculators leaving in drunken reverie and some left to cry in their beer. These shorter-term traders arrived to the gold market party en masse, and left much the same way. For the last week, the gold market has reverted back to a much more normal and predictable fashion, with traders still keeping a watchful eye on the war, a second eye on the equities markets, and a third eye on the continuing depreciation of the USD. Volatilities continued to lessen; sharp and sudden price movements were fairly rare, and trading volumes rather meager. Gold prices bounced nicely off major technical support in the $325 price level and were able to rally $5.50 on the week.
While the gold market continues to be held hostage to the news and headlines, I sense that we are finally beginning to see a greater influence of the underlying fundamentals rather than the irrational exuberance or illogical despair of emotion that so painted the gold market these past months. Physical buying by commercial/industrial concerns has re-emerged, bolstering the floor of this market. Investors and speculators are now buying for all the RIGHT reasons, rather than just piling into the market in the hope that the next fellow will be happy to pay even a higher price.
As the "reality" of the war sets in, the economic themes and trends of the prospect for a lower USD, the massive deficits which will be incurred by the USA government, the probabilities of the ongoing bear market in stocks, etc..etc..are now becoming more apparent, and the gold market is faithfully responding. These are the levels that make sense; these are the prices at which both investors and speculators should be buying, rather than selling. After all has been said and done, all that is happening now is we are reverting the original trend of the market, a secular bull. The war premium has come and gone, the revelers (the specs) have come and gone, and now the professional traders are seeing value.
Over the past week, with the realization that the war with Iraq may have quite serious ramifications upon the global economy, and the "industrial" metals just got clobbered, silver decided that it was a monetary metal, and traded in lockstep fashion with gold. Prices were up about 8 cents for the week in rather calm trading conditions. The silver market remains a trader's dream, a market where reliability is assured. It seems that silver is cheap in the $4.30's and $4.40's and expensive in the $4.70's and $4.80's.
While gold and silver had quite good weeks, building support and consolidating, the industrial metals were hurt badly as the large speculative concerns bailed out of their long positions. Platinum was down $18.40 for the week, and is now down about $67 in just 20 calendar days. This commentary forecast a decline in this market several weeks ago, but truth be told, I did not see it as vicious as it turned out to be, nor go quite as far as it did. Palladium was the "wonder of the week", falling $42 in value as we saw massive selling out of the Far East. The talk in the trade was that the selling had much to do with the fiscal year-end in Japan, being March 31, 2003, and that stale longs were liquidating en masse. This theory is easily proven right or wrong if we see some recovery in the coming days.
With the certainty of a longer than expected war in Iraq, the USD was sold heavily last week, and as an example, the Euro had it's largest rally against the USD in 8 months. Please remember that as the USD declines in value, it becomes cheaper in all foreign currencies, which significantly increases demand. And, at the end of the day, it is physical demand for gold that really determines the floor for this market.
A fascinating birth in the gold market has been the news that an exchange-traded security has begun trading on the Australian Stock Exchange. Each share of this fund is equal to 1/10 of one ounce of gold, stored in the vaults in London, and is priced in Aussie Dollars. So far, volumes have been meager, but it seems that not much promotion nor advertisement has been done. If this is successful, it could be a blueprint for the establishment of much the same theory on other exchanges, the most important, of course, being the USA, where it would trade in USD. It has been the fervent hope of the World Gold Council to promote and establish such a trading vehicle so that investors and speculators would have easier access to the purchase of physical gold. While such exchange-traded vehicles have the potential to change the structure of the gold market, I must admit that I remain quite skeptical. I have never understood the cries of some in the industry that gold is hard to buy, that a better "wheel" needs to be invented in order to encourage the investor. After all, the futures markets, where delivery of physical gold is required when demanded by the buyer, remain the cheapest, most efficient, more transparent, most liquid, and most heavily-traded instrument on the planet.
Speaking of gold, China has now become the 10th largest official holder of gold in the world, now keeping 600 tons of gold as official reserves. This nation has been a rather aggressive buyer of gold of late, and the industry is watching this trend most carefully.
While the Bundesbank has made its intentions to sell a bit, or more than a bit, of gold very clear in the market, it now appears that the proverbial "fly in the ointment" has emerged. It seems that IF the Bundesbank does sell gold, all of the profits go to the government, and not the Central Bank who wishes to reinvest the proceeds. Mr. Ernst Welteke, who has been the champion of such gold sales, was recently forced to admit that if the profits went to the government, rather than to the Central Bank, that the Bundesbank would "reconsider" such sales. It would take a change in the law to allow the Central Bank to retain the funds, and as such, is very unlikely. While the market has feared gold sales by Germany, which currently has 3,446 tons of gold reserves, it now is rather evident that it just ain't gonna happen.
On to the Commitment of Traders' report, as of March 25th, for both futures and options:
Gold
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
40,295 15,680 118,071 175,415
-6,060 -13,152 +9,529 +8,150
Long Small Spec Short Small Spec . .
64,676 31,947 . .
-11,671 -3,200 . .
During the reporting period, gold prices fell by over $9 as open interest contracted by 10,497 contracts. Much of the change of ownership of contracts on the Comex was just swapping between the long specs vs. the short specs, and the long commercials vs. the short commercials. Long speculative concerns sold about 17,700 contracts, and these sales were bought by the short speculators who bought about 16,500 contracts, covering their short positions. Commercials just basically traded with each other. I find these statistics puzzling, and somehownot quite reflective of the trading conditions I witnessed during the week. I would have thought that the short commercials would have been significant buyers, as that would portray excellent physical demand for the yellow metal. And yet, it didn't happen. While there is little to learn from the statistics above, it is most evident that the "froth" has left this market. Long speculators are now only about twice the number of shorts, a more "normal" condition.
The one truism to be learned is that the largest seller of gold futures and options, the small speculator, was the group that evidently lost the most money trading. Looking back, it is clear that they were buyers at the highs and sellers near the lows. Some things never change, thankfully.
Silver
Long
Speculative Short
Speculative Long
Commercial Short
Commercial
24,576 25,822 34,602 54,709
-3,134 +10,928 +7,505 -8,225
I find it highly amusing to note that silver reached its nadir on March 21, where May Silver closed at about $4.35 per ounce. Please consider that when perusing the statistics above, and it becomes blindingly clear that ONCE AGAIN, the speculators were MAJOR sellers at the lows, while the commercials were MAJOR buyers. It is just astounding that this phenomenon occurs time after time after time, and one would think that the speculative crowd just might begin to resent their charity in this market. As mentioned above, the silver market seems to be the paragon of reliability, with speculators stubbornly buying at the highs and selling at the lows, while the commercials, who know the market much better, gleefully take the other side of their trades.
Successful traders of this market know to follow the lead and the actions of the commercials, and to disregard the "hype" that so characterizes this market. I remain bullish on silver at these price levels.
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