Precious Metals Report
Leonard Kaplan
Prospector Asset Management
Aug 10, 2004
Treacherous Viscious Volatility
CLOSES (Fri Aug 6) INDICATIVE LEASE RATES
Based on 30 day maturities
DEC GOLD $402.10 GOLD .00/.50%
SEP SILVER $6.775 SILVER .50/2.00%
OCT PLAT $832.00 PLATINUM 1.00/4.00%
SEP PALL $214.00 . .
GENERAL COMMENTS:
The financial markets as a whole, and the precious metals in particular, are swaying to the rhythms of rosy optimism on one hand, to abject pessimism on the other, as governmental reports, and comments by Federal Reserve governors, have portrayed the US economy as either improving or declining. Two weeks ago, when Dr. Greenspan painted the picture of economic health and vitality, the USD rallied, sending the precious metals lower. Last week, weak GDP statistics and a shockingly bad employment report sent the USD sharply lower, propelling the precious metals higher. The precious metals have had little life of their own, as the gold and silver markets continue to shadow the movements of the Dollar.
Volatility has been vicious as thin trading conditions exacerbate the price movements. As an example, last Friday as news emerged that the US economy only produced 32,000 jobs against expectations of about 230,000, the Euro rose over 200 points, its biggest gain in over 2 years. Naturally, the gold market followed step for step, rallying over $7 to close the week near the $400 price level in spot. The silver market, the current darling of the large speculative funds, rallied over 21 cents, achieving highs not seen in 4 months. The sharp decline of the USD last week was not lost on the platinum market, where prices ran up by a bit over $14. The overwhelming influence of the precious metals continues to be the Dollar, with little else seemingly important.
But I continue to be awed by the continuing volatility of the silver market, with prices careening back and forth, with no apparent justification or rationale. Twenty cent moves in either direction, up or down, occur with great frequency and rapidity. This market is getting thinner and thinner as even the locals (traders on the floor of the exchange who trade for their account) are hesitant to participate. This only increases the danger of this market. As an example, my broker on the floor of the exchange reports that just 1000 contracts, 5 million ounces or about $33 million dollars in total value (please note that it would require only $2.7 million in actual cash as margin), would move this market by ten cents! With large speculative commodity funds currently holding a minimum of $80 Billion USD or more, it becomes most evident that this is the "driving factor" of this market.
The gold market continues to look like a trading range, comfortable resting in the $380-$410 range after its bull market of the past three years. Well, perhaps it is more accurate not to portray gold as having been in a bull market but the USD as having been in a bear market. As readers of this commentary have read, my belief is that the next leg of the bull market will occur when gold begins to rally in most or all currencies, but until then we will mired in a well-traveled and well-defined trading range, which is certainly not a bad thing as it creates an trading environment that can be most profitable. The long-term secular bull market in gold is not over, it's just delayed. Sooner or later, the underlying economic fundamentals take precedence, and gold goes higher. But not for a while.
The financial markets are currently totally obsessed with the daily emotional dialogue as to how fast, how soon, how "measured" will the Fed raise interest rates. Just the hint of economic weakness and you see some financial pundits declare that the Fed will not raise rates in some month or another, and the USD plummets, pushing gold higher. A bit of economic optimism, or just the jawboning by a Fed official, is enough to rally the USD, forcing gold lower. What the financial markets have not yet grasped is that interest rates must rise by at least 200 basis points just to get back to normal, to some modicum of neutrality. My sense is that the Fed raises rates by 25 basis points at each and every opportunity until very late this year. Such actions will most probably keep the precious metals at bay, and keep the Dollar rather strong going into the elections.
Another striking negative for the commodities market is that growth in China appears to have peaked. JPMorgan estimated that manufacturing output virtually ceased growing in the April-May period for the first time in three years as the Chinese government is attempting to moderate the unsustainable economic growth rate. If the base metals or other commodities stagnant in price, it will change the psychological perception of the marketplace, and large commodity funds will be less likely buyers. Look for this to have a knock-on effect on the precious metals as well. Amidst condemnation by IMF, other world bodies, and loud screams uttered by the miners, Chile's government has slowed down the legislative process that would require royalty payments for mining. Perhaps that nation should look carefully at what has occurred in South Africa over the past years, where layer upon layer of taxation, in one form or another, has hurt the industry. While the influence of a strong Rand certainly has punished many gold producers, please note that on an annualized basis, South Africa may only produce 338 tons of gold this year, down from 375 tons last year and 425 in 1999. The Chilean imposition of any royalty tax upon miners is likely to be completely counterproductive, as they may gain 3% of the value on ever diminishing production levels.
In an interview with Reuters, the economic advisor to the Prime Minister of Italy floated the idea of selling off gold reserves to help reduce the Italian government's debt, currently at 107% of GDP. Italian gold reserves total 2,452 tons of gold, the third highest in the EU. But not to worry, as this nation is already a signatory to the Washington Accord, and perhaps the market is already expecting 500 tons per annum. Just add the Italians in with the Germans and the French as those waiting in line to sell their "barbarous relic."
Of all the precious metals, the fundamentals for platinum continue to be strong. With China now accelerating their requirements for emissions controls in cars and trucks, this market should continue to see growth. Prices remain strong, and any major dips in the market are bought. |
