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September 30, 2003

Market Commentary
by Leonard Kaplan

General Comments:

During the last week, the precious metals markets achieved several achievements, some notable and some not quite so endearing. The gold market was down only a shade over a dollar for the week, but that snapshot taken from Friday to Friday, hardly reflects the extreme volatility of the period. The gold price traveled almost a $15 range from its highs, achieved on Thursday at $394.80 basis the December contract, a 7-year high, to its lows just one day later at $380, a stunning display of volatility amidst a bout of liquidation. With now just about all precious analysts looking for the gold price to exceed $400, the large speculative funds pushed the sell button just a bit sooner, locking in profits.

As might be expected, the silver market suffered a far worse fate, falling about 15 cents for the week, as large speculative funds were the noted sellers, again. This market made new highs on Thursday morning at $5.395, only to see $5.135 the very next day, a swing of 26 cents, or about 5% of its value. The silver market is swinging viciously, with very little or no substantive reason why or when. Volatilities have skyrocketed, and the risks, or the rewards, of having any position in this market have dramatically escalated.

Certainly the best example of the complete insanity, and massive volatility, of these precious metals markets would be platinum. Although the week to week comparison only shows a decline of 40 cents, hardly worth noting in a commodity that sells for $700ish, platinum had a $30 range for the week, all seen on just Thursday and Friday. At one point on Friday morning, platinum was down almost $30 per ounce in just the first hour of trading, recouping its gains later. Again, large speculative commodity funds were the culprits, attempting to sell about 1000-2000 lots in a thin market, all at one time. Palladium, taking its cue from its nobler sister, fell $11.20 on the week, coming back to technical support just above $200.

In markets like this, at times like this, logic and reason are of little value. Generally, from a classical technical standpoint, when a commodity makes new multi-year highs, it SHOULD be expected to continue. Well, platinum made 23 year highs, and then fell sharply. Gold prices made 7 year highs on Thursday, only to fall $15 in just two trading days. Silver made new highs on Thursday, only to fall over 5% in the ensuing days. Technical support and resistance levels mean very little as the capricious order flow of the large commodity funds pummel the market in one direction or the other. Please understand, even after the debacles, I remain quite bullish on all of the precious metals. These are difficult times, but bull markets, by definition, take as few positions higher as they possibly can. Real bull markets always try to shake out all weak hands, before moving higher. And trust me, they are shaking the trees REAL HARD now, with those who just had a tenuous hold on a branch being thrown hard to the ground.

Such movements are not at all that surprising, given the fact that now, for the first time in two decades, it seems that the entire financial world is not only confident of higher gold prices, but are trumpeting their opinions to the press and their clientele. Even Merrill Lynch, out of London, is calling for higher gold prices! Just as their voices were the loudest, gold took its sharpest decline last week.

That said, the fundamentals for gold are still superb. Nothing has really changed except the price. In fact, putting aside all emotion, the fundamentals are now BETTER than before. Last week, the G10, calling for flexible exchange rates' basically announced, in the parlance of bureaucrats, that the strong Dollar policy of the USA was being abandoned, and that the USD must fall against most major currencies, particularly the Japanese Yen and the Chinese Yuan. And, fall it has, as the value of the Dollar fell over 3% in just one week. Discounting the last week as an aberration, over the long term, gold prices do indeed have a distinct negative correlation to the value of USD, and as this currency falls, gold must rise.

Another benefit to the gold market coming out of the G10 was the admission that the Washington Accord will, in one form or another, be renewed. It was stated that the Central Banks will most probably agree to limit their sales and use of derivatives and leasing in the gold market for another 5 years. Yes, it is likely that the quota of gold sales per year may be increased from 400 tons per year to what it thought to be about 500 tons. And yes, perhaps there will be other signatories to the accord. But, most importantly, the ominous threat of profligate Central Bank sales of gold has, for the most part, been silenced. Dutch Central Bank governor, Nout Wellink, said that while gold sales had been briefly discussed, a 'new deal' would be tackled early next year.

I was amused by a comment from the deputy governor of the Russian Central Bank who stated that his nation would like to increase the percentage of foreign reserves it holds in gold, BUT it is not in the position to do any buying at the present. They also brushed aside criticism from the IMF that they needed a more flexible approach to the exchange rate, in favor of what they call a more ' managed' approach. Russia's percentage of gold to total reserves is about 7-8%, and this gentleman noted that they would like to see it at 10%. I am quite sure that I understand the motivation behind the Russian comment, except to assure that gold prices would remain strong. Perhaps as the gold price rises, and the value of the USD falls, they can achieve their wanted 10% without buying any gold.

Recently, Gold Fields Mineral Services, a closely watched and respected authority in the industry, stated that they looked for gold to perhaps pierce the $400 barrier by the end of the year, albeit briefly, due to accelerated investment demand. Such demand in the West climbed a record 55% in the first half of the year to 140 tons, but bar hoarding in Japan fell by 43% as fears of a banking calamity in the banking system subsided. The market has been, and is, rallying solely on investment demand as global fabrication demand for gold fabrication (read jewelry and other industrial demands) fell by almost 2% to 1509 tons in the first half of this year, the lowest level since 1994. GFMS estimated that net outstanding hedge positions by gold producers declined by a record 308 tons in the first half of the year, but were seen slowing to perhaps 220 in the later half, as current high prices dissuaded the producers from buying back previously sold forward positions. Sales of gold from the official sector (read primarily Central Banks) were thought to be just below 550 tons, a slight decrease from last year.

As one can easily deduce from the statistics above, and from the outrageous volatility of the current precious metals markets, while the fundamental supply and demand picture COULD be considered rather bearish, the gold market is rising due to speculative and investment demand. Gold is NOT just a commodity; it most often acts as a currency or as a barometer of economic and political trepidation and fear. It is not the its use as jewelry that is propelling the current, and ongoing, bull market, but its use as a 'safe haven' or hedge against the ominous global macroeconomic outlook.

And, there is palpable hope in the gold market for yet greater investment demand emerging soon from China. In a recent survey, 20% of Chinese respondents stated that they would be willing to place 10 to 30% of their savings in gold, if and when the government liberalized the market allowing such actions. The Chinese have historically been culturally attracted to gold, but currently Chinese demand is only .2 grams per capita per annum, compared to .7 grams in India. Based upon such numbers, such numbers would create the demand for about 3,000 tons of gold, far in excess of one year's global production. Xi Jianhua, the Chinese Central Bank's gold business expert, was more conservative in his estimates, saying that IF such liberalization occurred, he would expect 300-500 tons of demand to emerge. Still, a very large number. The most interesting aspect to this potential is that it would present China with a most unique opportunity in that it offers a method of disposing of piles of USD that they continue to accumulate at an alarming rate, and may lessen the upward pressure on the Yuan. While China has achieved liberalization at a surprisingly fast rate in recent years, while there are voices within that nation calling for such actions, there is no evidence, as of yet, that it will occur. As noted in the first sentence of this paragraph, it is still a hope.

Another hope of the gold market is the long delayed arrival of ETF's (Exchange Traded Funds), due to arrive on the major stock markets of the world, which many believe will accelerate the investment in gold by individuals, corporations, and pension funds. It is rumored that the one for the USA may emerge by the end of the year. There are still a myriad of problems, with both legal and tax issues dominating concerns, with their introduction. Details are not available at present, and I will comment on them when more is known. But, the only one currently trading, in Australia, has, at best, been a most moderate success. Again, this is just a hope at present.

Finally, a bit of gold news out of India. The National Multi-Commodity Exchange of India will begin trading futures in gold and silver next week, for the first time in about 40 years. This computerized trading system has about 135 terminals in 40 locations at present. While such efforts are notable, this exchange is probably due to failure at the end of the day, as there is not one foreign dealer or bank, as a member. This is simply a beginning, a laudable one. Also, although current prices levels might be rather unattractive to many Indian consumers, gold demand in that country may pick up a bit as Friday marked the beginning of an auspicious period for gold buying by Hindu mythology.

On to the Commitment of Traders Reports, as of September 23rd, for both futures and options:

As the price of gold rose by about $12.50 during the reporting period, open interest surged by almost 33,000 to a new record high. Rising prices and rising open interest are THE classic signal of a continuing bull market. The long speculative crowd, both large and small, continues to accumulate contracts, well past historical norms. Long commercials, predominantly jewelry manufacturers are active buyers, hedging their needs for the coming Christmas season. Basically, the ONLY seller remains the short commercials, hedging their inventories and other similar commitments. But, importantly, the ratio between the long specs and the short specs CONTINUES to improve the past imbalances, with the ratio falling now to 4.1 to one. Several weeks ago, this ratio was as high as 6.5 to one. I remain very confident of higher prices to come, although trading will be most difficult with volatilities now surprisingly high. As the USD continues to decline, as looks promising, gold prices will rise, although it appears that the ride to higher prices will be most terrifying to most traders. Option premiums are simply enormous, and I would recommend selling near term call options against most of all futures held. Call for specific recommendations for your account. Other recommendations will follow.

During the relevant week, silver prices barely budged, and accordingly, very little change occurred in the ownership of contracts on the Comex. Investors and speculators continue to shun the silver market, which has some characteristics of being primarily an industrial metal at this time, in favor of the gold market. As the silver market sees much lesser interest, and greatly reduced volume, one could naturally expect extreme volatility as the orders from the large speculative funds swing prices wildly from one extreme to the other. In my opinion, there is little to be gained in analyzing the small changes in the statistics above.

I remain very bullish on silver, perhaps foolishly so. But I think that it may be time for one of those really silly, short lived rallies to much higher prices. Now, please understand that I also believe that it will end badly, as all large rallies in silver have in the past. But, first we go higher. This market is not for the timid, nor the undercapitalized trader. Recommendations will follow.

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
Expected trading range $688 to $708
(positions and recommendations are available to clients and subscribers only)

Leonard Kaplan
Prospector Asset Management
1415 Sherman Ave. #504
Evanston, IL 60201
Ph: (847) 733-8400
Fax: (847) 733-8958

Prospector Asset Management, and its sister company, Prospector Metals LLC offer the following services:
*Brokerage of commodity futures and commodity options
*Managed and directed speculative accounts in commodity futures and options
*Brokerage of physical precious metals
*Consulting Services
*Daily Newsletter and Special Reports on the Precious Metals

A complimentary subscription to the newsletter, with specific recommendations and positions, is available upon request for a one-month period.

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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