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June 22, 2004

Market Commentary
by Leonard Kaplan

For markets of June 21^th

General Comments:

With the listless days of summer dulling the appetite for trading, the precious metals markets, with few exceptions, continue to adhere to the trading ranges forecast by this commentary. Last week saw these markets post considerable gains to challenge their technical resistance near their 200 day moving averages, only to be set back. The precious metals markets have assumed their typical summer trading postures, with rather sharp price moves (primarily due to thin market conditions) both up and down, but ending virtually unchanged on a long term basis. The gold market found excellent support from commercial interests in the low $380's to rally to the high $390's, only to be subject to speculative selling, to close the week up $9.10. Silver continues its rather capricious and volatile nature, and following gold closely, was up 23 ½ cents for the week, trading near the $6.00 price level. Platinum was up $11.70 for the week, while palladium added $10.45 to its waistline, fattening the price.

As expected, the driver of these markets remains the USD, with the metals following its tune in almost perfect harmony, tic for tic. This correlation has been the case for years, but has been exacerbated due to the thinness of summer trading conditions. As such, these markets have become a bit more dangerous, as the flow of orders creates outsized moves. Even a few hundred contracts in silver, for example, placed at the "wrong" time can now move the price by 10 cents or more. Trust me, this is not all that unusual for this time of year. The next week holds little chance of excitement, as it seems all the financial markets await the decision by the Federal Reserve on interest rates, and few are willing to bet too heavily on the outcome.

From an investment standpoint, the precious metals are torn between the countervailing forces of the potential of a strengthening USD (which will most probably weaken these markets), and the possibility of the addition of "hard asset" purchases by investors due to the quickening pace of inflation in the USA. Right now, surprisingly, the financial markets seem to be completely ignoring any sign of inflation and are totally fixated on the interest rate environment. The fact that US producer prices rose by .8% in May is no consequence it seems.

A quick glance at the chart above should scare most economists and some investors, but the markets seem little concerned. My sense is that such obsessions will continue for a while, and if the Fed is perceived as being aggressive and pro-active about interest rates, then the USD will rise, and the metals will fail. On the other hand, the "smart money" in the market has already seen the dangers, and is supportive of the gold price as a hedge against the ravages of the upcoming reflation. With the wind blowing from both directions in these markets, odds greatly favor that the precious metals markets will continue to waft from heavily supported lows to well protected highs. This is a godsend to most professional traders who profit best in markets that have well-defined boundaries.

Another minor negative to the gold and silver markets has occurred as the Indian Rupee, the leading global demand center, has reached lows not seen in 7 months. During the first part of this year, Indian demand, even at increasing price levels for the metals, has been VERY resilient and very much better than generally forecast. Indian buyers have historically been quite price sensitive, refusing to buy when prices rise too quickly, but demand was uncharacteristically strong, as a strengthening rupee mitigated some of the price rise, as the metals are traded in USD. This should have some to little effect when the precious metals are near their lows, but will have much greater importance on rallies.

As predicted, gold production in South Africa continues to suffer, with a drop of 8.3% in the first quarter of the year to 84.6 tons. If this trend continues, production will total 338 tons of gold for the year, down very sharply from the 425 tons mined in 1999. As onerous legislation and a declining business environment have hampered South Africa, Australia continues to add mining production. According to ABARE, 288 tons of gold will be produced for fiscal 2005, up from 268.

While digital photography has taken some of the luster off the demand for film in years past, the trend is accelerating quite rapidly. While the market has experienced a drop of 4% per annum in past years, Kodak recently predicted that film sales will drop 10-12%. This is still rather inconsequential, as photographic demand is only third on the list for demand. But still, important to consider as the fundamentals for this metal continue to deteriorate darkening prospects for any significant rally without increasing investor support.

Just for interest, here is another graph from commitmentfortraders.com, overlaying the ratio between the long and short specs against the market price. This commentary has, for years, advised following the lead of the commercials and going against the speculative crowd, as the former is almost always right while the later is almost always wrong. This chart pictorially depicts this trend, as please notice that the specs were the most short at the lows, and long at the highs. Nothing is perfect, but such historical documentation does provide a most important tool.

On to the Commitment of Traders reports, as of June 15th, both futures and options:

During the relevant period, gold prices fell by $3 per ounce as open interest declined very marginally. As vacation and holiday pursuits now occupy a greater urgency than trading, not much changed in the ownership of contracts on the floor. However, please note that the biggest buyers during the week were the commercial shorts, indicating that physical demand was quite vibrant. As previously mentioned, I believe that this market is very well supported on dips. Traders should be rather aggressive in buying futures, or selling out of the money puts on dips in this market and should also be selling futures, or selling out of the money calls, on rallies, although in much reduced size. Recommendations will follow.

This market, over the reporting week, is reminiscent of a sad story from my youth, when the ugliest and least popular girl in my class invited everyone to her birthday party, and nobody showed up. After the devastation in this market over the past months, the speculators, both large and small, have deserted this market to find gayer affairs elsewhere. Basically, all that occurred here was that the commercials traded positions to a great extent. There is little to be learned from last week's numbers.

GOLD RECOMMENDATIONS:
Expected trading range: $385 to $398

(positions and recommendations are available to clients and subscribers only)

SILVER RECOMMENDATIONS:
Expected trading range: $5.60 to $6.25

(positions and recommendations are available to clients and subscribers only)

PLATINUM RECOMMENDATIONS:
Expected trading range: $800 to $840

(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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