Market Commentary

By: Leonard Kaplan | Tue, Jan 20, 2004
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For markets of January 20th

Based upon 30 day maturities
FEB GOLD 407.00 GOLD .00/.50%
MARCH SILVER 6.33 SILVER .50/2.00%
JAN PLATINUM 851.90 PLAT 5.00/12.00%

General Comments:

The past few weeks has seen the precious metals careen wildly higher, in most cases, as the USD continued its unrelenting, and rather furious, march to ever lower levels. The gold market peaked on January 6th at over $430 per ounce, only to then fall some $25 as the Euro lost some 5 cents in the past days. Silver simply exploded, justifying the opinions of many analysts (myself excluded) that silver was ready for its rally, and the last few weeks saw a most impressive one dollar per ounce rally to trade as high as the $6.70's. Naturally, prices have succumbed to some moderation as gold, to which it seems wed forever, fell in value. Platinum also staged a 10% rally to trade in the $860's basis the April Contract, while palladium reawakened with a rally of about the same size.

With the new year, it is time to reconsider our thoughts about the market, to reexamine our version of the "truths" of the market, and look at both our failures and successes and why. One thing that has struck me quite hard about the gold market is that I, and many many others, wasted hundreds or thousands of hours worth of research into the fundamentals of this market, trying to vain to understand their influences on the price movements of gold. We were attributing rallies in gold to various factors, such as producer repurchases of previously sold gold production, or to greater global uncertainty, fear, and terrorism, looking for solid demand from India, pouring over the Commitment of Traders reports, and the like. Every movement in the price of gold was the effect of some fundamental feature, and these were ardently studiously followed. The fact is, we were probably all wrong.

We were studying the gold market as we thought it was, looking mostly at it as a "commodity" with a very heavy modicum of "safe haven" or investor interest. But still, traditional fundamentals were heavily considered. Again, we were wrong. Given the decline of producer hedging, given the ebb and flow of industrial/commercial demand and supply, given the thousands of other factors such as jewelry and investor dishoarding or demand, how do you explain that gold prices, and the Euro, have marched hand in hand for all of last year? As the chart shows:

There is only one answer. Gold, over the last year or two, has been behaving NOT LIKE A COMMODITY, but a CURRENCY. Such a close correlation between the USD/ Euro or the value of the Dollar Index indicates that valuing gold as a commodity has been virtually useless. It is acting as a currency, it is acting as MONEY. In college, in philosophy, there is this theorem named Occam's razor. It states that the easiest answer is most probably correct. Therefore, gold is now money because it is acting as money.

As such, all fundamentals factors in this market must be accorded short shrift. It seems that such matters have little material effect. It seems almost unimportant that Indian gold demand fades when prices are high and shines at lower levels. It seems totally irrelevant that the gold producers have repurchased millions of ounces of gold in this market. It appears foolhardy to judge global jewelry demand and make any assumptions. Gold has been, simply, a currency of late. The very facts demand we see it that way.

Throughout history, there have been times that gold has been accorded commodity status. And, there are times, as now, where the battle cry of the hard money crowd, "GOLD IS MONEY", has been echoed through the halls (these days, please substitute internet chat rooms). But now, until things change, gold is simply money, another currency. And remember, rule #1 (or is it #2?) of the commodity trader's handbook is that a trend stays a trend until it doesn't.

Ok, next case, or in this case, another reinspection of previously held beliefs about these markets. Besides the waning of the importance of fundamental supply/demand considerations, the silver market over the past month shouts at another change in these markets, irrationality. Just look at the silver market over the past two months where prices went up by $1.50 per ounce. I would dare anyone to describe what has changed, from a hard-core fundamental analysis standpoint, just what changed to propel prices up just this much? The answer, nothing. And the deduction of these facts indicate that, yes, nothing is required to make silver go up by 30% in two months. It can just happen because of technical chart considerations and perhaps the activities of the major commodity funds. Or just because.

So, clearly, the markets are now teaching us that fundamentals are no longer all that important, and that greater allowances for complete irrationality must be given to the market. In order to be a profitable trader/investor, it is imperative to know the true nature of the market, to learn from its past, as its past is most likely its future (until its not).

The nimble trader must now discount the fundamentals, must now direct his attention to the foreign exchange markets, and expect greater movements in prices than were previously considered. Times have changed and the search for profit in these markets must change. Our methods and madness must change with the markets.

This has been a most self-indulgent, and introspective commentary. I know you were expecting something else and, yes, you will get that shortly, just like it was before. But, this is a New Year and time for an annual bout of re-examination. But the lessons we learn from these markets are more important than short term recommendations and the like. When we are in tune with the markets, profits come more easily. We need to be looking at the right things.

As an aside, I am reminded of what my introductory philosophy professor said on the first day of class, "philosophy will teach you HOW to think and not WHAT to think". At the time, I didn't understand how profound that comment was, of course. And, I do see a close correlation to trading or investing in these markets, where you need to understand just what is really going on, what is important and what is unimportant, in deciding whether to buy or sell. Looking at the wrong signals leads to failure.

Again, I promise you a return to my more conventional newsletters, where both the technicals and the fundamentals of the market are discussed and duly commented. But, once in a while, it becomes much more important to look at the forest, and not the trees. It lends another, perhaps more appropriate, perspective to the markets to look at it with fresh eyes, discarding the baggage of previously held thoughts and beliefs.

Re-reading the paragraphs above, I am immediately struck with the fact that I better not write like this again. But, truth be told, I think it valuable, perhaps just once a year.


Leonard Kaplan

Author: Leonard Kaplan

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

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