Market Commentary

By: Leonard Kaplan | Mon, Sep 8, 2003
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For markets of September 8th
Based on 30 day maturities
DEC GOLD 378.70 GOLD .00/.50%
DEC SILVER 5.150 SILVER 1.00/2.00%
OCT PLAT 714.70 PLAT 2.00/7.00%

General Comments:

In last weeks commentary on the precious metals, I was most unashamedly bullish, perhaps more so than I have ever been, and the markets, thankfully, cooperated nicely. Gold prices were up $11.40 for the week, seeing a high on Friday above the $380 level basis the nearby December contract. During the middle of the week, when the USD was at its strongest, gold prices declined to test support near the $370 price level on several occasions, but when Friday's "Unemployment Report" (known in the trade as "unenjoyment") was released, and it became clear that the US economy is NOT as strong as previously hoped, the USD fell mightily and quickly and the precious metals zoomed. In past weeks, this commentary has noted that the gold market was strong even as the USD was strong, but when this currency began to falter, gold prices reacted quickly. Trading took a decided pattern during the week, with gold prices being pressured in London almost every morning and falling a bit, but when New York opened; fresh speculative buying interest was always seen. It continues to be the trade who is selling, and the specs who are buying, and buying in a big way.

Silver prices chopped around during the week, to close only up a bit less than 2 cents. Volatility remains high, with the weekly range about 20 cents, or 4%. Silver prices more or less shadowed gold during the week, to no surprise. Silver remained within expected trading ranges, and continues to consolidate, probably as a prelude to moving sharply higher. The platinum group metals were also invited to the fanfare, as speculative buying took platinum some $7 higher. Palladium, the thinnest and most illiquid precious metal market, was the outstanding performer, up $18 on the week, some 9%. As long term readers note, this commentary has been recommending palladium for months and months, as a long term trade, and it seems that just now the "mainstream" press is beginning to realize that the price differential between platinum and palladium is seriously misaligned. I still remain bullish on both of these metals, but perhaps the easy money has already been pocketed in palladium.

Make no mistake about the precious metals markets. These markets ARE NOT driven by their own internal fundamentals, nor their technical chart considerations. These markets are being bought, and bought heavily, by the speculative crowd. Yes, there are perhaps most seductive macroeconomic occurrences that are encouraging such a display, and we will look at several of them, but make no mistake, these markets are at current prices, and look to go higher, due strictly to speculative buying. And, historically, the speculator in gold has been most cavalier in his perceptions and actions in the market, with his psychology changing unpredictably. Historically, in gold, when the speculative selling begins in earnest at high price levels, the market drops precipitously. In the past, such a internal composition of the market, with the specs long, the commercials heavily short, and little to no support from the physical market in terms of off take, has almost always seen the market collapse, ending very poorly. Such knowledge forces a change in trading strategies, and recommendations will follow.

Investor interest in commodities in general is blossoming, and for very good reason. Perhaps the best motivation for such actions is that it is clear, to most market participants, that the nations of the world are now deep in the race for competitive devaluations. No country wants a strong currency anymore (not even the USA which still "officially" jaws this platitude). Every country in the world wants a competitive edge with their currency cheap in relation to their trading partners, so that their exports may thrive and their economies rebound, of course, at the expense of their trading partners. The most flagrant offenders are the Chinese and the Japanese governments, which are now the target of US Administration ire, attempting to end their decidedly unfair advantage over US producers by maintaining their currencies at seemingly low economic levels.

During the week, the Japanese government admitted that it had spent $77 Billion USD just this year in keeping the Yen from rising, and thumbing their nose at our Treasury Secretary who was in the Far East for the express purpose of asking the Far East to stop such maneuvers, again intervened in the currency markets. China has a trade surplus with the USA at or above $10 Billion USD per month, and yet refuses to revalue its currency. Every country is attempting to take advantage of every other country, by devaluing its currency; it is a race to the bottom. In such an environment, it becomes clear that hard assets, hard goods; commodities MUST gain in value against ALL currencies eventually. And, as you would expect, the very first asset that is desired is the precious metals, and first and foremost, gold. Unlike currencies, gold cannot be created easily. This realization is perhaps the reason why the gold market has remained so strong as of late, and has not been subject to the vagaries of the currency markets. It is rising on its own merit, as the best alternative to currencies.

Another reason for the sudden interest in commodities is the fact that interest rates in the USA are at 45 year lows nominally, and are truly negative after inflation and taxes are factored. In this environment, investors are forced to seek alternative venues for their capital, and with trust in the equities markets deteriorating; investors are seeking gains from commodities. The huge inflow of capital distorts the commodity markets quite easily, as these markets can be much thinner that either the stock or bond markets. Greater volatility, and "whippier" swings, are being experienced as money flows in and out aggressively. This year, it is estimated that large public commodity funds, just a small portion of the money in the market, may be as large as 65 Billion USD. Simply put, investors and speculators want to make money, and they don't like the other alternatives.

Lastly on this subject, before we move on, is the most obvious potential for a significant monetary inflation in the USA. Given the interest rates, given the historically enormous budget deficits being planned in this country, it becomes clear that inflation will be coming, and coming hard. Yes, I know&the CPI (Consumer Price Index) in the USA is still rather tame, it does not "truly" reflect the current rise in prices, in my opinion. Nor does it forecast the future. In the past, rising inflation has meant rising commodity prices; another reason investors and speculators are piling into this one sure bull market.

Canada announced that it had sold some 135,000 ounces of gold during August, leaving only 200,000 ounces left in the cupboard, down from 21 Million ounces in 1980. At this rate, they will be out of gold reserves by the end of the year, having sold the greatest percentage of their gold during the bear market. Well, at least they didn't sell most of it near the exact lows, as the British Treasury holds that honor at present. Naturally, this makes no financial sense, but who am I to question a Central Banker, or his motivations?

Also bulling the gold market is some evidence that the Washington Accord, where the Central Banks of Europe agreed to limit their gold sales 4 years ago, will be renewed, and perhaps even expanded. One of the gold bull's greatest fear has been the undisciplined selling of Central Bank reserves of gold, and the most feared candidate has always been the Germans. Now, statements from the Bundesbank indicate that while they are interested in selling "some" gold, Finance Minister Eichel commented that they would sell in only "small steps" as the gold market was sensitive. The gold market can easily absorb small amounts of German gold, after all&the Swiss will have sold 1400 tons of gold by September of 2004. As an aside, doesn't it seem rather curious that many Central Banks are interested in selling gold, even in a most disciplined manner, when gold is perhaps the best performing asset of the last few years and most seasoned analysts propose that higher prices are in view? It is difficult to believe that these people are running the economies and determining the future of their countries. Oh well, at least the USA hasn't sold any gold in a very long time and has no plans to do so, I hope.

On Wednesday, the World Bank forecast that gold should soon fall below $300 as new low cost mines are found and producers slow their rate of de-hedging. Lest you become concerned about such "expert" prognostication, please be aware that they said the exact same thing, almost verbatim, since 2001. It would appear that the verbiage was just copied from year to year. Such shameful and indolent practices were brought to my attention by an article from Obviously, ignore anything they say, as they probably couldn't find the nose on their face with two hands. On the other hand, perhaps those Central Bankers who are selling their national reserves of gold are indeed reading this drivel. Tee hee.

Next, it would appear that the long-awaited World Gold Council exchange traded fund in gold may indeed surface in the USA. It appears that an outstanding lawsuit may have been settled and that, now, the SEC may give its approval to this investment vehicle which buys and stores physical gold bullion for its shareholders. While there are several instances of such a fund in other countries, there has yet to be a success. It is hoped that such a fund will unlock institutional investment, but don't count on it. Markets ALWAYS move toward efficiencies, and this fund will be most inefficient in comparison to other, already established, commodity and futures markets.

Before we move to the Commitment of Traders reports, lets look at the Bullish Consensus as of September 2nd.


81% bullish from 76%

as of August 26th


60% from 61%



78% from 72%


Over four fifths of the analysts are bullish on gold at this time. Those who find comfort in being with the crowd are happily long gold. And those contrarians that find comfort being on the other side, are either short or out. Take your pick. In the past, such high percentages have signaled a top in the market, as common wisdom would tell you that there are few left to buy any more. But, such numbers have been seen for quite a while, and yet, the market continues to rally. Perhaps, as above, there is good reason. And, perhaps not.

The COT's, as of September 2nd, for both futures and options:

Long Speculative Short Speculative Long Commercial Short Commercial Small Long specs Small Short Specs
138,294 15,176 128,681 299,620 70,297 23,145
+29,575 +3,478 +7,174 +37,035 +6,691 +2,927

These are truly historic statistics. Speculators are now long 208,000 contracts, close to 650 tons of gold. Their purchases, and those of the long commercial interests, were accommodated by the short commercials, who sold a VERY large number of contracts during the period, even as prices were rising, and then rose even more after Tuesday, when this information was accumulated. Open interest continues to surge, up some 60,000+ contracts, also a new record and a classical bullish sign. So far, the speculators are totally right, a rather rare occurrence. Yes, investors and speculators are indeed piling into this market, and yes, they most certainly control the price. With the ratio of spec longs to spec shorts at about 6.25 to 1 (eeek!!), you wonder who is going to be a buyer if the speculators decide to sell. While the market continues to move higher, and I still look for higher prices, there can be no question that this market is most vulnerable. Armed with this knowledge, trading strategies must be altered to fit the potential vulnerability of this market.

Long Speculative Short Speculative Long Commercial Short Commercial Small Long specs Small Short Specs
50,770 5,767 18,533 96,055 41,389 8,870
+369 +1,168 -2,257 +1,200 +2,931 -1,595

This market remains sleepy in comparison with gold. Open interest barely changed and there was little change in the ownership of contracts. Commercials continue to sell, although in smaller size, while the speculative crowd continues to buy. We are still stuck within a trading range, lets say $4.90 to $5.25 so there is no great surprise that there is little change in the numbers above. As I said last week, I remain very bullish, perhaps foolishly so. We could see a rocket in price if we can get a close over $5.25, especially if gold is strong.

In the precious metals markets, there are times to go with the probabilities, to conform to historical norms and rationale, and there are times to go the other way. The current market seems the best candidate for pushing aside fundamentals, disregarding the internals of the market, and staying bullish even when past odds dictate the reverse. All you have to do is change the way you trade, and recommendations follow.


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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