Market Commentary August 29/04

by Leonard Kaplan

For markets of August 30th

CLOSES		INDICATIVE LEASE RATES Based upon 30 day maturities
DEC GOLD	$405.40	GOLD	.00/.50%
SEPT SILVER	$ 6.627	SILVER	.50/2.00%
OCT PLATINUM	$864.50	PLAT	1.00/4.00%
SEPT PALLADIUM	$215.00

MARKET COMMENTARY
GENERAL COMMENTS:
As strongly suggested in last week’s commentary, the precious metals (with the exception of
platinum, which will be discussed later) retreated from their lofty perches as these markets were
unable to penetrate significant technical resistance levels. Perhaps the gold market, which
declined by about $10 for the week, was following the oil price lower, or more likely, this markets
decline was a direct reflection of the value of the USD, which rose by about 2% in value. The
long-standing correlation between gold and Euro was resurrected. Gold continues to behave as
a currency, with brief periods where it rises disproportionately due to increased fear and
angst due to geopolitical or macroeconomic events. However, even a casual examination
shows that the gold price soon reverts back to its expected value in correlation with the USD.
The gold market has been rather stronger over the past weeks than one would expect basis
foreign currency movements. Such strength may be attributed to a greater level of fear in the
hearts of investors due to possible terrorism in New York at the Republican Convention, the
continuing battles in Iraq with Al Sadr, or perhaps that the report that a major European Bullion
Bank continues to be a large buyer of futures contracts, purportedly for an unknown Australian
gold producer who is thought to be repurchasing previously sold forward contracts. In what I
thought was an extremely well done piece, Frederic Lasserre, of SG Commodities, estimates that
the “risk premium” in gold is currently $15 per ounce. With gold currently trading near $408, that
projects the equilibrium value of gold back to $392, an important technical support level and
roughly my current target for covering small gold short positions.
Using the LBMA website, we find that the lease rates in gold are now at or near 10 year lows, as
shown:

1 month	2 months	3 months	6 months	1 year
.104%	.106%	.96%	.124%	.194%

That’s right; the nominal derived gold lease rate for one year is 2/10% of one percent.
While these statistics are derived, and not indicative of the actual marketplace, they clearly
demonstrate that there is little to no demand from either gold producers to engage in
forward sales, and no demand from investors borrowing the metal to engage in short
positions or to initiate carry trades. Such statistics sharply condemn the notion of some in the
market who believe that there exists a very large short position in gold held by some mysterious
conspiracy attempting, for rather unknown reasons, to control the gold market. If such large short
positions existed, then it logically follows that we would be seeing demand for leased gold, and
we are most certainly not. Well, of course all the Central Banks and all the Bullion Banks and
dealers could be part and parcel of such a conspiracy lasting years, but, I am reminded of the
comment by Plato, to paraphrase, “Three can keep a secret if two are dead”.
Silver, on the other hand, remains the playground of the large speculative funds who run the price
up or down at will in the thin summer markets. With gold falling, silver dropped by 28 cents for the
week, falling from its recent highs at or approaching $7 per ounce. Volatilities remain high and
rather wild swings occur with frequency. Anecdotal evidence has actual physical demand rather
poor at present but this seems immaterial as the funds swing 100’s, or 1000’s, of contracts
around. The palladium market dropped by $12 per ounce in quiet conditions.
Platinum prices were buoyed by investor interest out of the Far East, and reports of possible
strikes by miners in South Africa who again are asking for large raises from the platinum
producers. However, Implats, the second largest global platinum producer, forecast a small
supply surplus in 2004, for the first time in 5 years. Although the auto sector continues to be a
strong source of demand, platinum jewelry demand has fallen sharply in the Far East due to
continuing high prices. As an aside, what scares me about this market is that the Auto sector has
been picking up their forward purchases, and historically, these companies have usually been
buyers right at the very highs, as Ford did in palladium several years ago.
On to the Commitment of Traders reports, as of August 24th, both futures and options:
GOLD

Long Speculative	Short Speculative	Long Commercial	Short Commercial
129,085	18,441	118,527	268,835
+32,394	-892	-4,643	+30,332

Small Long Spec	Small Short Spec
61,034	31,370
+1,950	+260

The gold was ACTUALLY LOWER for the week, albeit by only a few dollars, as large long
speculative commodity funds piled into this market in size. The commercials, as you might
expect, were willing sellers at the currently lofty price levels. Open interest was up sharply, a
rather negative undertone to a market that actually fell in price. Remember, the health of the
physical marketplace is demonstrated by the short commercials. When they are buyers, the
physical market is strong. While the ratio of long specs to short specs is a bit under 4 to 1, well
down from historic high danger levels, I still see the above data as being a bit bearish. Over the
longer term, the commercials are usually right. Of course, such analysis can never portend any
news event which could easily push the market higher. But all else being equal, I remain
cautious.
SILVER

Long Speculative	Short Speculative	Long Commercial	Short Commercial
50,456	1,819	21,140	95,107
+1,609	-701	+1,004	+3,623

For the second week in a row, the changes in ownership of silver futures was rather insignificant,
not surprising for the last weeks of summer. Silver fell in value by 15 cents during the period, but
that was not enough damage to encourage the large speculative funds to sell. The commercials
shorts seem quite ready to sell at these price levels, although volumes are low. I remain a bit
bearish but can not justify taking short positions at this time.
GOLD RECOMMENDATIONS:
EXPECTED TRADING RANGE: $395 to $415
In gold, I remain bearish as I see prices over $410 as quite near the top of the trading range.
Look to sell December gold, in very small size, at $411 to $412, and use a stop close only above
$416. Look to cover half of the position at $402ish, and the rest against technical support at $396
or so. Do this trade in small size. Alternatively, sell out of the money calls at the $425 price level
basis the December contract. These can be done as naked calls, but only in small size as the
threat of terrorism still always lurks.
SILVER RECOMMENDATIONS:
Expected trading range $6.40 to $6.90
Again, we see how this market operates, with the funds driving prices up to unsustainable price
levels only to see the physical market disappear, the commercials become sellers, until the
inevitable wash-out occurs. With the capriciousness of the large funds, the volatility of this market
in thin summer trading conditions, it makes recommendations difficult. Although I remain bearish,
I am cognizant that the foolish funds could drive prices well higher before they cascade lower.
Selling way out of the money calls is the only sensible trade I can imagine. Call our offices for
specific recommendations.
PLATINUM RECOMMENDATIONS:
Expected trading range $800 to $855
Prices seem rather strong here, and if gold and silver decline, then it is likely that platinum will as
well. I really don’t want to get short this market, so we will wait for a buying opportunity later. I am
still looking for the $780’s for purchases.