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Market Commentary

For markets of November 10th
CLOSES INDICATIVE LEASE RATES
Based upon 30 day maturities
DEC GOLD 383.40 GOLD .00/.50%
DEC SILVER 5.058 SILVER .50/2.00%
JAN PLATINUM 759.00 PLAT 6.00/11.00%

General Comments:

All in all, the precious metals markets continued their recent pattern of consolidation, with prices in gold, silver, and palladium continuing to careen from what appears to be superb technical and fundamental support levels at the bottom of their now well-worn and well-traveled trading ranges, to their tops of the trading ranges, where substantial liquidation of long positions decidedly prevents any further price rallies. Although gold prices closed down only $1.30 for the week, prices visited $377.50 (basis the December Comex contract) three times during the week, only to see $384 four times during the week. It was a short-term traders delight, buying the dips and selling the rallies.

As noted in previous commentaries, I would imagine it is going to be quite difficult for gold prices to surpass the $400 price level shortly, due to the very internal composition of the market. This market is very heavily long spec at this time, and as such, on each occurrence when prices rally near technical resistance at $390, or slightly over, large scale selling occurs as speculative forces are pleased to take profits. While global physical demand seems to be improving, this demand acts more as a "floor" to the marketplace, rather than the driver of rallies. Physical buyers of gold tend to buy dips in the marketplace, rather than chase rallies which seems the exclusive stratagem of the largely momentum driven large speculative funds. "Real" long term investment in gold is still largely absent from the market, as most of the buying is in futures and options, a very highly leveraged bet.

I would believe that the gold market would require an "event" for prices to blast through the $395 to $400 price level in the next few weeks. Such an occurrence could be either political, or economic in nature. Without a screaming political event that simply forces the buying of gold as a " safe haven", without a decided economic happening such as a major decline in the USD, or a very shocking downward move in the equities markets, I am rather confident that we will continue to see a continuing consolidation in this market, although with substantial volatility. Yes, longer term, the gold market does continue its secular bull market and higher values will be seen, just not shortly.

Although I can not prove my following statement, it would appear that, as months and years now go by, that gold is becoming more of a "currency", more of a monetary instrument antithetical to the USD and other fiat currencies, rather than just a "commodity". This transition, a basic change in its perception by the market, is by definition quite gradual, and can seen most clearly by the reminder that straight fundamental analysis of supply/demand characteristics no longer are that valuable in forecasting this market. The gold market price is being set, more and more, by the speculative/investment crowd, rather than the actual producers and consumers of this commodity. Gold now moves more and more in line with other financial price movements, negatively correlated to the USD, and less in line with its inherent fundamentals. This perceptional change is critical to support the ongoing bull market, as ground floor investment interest must emerge, in size, to offset the deteriorating basic fundamentals of this market.

As global jewelry demand wanes due to the recent sharp rise in the price of gold, as producer " de-hedging" naturally and normally declines as prices continue higher and the global hedge books become thinner, the ongoing bull market is dependent upon the emergence of ground floor investment interest. The rally seen over the past year has been created by the large speculative funds, trading futures and options, and the truism that such players are little committed to this market long term worries many analysts.

But the very most important consideration to the gold market is, and must be, the value of the USD. If a commodity is priced in USD, it has been rising, as the USD falls. Let's look at some comparisons, from around 8/25/2003 to about 10/25/2003.

USD DOWN 7%
CRB INDEX UP 7.8%
GOLD UP 4.6%

While we see the gold lagging a bit, the correlation between the value of the USD and commodity prices, IN GENERAL, remains quite high. This makes perfect sense as commodity prices must rise in a global sense as the underlying unit of measure deteriorates. And, speaking of the CRB Index, the following chart of the USD Index seems to indicate that we may see a re-test of the recent lows.

As such, odds favor the current trend of higher commodity prices, and will continue to be most supportive of the gold market. As noted, it is not so much a rally in commodities, but a decline in the USD that is the driving force in current markets.

Speaking of the USD, on October 27th, a senior analyst at the IMF stated that the current account deficit of the USA was forecast at 4% of GDP in 2008, and "that is only slightly lower that this year's 5% of GDP, leading to a continued and unsustainable build-up in the US net external liabilities. Clearly, further adjustment in the USD will be needed to achieve sustainability and the only question is how it will be attained" (emphasis ours). There you have it, as clear as day. Global institutions and Central Banks fully expect the USD to continue lower, as it must. And as such, commodities, and especially the precious metals, should continue higher, over the very longer-term.

Last week, the silver shadowed gold slavishly, in highly predictable trading ranges. Basis the December contract, it traded at $4.95 every day, and then rose to $5.05 or better on four days out of 5. It would appear that the underlying forces moving gold prices, the ebb and flow of speculative interest, are also endemic in this market as well. It seems rather safe to forecast that such a close marriage between these two markets will continue and that any potential rallies in silver depend upon the same in gold.

Silver bulls breathed a sigh of relief last week when a film industry expert commented that photographic demand for silver should remain almost flat in the coming years, even though digital cameras threaten historically important demand. Don Franz, editor of Photofinishing News, stated that use of film in photography is declining at an 8-10% rate in the USA, a couple of percent per annum in Europe, but is growing at a 10-15% rate in China, India, and Russia. While the silver bulls coddle up to such rosy predictions, please note that one industry authority, GFMS, estimated that silver demand from photography fell by a whopping 4% in 2002. While the jury is still out, I tend to trust the numbers from GFMS to a greater extent.

In reading the GFMS report, I was struck with some very harsh realities, mostly bearish.

(a) In "real" dollar terms, with the exception of 2001, the silver price has not been lower since before 1945. While some may see this as an opportunity in thinking that silver is incredibly undervalued, I prefer to see it as a trend, due to deteriorating demand fundamentals. Now, if silver ever "picks up a bid" due to its monetary, rather than commercial, characteristics, obviously conditions could change rapidly.

(b) Total fabrication demand fell by over 3% last year, due to a slowdown in global economic conditions, and a price related decline in Indian demand. Surprisingly, in 2002, we continued to see NET physical disinvestment by individuals. If the global and political and macroeconomic condition could not persuade individuals to buy silver, it is difficult to imagine just what would.

(c) But, at the end of the day, as per GFMS, both total demand and total supply fell by 2%, keeping a precarious balance.

It would appear that like gold, the silver price will continue to be set by speculators, using derivatives such as futures and options on the exchanges, rather than a strong base-line increase in demand. And, as such, fundamental analysis becomes of less value as it is the rationality (or should I say the irrationality?) of the investment/speculative concerns that will dominate the price movement. But, over the very longer-term, look for silver to under perform gold.

The palladium market continues to bore even those who enjoy watching corn grow as it continues to form a base between $190 and $210. Surprisingly, this precious metal did not participate at all in the recent rally in the industrial metals. Platinum, up $12.60 for the week, continues to benefit as speculators drive the price ever higher in this most thin marketplace. The sharply increasing value of the Yen has also aided Japanese demand and speculative fervor. The platinum market looks extremely overvalued, but prices could easily go higher as irrationality has been proven, quite conclusively, to have no bounds in today's financial markets.

On the Commitment of Traders reports, as of 11/04/03, both futures and options combined:

GOLD
Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec
124,652 11,699 126,217 285,155 74,216 28,141
-7,311 -2,678 +3,485 +96 -209 -1,453

As gold prices stayed within a most prescribed trading range, there were rather insignificant changes in the ownership of futures contracts on the exchange. Large speculative concerns were the noted sellers, as large short specs covered their positions. It is noteworthy that some the long commercials increased their positions slightly but this is explained as jewelry manufacturing concerns lock in their cost basis for the upcoming Holiday season. All in all, just a rather quiet week. While this market still seems rather unbalanced, as longs specs are still 5 times those of the shorts, this ratio has retreated sharply in the last few months.

While it makes little sense, my expectations for the gold market over the next week or so must include the fact that while I do not foresee sharply higher prices, I think sharply lower prices are also out of the question. Look for continued consolidation, and as such, selling out of the money puts and calls, especially those outside the current trading range may be the best strategy.

SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
33,554 3,396 24,287 81,874
-3,113 -336 -169 -2,281

This looks much like the gold statistics above, with large long speculators liquidating their positions, probably out of some sense of boredom, while the commercials were buyers. We will need to see prices move out of the current range to get some significant change in the ownership of the contracts.

Again, either play the current trading range or look to sell the options listed above. Call our offices for specific recommendations for your account as selling options is not suitable for all accounts.

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

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