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Market Commentary

For markets of November 17th
CLOSES INDICATIVE LEASE RATES
Based upon 30 day maturities
DEC GOLD 398.00 GOLD .00/.50%
DEC SILVER 5.415 SILVER .50/2.00%
JAN PLATINUM 770.80 PLAT 2.00/7.00%

General Comments:

After consolidating their recent gains two weeks ago, the precious metals rocketed higher this week with very outsized gains, eclipsing even the decline of the USD which has been the predominant influence upon this market. Gold prices gained $14.60 on the week to reach new 7 new highs, and flirted shamelessly with the magical $400 price level. All of the buying was most speculative in nature, and was concentrated in New York, where virtually ALL of the price increases, or declines, now occur. There is no surprise to readers of this commentary that the market is now completely dominated by speculative forces, but, as we have been alluding over the past months, the very nature of such has been changing. To quote Mr. John Reade, of UBS, "Previously, typical gold investors would have been looking at the next 10 days or the next $10, thats not the case now". In other words, speculators have now become investors, looking past the short term into the future, and have become more committed to their positions than previously. This is easily seen in the large accumulation of long positions, by both large and small speculators, on the exchange and that the market has not been able to shake them out of the market despite some really vicious declines in the last few weeks.

Their commitment to this market stems from both superb and compelling rationale. The USD has fallen some 23% since the beginning of 2002 (gold up 36% in this timeframe), and is almost universally thought to be going lower longer term. While the equities markets have remained rather robust during these years, the fact is that stocks, in general, are still lower, and many analysts foresee continuing declines. Over the past year, this commentary has been warning of the onset of inflation due to the soaring creation of money by the Fed, the shockingly high twin deficits currently being incurred, and projected into the coming years, by the USA, mixed with the lowest interest rates in 50 years. And on Friday, we finally saw the monster come home to roost. The October Producer Price Index rose by .8%, over 10% per annum. Blend in the rather frightening geopolitical condition, what with greater fears of terrorist activities and a seemingly failing US mission into Iraq, and one has all the reasons in the world that the gold market will continue its march to higher prices. Rule #1 in any investor's handbook must be, "the trend is your friend", and so the secular long-term bull market in gold continues, for very good reason.

The silver market had a massive rally last week, up some 35 cents, as speculators dived in en masse. We have been looking for such a rally for a while now, and it is heartening to now have our long futures positions showing such tasty gains. The silver market is much thinner than gold, it has been largely ignored over the past years as gold has shown its strength, and just a bit of speculative fervor was enough to catapult prices higher. Please note that the hard-core fundamentals do not justify the current price in silver, but as in gold, it simply doesn't matter anymore. Silver is becoming MORE of a precious metal, transforming into its historic role as gold's ugly sister, and its fundamentals as a pure industrial metal are being ignored. Over the past several weeks, silver prices have followed gold, almost slavishly, and this must be considered a major benefit to the silver bulls. Look for this trend to continue, look for this correlation to strengthen as time passes. As noted above, the trend is your friend.

Platinum, the former star of the precious metals, underperformed last week but was still $10 higher. As usual, the close correlation between the platinum price and the value of the Japanese Yen continues, with both rising sharply since September 1st of this year.

As Tocom remains THE market for platinum, as both Japan and China are the largest demand centers globally, it is apparent that the value of the Yen has much to do with setting current prices. Palladium was largely ignored last week, falling by $3.50 per ounce. These two markets are rather quiet, awaiting the announcement of Anglo Platinum as to its revised production forecasts in late November, and Monday's Johnson Matthey Platinum 2003 Review, which will discuss, in depth, the supply/demand criteria for these precious metals.

As an overview, for the coming week, I feel that we are dancing, blindfolded, on a fence. We are seeing VERY critical technical levels in many markets. With the USD virtually at new lows, with gold prices approaching the very significant $400 price level, I have this gut feeling that we could fall off the fence in either direction, and that next week could see fireworks with increasing volatilities. IF the USD holds its lows, and if gold soon fails to surpass $400, I would guess that the large speculative funds would begin to quickly cover their outstanding positions in these markets and prices could sharply reverse. But, if the USD makes new lows, and gold moves convincingly over $400, I would envision that the funds will become emboldened and increase their positions. For some reason, I feel that we are at the breaking point, and that the coming price movements could be vicious, one-sided, and volatile. As uncertainties are now higher, trading strategies must change, and recommendations follow.

Haliburton Mineral Services and Virtual Metals last week released their eagerly awaited Gold Hedging Indicator, portraying the activities of the majority of the global gold producers in their derivative activities. As you might fully expect with the continuing sharp rise in gold prices, gold producers reduced less of their outstanding hedge books in the 3rd quarter of 2003. About 2.3 million ounces were shorn off the industry's forward commitments, versus about 4 million in each of the previous quarters this year. We now stand at 2,226 tons of gold sold forward (delta adjusted for options) versus the high seen in the third quarter of 2001 of 3,536 tons, or about 1/3 of all the gold sold forward has either been delivered into outstanding contracts or repurchased by the gold producers in just two years.

There can be no question that such buying, or lack of new selling, by the global gold producers has been of tremendous support and importance to the bull market in gold. What remains hotly contested among analysts in the industry is whether or not investor or speculative interests will rise to the occasion and pick up the slack in actual demand. So far, hope remains intact as gold prices rose some $26 during the third quarter even as gold producers were paring back their repurchases of gold. While many prominent analysts furrow their brows, worrying what the future may bring, I find it much more promising to look at the facts, to analyze the trends, rather than to postulate on the future. Remember the first rule; the trend is your friend. And so far, the diminution of buying by the gold producers has made little difference.

(ah..well. Just a little note about the first rule of trading. It also has a nagging sister which states that a trend is a trend until it stops being a trend. But, well...this commentary seems way more convincing if I just don't mention it. But, truth be told, odds favor the continuation of a trend once started, so perhaps we can just ignore the improbable. Well, maybe.)

As a proof that physical demand for gold, both industrial and jewelry, is no longer important, please note that Gold Fields Mineral Services, a most respected fundamental analytical firm, reported that demand fell by 1.8% in the first half of this year to 1,509, to its lowest level since 1994. And yet, gold prices managed to close higher for this period of time. As noted in previous commentaries, it is imperative for a trader, or an analyst, to recognize what is important and what is immaterial and, now, as has been the case for months, all still depends on the speculator/investor in the gold market.

On to the Commitment of Traders reports, as of Nov. 11th, both futures and options:

GOLD
Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec
129,142 16,047 134,757 295,420 72,171 24,603
+4,580 +4,348 +8,540 +10,264 -2,046 -3,538

With open interest rising by about 21,500 contracts, with prices rising over $8 per ounce (a classical bullish signal), most of the net buying was being done by the long commercials, which must be considered, to a large extent, a seasonal or cyclical phenomenon as jewelry concerns lock in their prices for the coming Christmas season. Short commercials continue to increase their positions demonstrating the ill health of the actual physical gold market (not that it matters all that much anymore, as noted above.) Speculators, large and small, just sort of batted the ball around a bit. In fact, speculative buyers or sellers added just 1,724 contracts net. The ratio of long specs to short specs remains at about 5 to 1, rather high historically but well off the extremes seen just several months ago.

I prefer not to make too much of the statistics above, as I would believe that the externals, not the internals, of this market now are much more important. If the USD makes new lows, if the gold market does convincingly break the magical $400 price level, things will rapidly change. And, as noted above, if the reverse happens, things will rapidly change. Recommendations will follow.

SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
32,883 3,722 23,813 81,084
-671 +326 -475 -790

Its best to just forget the numbers above, as the market has changed dramatically since the end of the reporting period, last Tuesday. ALL of this week's massive 35 cent move occurred on Wednesday, Thursday, and Friday, making the above statistics worthless.

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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