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Market Commentary

For markets of December 15th

CLOSES INDICATIVE LEASE RATES Based upon 30 day maturities
DEC GOLD 410.10 GOLD .00/.50%
MARCH SILVER 5.64 SILVER .50/2.00%
JAN PLATINUM 810.90 PLAT 5.00/12.00%

General Comments:

Having written most of my weekly commentary on Saturday morning, I was forced to trash it completely on Sunday morning as news of Saddam's capture was splashed across the screen. While the tangible benefit of his capture, alive, has little to no benefit or detriment to the financial markets, the psychological rapture of the US achievement should have great import. And, markets are, in their very essence, almost purely psychological with fundamentals such as supply and demand just stoking the imagination and interest. Look for the USD to react positively, look for the precious metals to fall in concert, and perhaps look for a continuation of the rally on Wall Street. But, also look for these movements to be relatively short-lived as investors/speculators begin to realize in the coming days, or weeks, that his capture does not really change all that much in today's turbulent political or economic dynamics.

If (and that's a very if) the markets act as predicted, precious metals prices should decline as the USD rallies, and another opportunity to enter the market on the long side should arise. It is difficult to ascertain just how sharply the precious metals will fall, but it could be anywhere from moderate to completely vicious. As the technical indicators have been quite negative in the recent weeks, screaming that the USD is due for a counter trend rally and that the precious metals have been overbought, the most logical forecast is for the USD to rally sharply and gold and silver to cascade lower. Happily, clients of the firm are more-or-less flat both of these markets, having reduced upside exposure as per our recommendations these past few weeks. Unhappily, clients of the firm are still short the USD, with significant gains marked to the market as of Friday. The next few days should be fascinating.

As expected in previous commentaries, the gold market had a difficult time of it last week, even with the Euro streaking up 1% for the week. Several attempts to continue the rally north of the $410 price level in the February contract were thwarted, and prices closed the week up $2.80. This market continued to be dominated by the influence of the foreign exchange markets, but, as thought, underperformed as large speculative concerns turned sellers probably due to end-of-the- year concerns. I continue to fear large scale speculative liquidation of existent long positions, and the news that Saddam has been captured alive may be the spark to this fire.

Silver prices rose by 15 cents for the week, plumbing heights not seen since 1999. Even without the breathtaking news from Iraq, I would expect prices to decline, and perhaps sharply, due to the release of news in regards to Chinese exports of silver in the coming year, and newly divulged, and very bearish, information regarding their production. As per Reuters, the Chinese government is expected to issue export permits for silver on December 15th for 3,050 tons, up from 2,200 just last year. While the additional sales of yet another 27 million ounces of silver is certainly not welcome news for the bulls in this market, what is most distressing is that this trend looks to continue, and perhaps accelerate. Just two years ago, the Chinese produced 2000 tons per annum, and now smelters in that nation are pushing out 5,000 tons per annum as a byproduct of zinc, copper, and lead. With internal demand in China estimated at just 1000 tons per annum, this leaves enormous room for adding, and increasing, physical sales of silver. With the global demand for silver in photographical use dropping by 4% per annum, the scales are now becoming heavily weighed against further rallies in the silver price.

On the other hand, if silver ever sheds its predominant disposition as being an "industrial" metal, if investors and speculators one day see it as a monetary asset, much akin to how they see gold, then this market changes dramatically. Please note that the Chinese sales total just about $550 million dollars per annum, a paltry sum IF investors are interested buyers. But, we have not seen much of that recently with the recent rallies pushed by speculative interests only. The heart of this market, the supply/demand fundamentals, is preaching extreme caution amidst an environment of oversupply. I am quickly becoming a rather large bear in this market with silver prices north of $5.60 per ounce.

Platinum was up almost $29 for the week, pushing to new 23 year highs, as speculators continue to buy even as prices go higher. The fundamentals for this metal are, and have been, truly superb as supply deficits are seen continuing for years, while demand appears to continue unabated. But, one wonders just how much higher they can go, from a practical level. There is an old cliché among experienced traders that "the cure for high prices is high prices". To quote Mr. Nick Moore, global head of commodity research at JP Morgan, "there is a fear that platinum .... simply prices itself out of the market". In other words, high prices promote added supply and curtail demand. This has not been the case with platinum prices over the past years, but getting long this market at these lofty levels is rather uncomfortable. I do expect that platinum will be sharply lower Monday, sliding as the other precious metals decline.

Palladium was up over $9 for the week, still within its well traveled trading range of about $190 to $215. While historical precedents would argue for higher prices for this metal, it has yet to prove it's meddle (pun intended). The market has to tell us that it wants to go higher, and it hasn't voiced such intentions as of yet.

The new ETF (Exchange Traded Fund), backed by the World Gold Council, and now trading on the London Exchange, has surpassed all expectations in its few days of trading. Almost 500,000 ounces of gold were bought on its opening day on December 9th (with gold trading near $410). Nearly 219,000 traded the next day and 26,000 ounces on Thursday. Certainly there was considerable pent-up demand that exhibited itself immediately upon the launch of the product, but, we will need to see what occurs in the coming weeks. But, so far, I am rather impressed, but still skeptical of continuing success.

GoldCorp Australia also reports record high investor interest in gold, both in their AAA rated storage programs and a "security" that trades in Australia, which is a proxy for gold. The Shanghai Gold Exchange is also growing, having traded 23.5 tons of gold in November. As other venues appear, the LBMA in London continues to post lower numbers in the movement of physical precious metals. It is still clear that investors/speculators still favor the futures markets, or derivatives, rather than traditional access.

I was amused by the reports of a Canadian gold producer, Goldcorp, who after screaming to the market that "gold was money" (no, they said it was better than that), and having built up a stash of some 270,000 ounces of gold from their own production and purchases in the market, decided to sell all of it into the market. Certainly they, and their stockholders, benefited from their market "play", as they appear to have sold the gold quite well. But, the message that they should have voicing is that gold is cheap at some level and expensive at another. In other words, a trading market. No surprise.

On to the Commitment of Traders reports, as of December 9th, both futures and options:

Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec
141,727 15,031 124,265 303,473 79,130 26,619
-3,729 +1,603 +1,923 -2,834 +3,683 +3,110

During the relevant week, gold prices were up some $5 as open interest increased by an additional 11,000 contracts. Significant changes in the ownership of contracts are hard to find, as the statistics above exemplify. With the capture of Saddam this morning, the most relevant ratio is that long specs held 220,000 contracts against 41,000 contracts held by short specs. This ratio of 5.4 to one MAY have profound meaning when the inevitable selling in gold begins on Sunday night, as the USD rallies. I look for gold to do much worse than the Dollar, i.e., if the USD falls 1%, look for gold to fall 1.5 to 2%, or worse. Clients of the firm are mostly flat this market, and I look to be an aggressive buyer on this decline, to reestablish significant long positions. Recommendations will follow.

Long Speculative Short Speculative Long Commercial Short Commercial
54,132 3,574 18,106 95,398
+3,621 +833 -3,170 -833

Unlike the gold market, the large long specs were buyers of silver during the week, pushing prices up some 13 to 14 cents. With the news, look for silver to get punished in the coming days, as the specs will be aggressive sellers in a very thin market. This could get real ugly, and fast. Again, clients of the firm are virtually flat, and I would look to reestablish long positions at much lower levels. The fundamentals have changed in this market, pushing me more and more to the bear side.

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

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