For markets of February 20th

General Comments:

Last week saw yet another bone shaking rally in the precious metals as the USD continued its recent systemic weakness. News reports from the government, such as the trade deficit, and comments by Alan Greenspan only seemed to embolden the USD bears, taking the Euro from $1.25 on February 6th, to a high of almost $1.29 last Friday. As gold prices have, and are, tracking the Euro price, virtually tick by tick, prices rose by $10 over last week. Volatility was shocking even to those with decades of experience in this market, with prices carving out a $23 range from low to high.

True to its recent history, gold continues to ignore virtually all its fundamental supply/demand characteristics and continues to trade AS A CURRENCY, rather than a commodity. Price movements are dominated by the speculative crowd, rather then the actual demand from consumers or investors. Positions held by speculative forces on futures exchanges are ever approaching or surpassing new highs, and gold prices are being driven higher as the USD falls, and for no other reason. Gold traders/investors are no longer gold traders, they are currency traders, as the fundamentals which are continuing to deteriorate, cast no important shadow upon this market. During 2003, the gold price and Euro had a .91% correlation, a most telling statistic.

While gold prices were up some 17.5% in USD last year, gold rose by only .12% in Euros, basically breaking even. Japanese investors in gold actually saw gold decline in value on the basis of their currencies, while Australian and Canadians experienced none of the reverie of their US counterparts. It is most clear that gold has risen in value over these years ONLY as the USD has fallen, and only experienced by those who live and breathe in US Dollars. It is only obvious that since gold is priced in USD worldwide, and as the value of the USD declines, that ALL commodities or products priced in USD must, of necessity, increase as its "currency denominator" falls in value. It would appear that gold will continue to rally if the USD falls, and will decline if the USD rallies, plain and simple. And, no other facts appear, at this point in time, to be of any importance.

That said, logic forces us to state that gold is not in a bull market. It is not so much that gold is rallying in price, but that the USD is falling in value. Perhaps this interpretation is rather extreme, but it seems deductively forced upon us. I would postulate that gold will be in a bull market, if and when it begins to rise in price against most or all currencies. Right now, it is simply reflecting the economic reality of the decline of the value of the USD.

I find the current situation rather alarming, as it would seem that the fundamentals are no longer important to this market. It no longer matters that jewelry demand is falling rather sharply due to the new higher price ranges, it no longer matters that the positions carried by speculators are near record high levels, in fact, none of it matters anymore. Just the value of the US Dollar. I do not recall any such period in my 30 years of watching this market, and, frankly, I do not expect it to continue for long. Somehow, it seems wrong. My sense is that we are in the very early stages of a bull market for gold, only a few years past the lows, and as such, gold prices are hogtied to an external influence for its sustenance, much as the young child depends upon his mother. As the infant ages, it takes on a life of its own.

There is excellent reason to believe that as global economies and nations all "race" to depress the value of their currencies against one another through fiscal and monetary policies to gain economic benefit, that global investors, and not just those who live and breathe in USD, may begin to add their names to the gold market. If and when that occurs, that will be a true bull market, when gold rallies in most, or all, currencies.

In regards to the newly organized exchange traded funds for gold in Australia and Great Britain, perhaps their most noted lack of success in attracting business is that investors in those nations have not seen a rising price in gold on the basis of their personal experience in the currencies of their nation. Australian investors would simply have done better by keeping their assets in the Aussy Dollar, collecting interest, rather than buying gold. If that is true, then it logically flows that an USA exchange traded fund might buck the trend and be the success that the gold market has long been pining for.

Speaking of taking on a life of its own, silver rallied by 31 cents last week as speculative forces and large commodity funds continue to push the envelope. Volatility is simply incredible with prices moving some 68 cents from lows seen a week ago Friday, to highs seen last Friday. It is certainly not a commonplace occurrence when a commodity can move in excess of 10% of its value in just one week.

There is a growing "urban legend" that silver is in most short supply, where 20 years of a supposed structural deficit has depleted above ground supplies to dangerous levels, and as such, that silver prices will simply "moonrocket" higher. Such fanciful arguments are difficult to argue, as silver inventories are almost TOTALLY opaque worldwide. In the absence of definitive statistical information, it becomes easy for some analysts to assume the most extreme case and state that simply, these inventories no longer exist. It is quite similar to those who would claim that there is no sand on the beaches of the Caribbean simply because they have not visited them.

While "hard evidence" is impossible to find, ask yourself how it could be possible that silver inventories at New York Comex depositories have RISEN as the price has risen. If such a shortage exists, it logically follows that it would rear its head at all locations. Next, if silver is in such direly short supply, then how can lease rates for silver be virtually zero? While it is impossible to prove the case, one way or the other, anecdotal evidence would compel one not to be taken in by such fantasy.

The basic fundamentals for silver continue to deteriorate, with digital photography replacing some its demand criteria, with China elevating silver exports to over 3000 tons in 2004, with the supply of silver soon to be increasing sharply due to probable expansion of copper and zinc production. But, such matters have little import when the large speculative funds and traders, with their billions upon billions of USD, have the bit between their teeth and are running at breakneck speed. And there are few willing to stand in front of such a stampede. It is my conjecture that silver is "worth" much less than current prices, but such an opinion is totally worthless, as this market has historically seen some of the most egregious speculative excesses, only to return to its fundamental value, or "worth", months or years later. Further increases in the price depend solely upon the whim and caprice of the speculative funds willing, or perhaps unwilling, to continue their wild rush.

The LBMA just published their recent forecasts from the most noted analysts in the industry. Last year, overall, the analysts were entirely too pessimistic with only 3 out of 28 analysts foreseeing gold achieving its 2003 average of $363.32. And in platinum, not one analyst called for an annual average price of $688.97. For 2004, it seems their pessimism has turned to that of moderation.

So, using their average assumptions, gold is currently only $7 under their forecasted average price, while platinum and silver must fall in price significantly to achieve their estimates.

To throw my hat into the ring, dangerous that it might be, I think that 2004 is going to be a choppy year, with prices extraordinarily volatile with narrow ranges, but ending up pretty much the same as we are now. My sense is that the easy bull markets in gold and silver over the past two years, where prices rose steadily and consistently month after month, will give way to more and more insanity. My guesstimates are as follows:

My premise is based upon the fact that I believe that the USD has been oversold, and that a relief rally is well overdue. In just two years, the USD has fallen some 30%, probably already discounting the worst. While I do not see massive gains in the precious metals, I also do not see large declines. But I do see vicious, violent trading ranges, perfect for the shorter term trader.

As per Gold Fields Mineral Services, gold hedges by producers declined by 2.2 million ounces worldwide in the fourth quarter of last year, bringing the total outstanding to 69 million ounces, or 2146 tons, just about one years of new production. With gold prices at current levels, I would guess that this diminution was due to producers delivering into previously existent forward contracts rather than actually repurchasing.

After two decades of gradually selling off its national gold reserves, Canada has finally cleaned the cupboard bare. All that is left of its original 20.9 million ounces of gold is 100,000 ounces of gold coins, probably Canadian Maple Leafs, needed as inventories for its gold bullion coin program. Joining Canada and those now bereft, Norway recently announced that it had sold 16 tons of its gold bar reserves and planned to sell the rest during 2004. And speaking of national reserves, the heartbeats of gold bugs the world over fluttered when recently, Japanese finance minister Sadakuzu Tanigaki told a parliamentary committee that he would have to "carefully consider" diversifying its central banks reserves into gold. With Japan holding less gold, as a percentage of total assets, than any among the 45 largest reserve holders, such purchases could be enormous. But don't hold your breath as I would consider such purchases about as likely as the Nobel Prize Committee starting a poolside bikini contest for their honorees.

The Bullish Consensus, as of February 10th:

As seen above, three quarters to four fifths of all analysts are still bullish on these metals. We remain very close to rather dangerous levels where historically sell signals were triggered when the market got overly optimistic. But, then again, we have been near these levels for a long time, and not much has happened. Again, it all depends on the USD.

GOLD RECOMMENDATIONS: EXPECTED TRADING RANGE: $392 TO $418

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

SILVER RECOMMENDATIONS: Expected trading range $6.00 to $6.80

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

PLATINUM RECOMMENDATIONS: Expected trading range $815 to $860

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