For markets of March 24th

General Comments:

Perhaps the most stunning commentary on the commodity markets is that as of last evening, the widely followed Reuter's-CRB Index had reached 23 year highs, not seen since 1981. Accelerating global economic recovery combined with 45 year lows in interest rates, and massive fund participation have pushed commodity prices to lofty levels. It is most illustrative, from a economic viewpoint, to note that back in 1981 these markets were driven primarily by monstrously high levels of inflation, accompanied by equally lofty interest rates, And now, the exactly opposite financial considerations have again pushed the commodity markets to almost record prices. And yet, most analysts still foresee further gains across the commodity complex.

The precious metals had another stunning performance last week, with gold rocketing higher by $17.10, with silver up another 50 cents, as the speculative crowd continues to pile into these markets. While the gold market seems to be trading in rather "normal" trading patterns, silver has been totally wild. Last Thursday, May Silver on the Comex rallied 22 cents, only to fall 22 cents, in about 10 minutes of trading. Volatilities have been frightening, as the large funds throw their weight around like an 800 pound gorilla. Platinum, on the other hand, was down about $17, as further signs emerged that the fundamentals of this market are slightly deteriorating.

One of the most significant bullish influences in the gold market over the past years has been the "dehedging", or the repurchase of formerly sold gold, by producers. This has been a most supportive influence as producer buying has largely overshadowed virtually all other demand sources, with the exception of jewelry. Due to recent consolidations in the industry, it is now expected, as per GFMS, that such buying will accelerate in 2004, even though prices have risen sharply over last year. The noted consultancy said that they expect between 11 and 13 million ounces will be shaved off the global hedge book this year. They also expect that producer hedging, usually demanded by lenders as a requirement for funding, may fall to 2 million ounces this year from the 3.5 million ounces added to the hedge book in 2003.

Another fairly supportive data point is that the costs for mining gold have risen VERY sharply over the last year, up some 25% by the reckoning of the World Gold Council. Cash costs rose to $235 per ounce in the fourth quarter, compared to $188 a year ago. In South Africa, due to the strength of their currency, cash costs rose to $295 per ounce from $197 year on year. Such information goes a long way in explaining why the stock prices of many of the gold producers have lagged the surging gold price of late. But, such narrowing margins for the producers also has the potential for a decided negative, the reintroduction of hedging and forward selling to preserve profitability. Since hedging is now such a dirty word, that is rather unlikely in this environment.

Then add to the equation that India, the largest global demand center for gold, enjoying a very good monsoon season, which enriches the largely agrarian populace, and with the Indian "wedding season" upon us, gold looks to be very well supported at or near current price levels. While gold's day to day fortunes have been largely confined to following the USD, I would believe that EVEN IF the Dollar stages a rally, which many analysts consider unlikely, I would think it very unlikely that based upon the fundamentals, that gold can get below recent lows in the high $380's.

The strength of the gold market has been evident over the past few weeks, where it has been rallying against almost all currencies. But, and a most important but, this has occurred during a time when the USD has been generally rallying. So, in other words, gold has fallen LESS than the foreign currencies, not a totally convincing argument that we are on the verge of the second leg of the bull market in gold, one in which gold rises against all, or most, currencies. My view of gold is that we are still in a rather well defined trading range of perhaps $380 to $430, with the bottom support holding even if the USD rallies mightily.

Silver, on the other hand, is most vulnerable to a sharp sell-off, as this "darling" of the large speculative funds, and numerous small speculators, have pushed this market quite near 6 year highs, to levels simply not justified by the fundamentals. Open interest, the number of contracts now outstanding, has reached almost 127,000, a level not seen since April of 1995. It is clear that this market is totally dominated by speculative excess. This is not to say that I am bearish on silver, quite the opposite is true. In a market as thin as silver, the funds can, and will, take prices wherever they wish, and for now, that looks to be higher. We have not seen these price levels since Mr. Warren Buffet announced his purchase of 130 Million ounces in 1988. And, I think it illuminating to note what then occurred, over the following year, silver prices fell from the $7.80 price to under $5 yet again. It does seem that every five to 10 years we have a silly rally in silver, only to retrace it completely. But, short term, it still looks to go higher.

The platinum and palladium markets seem to have totally decoupled from the gold and silver markets and are trading on their own dynamics. It would appear to me that the fundamental demand for platinum is still healthy, and although the speculators are a major force for short-term movements, current price levels appear to be justified. Platinum jewelry demand in China (down 19% year on year) is waning, but catalytic demand in Europe is escalating as diesel engines gain favoritism. The real key to the platinum market lies in the value of the South African Rand, and the Yen. If the Rand declines in value, then the mothballed expansion plans of the producers there may restart, providing the supply demanded by the market. And the value of the Yen is a most deciding factor as to whether the Japanese public are speculating from the long side or the short side.

Palladium has staged a fantastic rally over the past months, and still appears to want to go higher. Fund buying is most evident in this market, but the "players" appear to be long-term oriented.

Now that the Washington Accord has been resigned, with both France and Germany now formally appearing as sellers, there is ongoing debate over what to do with the proceeds of the sale of gold from their reserves. Bundesbank president, Ernst Welteke, was quoted as saying that the Bank had a "clear position" that gold sales should not be used to fill the budget holes, while a legislator was quoted by Bloomberg as saying "we don't need the Bundesbank's gold reserves any more - we should use it to reduce the country's debt". The Central Banks of both nations favor creating a sort of trust fund from the proceeds, where the interest received would be gifted to aid research. It is also amusing to note that while Switzerland has sold virtually all of its 1300 tons authorized by the first Washington Accord, they still haven't agreed on how to spend the proceeds. And so far, all the sellers over the past years have been on the wrong side, not that unusual for the supposed market timing of Central Bankers.

Commitment of Traders reports, as of March 16th, both futures and options:

During the reporting period, the gold price was just fractionally lower as open interest rose by over 21,000 contracts. As has been the customary tendency, large specs were the buyers with the short commercials taking the other side of the trade. An interesting question is why the long commercials added mightily to their positions, at a time of year when this rarely occurs? Nevertheless, one can sense that with gold prices above $400 during the relevant week, physical demand tailed away, unlike the fundamental picture seen the week before, when short commercials were buyers of futures as they sold inventory. While the gold market remains VERY well supported, I see it as a trading range, and we will need aide from either the equity markets or a continuing fall in the USD to make substantively higher price levels possible.

Silver prices were virtually flat during the reporting period, and there seems to have little change in the ownership of contracts. Mostly, some of the large specs got bored and liquidated a small percentage of their holdings, pawning it off on the small specs, who, for once, were dead on correct. The ratio of long specs to short specs is still about 6.5 to one, historically monstrously one-sided. The real vulnerability is that IF the long specs decide to get out quickly, or at once, just who do they sell it to? Certainly not the short specs as they far outnumber their counterparts. But, such dangers have existed for a while, and prices still look to go higher, in a most dangerous fashion. As I said last week, history shows us that this rally will end badly, as THEY ALL have in the past, but does it falter from $8, $10, $12 or even higher?

GOLD RECOMMENDATIONS:
Expected trading range: $403 to $426

Short term traders should be playing the range lets say buying near support at $405 or so, and selling as we approach $420. Near term support also exists at about the $415 range. Unless the USD makes a convincing new low, I think gold is a fairly good sell at the top of the range. Continue to expect vicious and violent movements within these boundaries. At this point, I am neither bullish nor bearish on gold; I continue to expect range trading.

The USD movements will continue to dominate all influences in this market. With adequate evidence that the gold market is VERY well supported at lower levels, selling out of the money puts seems most prudent at this time. I really like the June 380 or May 390 puts, and would be rather aggressive selling these options. Call our offices for specific recommendations for your account.

SILVER RECOMMENDATIONS:
Expected trading range: $6.80 to $7.80

Volatilities are incredible high as the funds throw their weight (and billions of dollars) around. This is not a market for the feint of heart as last week we saw prices move over 10%. From a very short term trading perspective, look to buy silver at about $7.50, use a 10 cent stop, and pray vigilantly. This strategy appears dangerous and should only be taken by those clients with risk tolerance.

My sense is that it is best to have very small positions in this market at present. Anything can, and will, happen. Probably, though, silver will simply follow, in exacerbated fashion, what occurs in the commodities markets in general and is, of course, at the whim and caprice of the large speculative funds that hold nearly record long positions. As per the Commitment of Traders reports, speculators now hold long positions worth almost one years total global production. If some external influence discourages the large spec funds, I assure you that they will have no one to sell to. Things are way too dangerous in this market, but I would be a buyer, against technical support levels, with very close stops on small positions. Sorry, but I cant come up any option strategies that make much sense at present.

PLATINUM RECOMMENDATIONS:
Expected trading range: $880 to $920

Again, as this market is dominated by the large specs, there does exist the chance of a sharp sell off. But, I have no idea of what to do here. There is no rule that says I have to play in a market without a clear picture of where it may go.