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Market Commentary

For markets of April 5th

CLOSES INDICATIVE LEASE RATES
Based upon 30 day maturities
JUNE GOLD $422.50 GOLD .00/.50%
MAY SILVER $8.155 SILVER .50/2.00%
JULY PLATINUM $896.80 PLAT 5.00/12.00%
JUNE PALLADIUM $305.95    

General Comments:

Although the end of week results were mixed, the precious metals continue their speculative driven rally, with gold reaching 16 year highs, and silver achieving 17 year highs. The precious metal markets have taken on an independent life of their own of late, quickly divorcing from the recent historic influence of the USD. The Euro is down some 9 cents from its high, the USD Index is up some 5% from its low, and the march to higher prices has continued regardless. Such market action is most bullish, as now the precious metals are rallying in ALL, or most currencies.

While the gold market saw new highs during the week, it was sharply knocked back on Friday when the Labor Department announced a truly "blowout" number on job creation in the USA. This resulted in a sharp sell-off of $10 at the lows, to close the week down by only 70 cents. Silver, which has become even more speculative, even more illiquid, and even more dangerous than before, was completely undeterred as more and more speculators continue to chase momentum, was up 44 cents in a most wild fashion. Just on Friday alone, in the course of just 3 or 4 hours, this marker traded to a high of $8.50, only to fall to $7.935. This market has become a most " public" market and most professional traders have exited and seem content to just watch the insanity.

This week also saw some sharp volatility in the platinum and palladium markets when Umicore announced that it had developed new technology allowing the partial substitution of palladium for platinum in catalytic converters for diesel engines. While the reality of such fundamental news may take months or years to develop, speculators quickly dumped platinum (down some $7 for the week) in favor of palladium, up some $15 for the week.

While I have often commented that markets are much more about perception than reality, I have not seen the precious metals markets more nervous than the past week or so. Every flutter of new information, new stimuli, moves these markets mightily. The Commitment of Traders reports below will show that speculative interest in both gold and silver are AT RECORD HIGHS, and I sense that while these markets may indeed go higher, both remain very vulnerable should the long speculators decide to exit.

A significant underpinning of the commodity markets these past years has been the remarkably low interest rates (at 45 year lows) mandated by the Federal Reserve. Investors and speculators have naturally shunned conservative and time-honored practices and have been racing after gains elsewhere. Now that job creation in the USA is turning around, it appears that the market now believes that interest rates will be rising, and much sooner than was formerly thought. IF this perception begins gaining currency, my sense is that it will take the wind out of the sails of this current leg of the secular bull market in commodities in general. While the precious metals have performed most admirably in the market environment of the past years, I strongly believe that the combination of a stronger USD and rising interest rates just may be enough to puncture the bubble. My belief is that Friday could have been a "watershed" event, that it could have marked the "turn" in the perceptions of the market. The next few days will tell us what the market wants to do. If the USD continues to rally, if the precious metals show signs of weakness, I would strongly recommend following that trend, as these markets could retrace a great deal of their gains.

The risk is now to the downside in the gold, silver, and platinum markets and any show of weakness should be followed by astute traders. I would NOT be a buyer on dips in the current market, but would be a seller, as the cascading momentum of speculative selling just may create downdrafts in the markets equal to, or greater than, the momentum recently seen on the way up. As mentioned, we will see over the next few days. It is possible that the markets may completely ignore the intrinsic perception that higher interest rates are soon upon us, and may continue to rally even higher. But, two to three days of lower prices in the precious metals may be all that we need to convince the enormous number of speculative forces in the markets to give up their long positions.

Another flashing warning sign for the silver market occurred last week when lease rates began to rise some 40-50 basis points. While some analysts may see this as a bullish phenomenon, I see it as signaling some producer selling in this market. It is not clear if such selling, even if it is occurring, will be enough to turn the speculative fervor of this market. Another nasty data point is that from a technical standpoint, gold prices were set back, once again, from the $430 technical resistance level, giving us what appears to be a rather strong "double top".

The Reserve Bank of India has recommended to the government that it should allow the export of gold bullion, should it become necessary to balance the supply of gold in that nation. I do not see this as a negative in any way, just a further liberalization of the Indian marketplace. India is already a very major exporter of finished gold jewelry, and currently, there is little to no need to export gold in bar form.

There is also a continuing hope among some gold bulls that some Far Eastern Central Banks, notably China and Japan, will inevitably turn to gold with their huge cache of USD as reserves. As of yet, this simply remains a hope, and far from inevitable. Although the percentage of gold reserves held by China and Japan is rather meager compared to their European counterparts, it must be noted that on a absolute scale, these nations have the eighth and ninth largest holdings. Yes, there has been rumblings that the Japanese are considering such moves, but naught has come to it as of yet. If anything, I would believe that the recent resigning of the Washington Accord has made the possibility more remote, as these institutions now see how difficult it is to offload a serious amount of this metal.

On to the Commitment of Traders reports, as of March 30th, both futures and options:

GOLD
Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec
164,385 16,744 125,462 333,414 79,497 19,185
+14,404 -6,428 -8,329 +11,935 -7,890 -7,322

Gold was up almost $2 during the reporting week, as open interest declined by just a hair. Large long speculative funds added almost 10% to their positions, accommodated by hedge selling from the commercials. Large short specs covered 25% of their positions as prices edged higher. Not only do we have RECORD long speculative interest in this market, but a more dangerous signal is the ratio between spec longs and shorts, which now rests at 6.8 to one. There is no question that this market remains vulnerable to the downside IF the longs are encouraged to exit the market. But, while I remain very moderately bearish on gold at this point in time, I do not see the possibility for carnage. While the technical support at $415ish may not hold, the low $400's should prove strong.

SILVER
Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec
67,466 2,073 15,939 112,901 48,745 17,176
-1,305 -2,099 -997 -1,536 -703 +630

SILVER Long Speculative Short Speculative Long Commercial Short Commercial Small Long Spec Small Short Spec

Silver was up by just 7 cents during the reporting period, and open interest declined very marginally. There was little change in the ownership of contracts on the exchange, and it seems wrong to make too much of such small changes. My comments above indicate my preferences in this market. This market can go very much higher should the specs continue "loading the boat", or it can plummet if they want out. Once every 10-20 years this market has a really enormously stupid rally, only to get completely devastated. Odds greatly favor a repeat of history, but it is almost impossible to call the turn. This market SHOULD go lower, but the current bout of irrationality can last longer.

GOLD RECOMMENDATIONS:
Expected trading range: $410 to $424

If the USD remains strong, and the bond market continues its declines, I would be a seller on any sharp rally. For day traders, look to sell against $422 to $424 and look to reverse the position as we approach technical support near $415. Let us characterize this market as a trading range with a definitive bias to the downside. However, should gold get convincingly over $432, I would be a buyer, and in size.

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: $7.50 to $8.50

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 volatilities are enormous. This market makes the term "irrational exuberance" sound like complete boredom. This is now a public market, a classic mania that may or may not continue. There is no mainstream analyst who can justify current levels from a fundamental consideration of supply and demand characteristics. But insanity can reign for longer than you may think. Our last recommendation of buying silver at about $7.50, with a 10 cent stop, worked fabulously. If still long, I would recommend exiting. The only strategy that makes any sense is to sell, very lightly, on a close under $7.93 in the May Silver, and exit if the market if at all higher the next morning. We will attempt to catch the momentum lower, if it occurs. No option strategies appeal to me at the present.

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.

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. This market appears to be tracing out a top, with a most definitive trading range of $880 to $915 basis the July contract. I would be a seller of a close under $880 with a $10 stop.

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