For markets of April 19th

With speculators massively long the precious metals markets, and with the markets most vulnerable to a sharp cascade of prices, the realization that US interest rates would rise sooner than later triggered sharp declines in all the metals. Silver, currently the darling of both large and small speculators was down over 10% for the shortened week, dropping some 10%. The weekly trading range was about $1.40, and as one might expect, trading conditions were vicious and treacherous. The gold market fared little better, down some $19.30 for the week to end just over the $400 price level. The platinum group metals suffered as well, with platinum down $17.50 and palladium losing about $23.50 in value over the week.

While little changed in the fundamental supply/demand outlook, it is most evident that the price declines were simply the result of long liquidation by the oversized speculative crowd. As the USD gained just a bit, those specs who wanted to sell found that there was almost no-one to sell to, that commercial/industrial users had little interest, if any, at the then current price levels. This was most true of silver and less true in gold, where excellent physical demand was seen from India and the Far East as prices fell under the $400 price target.

The most shocking news of the week was the announcement by N.M. Rothschild that it is leaving the commodities business in its entirety. This firm has chaired the London Fix since 1919 and has been THE NAME in the gold business for 200 years or so. Their departure from the physical gold business follows other major banks and institutions such as Credit Suisse several years ago. Rothschild's blamed the lack of profitability in the commodities business as measured against its other ventures as the primary rationale for its departure.

This comes of little surprise, but of some shock, to this observer. Please consider that with the gold producers sharply cutting back on forward sales, with the leasing market in gold moribund, and with volumes declining in the physical market, profitability would be hard to come by given the competitive nature of the market. This current run in the precious metals has not been evidenced in the physical market to any great extent as LBMA clearing volumes have been steadfastly retreating, but has shown its strength in the OTC and regulated futures and derivatives marketplaces. While the physical market does less business, the speculator/investor has chose to place his bets in markets that are most cost efficient, offer superb liquidity, and are often highly regulated offering assurances that the physical markets can not provide. It is a law of nature and financial markets that markets will evolve to find the greatest efficiency and transparency, and the traditionally opaque market-making activities of the physical market are the natural victims of the continuing evolution of the precious metals markets.

There is much conjecture about who will purchase the Rothschild seat on the fix, just the second time in 85 years that such an opportunity has become available. There is even some chatter that perhaps the chairmanship may rotate among the 5 members, that perhaps the 5 will no longer meet in the offices of Rothschild and tip over Union Jacks as they agree on the fixing price, and that (God forgive!!) they might begin fixing the gold price via the telephone or by videoconferencing. It seems that the gold market, while a bit late to the party, may be entering the 21st century.

I found it most interesting that the precious metals markets took the news of a burgeoning CPI negatively, since, historically, inflation has been a cornerstone of investor demand, prompting investors to seek protection. But this time, the financial markets were more clearly focused on its effects upon the Federal Reserve and the possibility of increasing interest rates. As the huge boom in commodity prices has largely been caused by the reflationary policies of ultra-low interest rates and its subsequent revitalization of the global economy, any smidgeon of a sign that interest rates could rise had an immediate and profound effect. As noted in this commentary many times, financial markets are much more about perception than reality. Another lesson to be noted is that USD interest rates are most probably the most important factor in the external stimulus to the precious metals markets. If rates rise, or even if the market perceives that probability, the precious metals may suffer.

Another psychological negative to the gold market has been the realization that both Germany and France, traditional stalwarts of gold as a necessary Central Bank reserve and very large holders, have both announced that they are seeking to sell some 500-600 tons each under the auspices of the newly resigned Washington Accord. While both nations are having internal squabbles about the structure, and the disposition of the resultant assets, it does appear that they will be sellers, discouraging many gold bulls. While some analysts belabored the fact that the Washington Pact allowed up to 500 tons of gold per annum in sale, that perhaps that quantity would not be sold. I sincerely doubt that. Count on every ounce being sold as the European signatories line up at the counter. There is a very clear trend evident, that the Central Banks who have gold want to sell it, and that those who don't, don't want to buy it.

The noted consultancy, GFMS, this week predicted that gold could trade at the $450 price level this year, to quote "should the conditions remain right for attracting further investor interest". While such predictions seem rather conditional, it must be noted that investor participation in this market has not been as strong as one would imagine, with gold just managing to bring in $10 Billion USD of net investment, with MOST of that speculative purchases by hedge funds trading on Comex or other OTC "paper" products. They were quoted as stating that purchases of gold by institutions, high net worth individuals and retail investors has been " patchy".

Such comments only justify my observations of the gold market. A market that is still in its infancy as a secular bull. It is not surprising that the average investor has shunned this market even though it is most probably the best performing asset class over the last few years. In fact, things are as they should be, for when the man in the street begins buying gold, we will know that we have entered the last stage of the bull run. While gold has gained a greater presence in the financial world, it is still FAR from being desired by the mainstream.

The other statistics given by this important report by GFMS were rather sobering to the bulls in the gold market. Jewelry demand, which composes roughly 90% of the total, fell by 6% to 2,533 tons; it's lowest in 12 years. De-hedging, or the repurchase of previously sold forward contracts and options by the gold producers, fell by 29% to 310 tons. On the supply side, although many analysts looked for a slight decline in global production in 2003, was up marginally to 2,593 tons. Next, official sales by Central Banks rose sharply, by 11%, to 606 tons, the highest in 12 years. As the price of gold rose, the Central Banks increased sales. Lastly, for the highest level in 5 years, sales of scrap gold rose to 943, now 23% of total annual global production.

As noted above, the physical gold market is suffering even as the "paper" markets thrive on the uncertainly and fear generated by the current geopolitical and macroeconomic conditions. Even more than ever, it is the speculative crowd that is the overriding force in this market, and the willingness of the investor/speculator to hold gold, buy gold, or sell it, will determine its short-term fate. I have been singing this song for months, and the hard-core statistics justify my perspectives.

By the way, even as jewelry demand slumped worldwide, small increases were seen in both India and China, as their improving economies provided the means for gold purchases. This is a longterm positive because both nations have shown the proclivity to buy gold as their incomes rise, and prospects look superb for continuing economic prosperity in both nations.

Palladium got taken down more than a peg or two last week by significant speculative long liquidation even as the fundamentals improved. General Motors announced that it has reengineered, and most important already certified, engine catalysts containing a higher palladium loading than previously, at the expense of platinum. Such important fundamentals were simply washed away by speculative selling during the week.

Before we do the Commitment of Traders reports, something very strange occurred in the compilation of such data. For the very first time in my memory, the CFTC is publishing the statistics as of MONDAY, not as of Tuesday, presumably due to one large trader not submitting timely information. But, suspiciously, Tuesday is the day silver fell 58 cents and gold dropped some $13 in value. The changes of ownership of contracts will be obfuscated on this most important day. I have never seen this before.

The gold price was virtually unchanged during the much shortened trading week, with open interest edging up just a tad. The price devastation seen in this market occurred on Tuesday, Wednesday, and on Thursday, AFTER the time period covered by this report. As such, this data has very little relevance. In fact, no relevance. This market was most vulnerable as the ratio of spec longs to spec shorts was almost 7.5 to 1, and as projected by this commentary, prices came down very sharply when the longs decided to sell.

As this point in time, I still see gold as a trading range. There is superb support, both from a technical standpoint and from the interest of physical buyers, in the $390 to $395 price range, and good selling at $408 to $410. Look for this market to continue its consolidation. Recommendations will follow.

Again, the data does not cover the most important days, where silver plummeted in value, and is thus irrelevant. Silver prices were relatively stable during the period, and it was the large specs that were doing any business. It is rather interesting that the some large specs managed to pare off a bit of their positions at the highs, while the small specs were buyers at the highs. I guess that is as it should be.

Now that the back of this market is broken, as previously warned by this commentary, I would look for lower prices. I see no reason why we can not eventually retreat in price all the way back to the 200 day moving average around $5.50 per ounce. Look at this historically, and every serious rally has always led to a devastating decline. This market is VERY THIN, very volatile, and most erratic and should only be traded by those with a very high risk/reward profile, and even then in small size. Recommendations will follow.

GOLD RECOMMENDATIONS:
Expected trading range: $392 to $408

If the USD remains strong, and the bond market continues its declines, I would be a seller on any sharp rally to the $405-$408 range and a buyer near the recent lows at $395-$397.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 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 $7.50 (only a guess)

Now that the momentum has turned lower, I would expect it to continue. Rallies should be shallow and half hearted while declines may be vicious. There is support at the $6.80ish level basis the May contract and they may provide a respite. The speculators are STILL very long this market, and my experience screams that there is more trouble coming. Aggressive traders should be selling rallies, with very small positions. Things are way too dangerous in this market for the average trader. Please call our offices for more specific information as conditions are rapidly changing in this market. Sorry, but nothing looks good from the option side.

PLATINUM RECOMMENDATIONS:
Expected trading range: $915 to $935

This market continues to confound. We had a massive technical breakdown, only to be followed by a equally massive recovery. Then, the market made fresh 23 year highs. I would now be a buyer on dips to the $918 range, basis the July contract with a $10 stop close only.