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Market Commentary

For markets of June 7th

Based upon 30 day maturities
JUNE GOLD $391.70 GOLD .00/.50%
JULY SILVER $ 6.81 SILVER .50/2.00%
JULY PLATINUM $829.60 PLAT 1.00/4.00%
JUNE PALLADIUM $244.40    

General Comments:

As expected and recommended in last week's commentary, the precious metals did indeed fall for the week, in some cases rather sharply, even though the USD was largely unchanged for the week. In a shortened trading week, gold was down only $3.20 having rallied on Friday after the jobs report. Silver had a much more shameful showing, down 30 cents for the week as technical resistance near the $6.20 price level repelled any advances. Platinum, still dancing to music that it only hears, actually was up fractionally for the week, while palladium plummeted by $15 to rest near its technical support slightly over the $240 level basis the September contract.

All the precious metals continue to appear to be in trading ranges, consolidating after their painful losses over the past month, and recuperating after the exodus of the speculators who left these markets so quickly. Prices are being driven, almost exclusively, by the value of the USD, and especially the Euro. Trading volumes have diminished and these markets seem more "normal" than the tumultuous and volatile times recently experienced. Trading range markets offer superb opportunities for the speculator, as prices move in rather expected fashions, but are anathema to the long-term investor who dreams of ever increasing profits. But the truth is that markets are most often what they are now, and buying dips and selling rallies works splendidly.

It is clear that the "steam" has come out of these markets quickly, as option premiums have declined, especially in the gold market, as volatilities decline. The public is no longer keen to buy well out-of-the-money calls in gold, and without that stimulus, premiums have shrunk to levels not seen for many months. Investors and speculators are no longer seen certain of vastly higher price levels, and frankly, they are correct. Some reality has crept back into the psychology of these markets. Experienced professional analysts have seen the same phenomenon, as UBS AG reduced its price forecasts for the precious metals due to the fact that speculators have left the party.

A bullish influence continues to gain a foothold in the gold market in that many countries are accelerating their taxation on the mining community, South Africa being the prime culprit. Now, we have Peru initiating a "royalty" of 1 to 3% on total annual sales on metal produced in their country. Please note that this payment is due even if the company enjoys no profit. And, miners in other nations are beginning to find that obtaining licenses, or other permissions, is becoming more problematic. While such events widen the disparity between the performance of the stocks of the gold producers and the price of gold, it will on a longer-term basis assure that gold production will lag the formerly rather optimistic forecasts of many analysts. It is basic economics that as the price of the a commodity rises, one might expect more and more to be produced as more and more gold becomes economically profitable to mine. This may turn out NOT to be the case, as mining has become just a sheep to be shorn in some countries, and in others, just a "four letter" word due to environmental concerns.

The World Gold Council last week published some rather bullish fundamentals. Even with prices near recent highs, consumer demand for gold (jewelry and net retail investment) was up some 12% in the first quarter of this year in tonnage, measured year-on-year. With gold at higher levels, such demand was up some 30% in Dollar terms, a MOST impressive performance. Such a statistic flies in the face of historic precedent where higher gold prices forced consumer demand to recede due to the sensitivity of Asian, Middle Eastern, and Indian markets. With those economies flourishing, with the global geopolitical and macroeconomic conditions continuing to deteriorate, investors are buying MORE gold even as prices rise. As an example, Indian demand was up 21% in tons and up 33% in local rupee terms during the first quarter of the year as their agriculturally-based economy benefited from an excellent monsoon during 2003.

Industrial demand was strong during the first quarter, up some 8% as gold found new increasing usages in the recovering global electronics markets. Demand in Japan and Vietnam was particularly strong. Chinese demand for gold rose by 6% in tons during the quarter, with most of the increase attributed to jewelry buyers in that nation preferring to purchase "white gold", rather then platinum, which has recently gotten to price levels that seem rather expensive. Even the United States put in a favorable showing, with a 6% increase. And, even as demand for gold accelerates, the supply of gold fell by 7% in the first quarter of this year.

This week, GFMS released information that the global hedge book, gold sold forward by producers as hedges, declined by 2.7 million ounces in the first quarter. Options positions were cut by 2.1 million ounces while forwards fell by 600,000 ounces. However, as of April 1st, there were still some 67.6 million ounces of gold hedged, about 83% of one year's total global production. With stockholders wanting full exposure to the gold price, gold producers have been forced to curtail or eliminate hedging their production. This has been a decidedly bullish influence on the gold price.

The statistics noted above are just "data points", just a smattering of some of the changing fundamentals of the gold market, but they are illustrative and document my continuing long-term bullishness in the gold market. While the rest of this year will most probably see continued consolidation with prices careening from support in the $375-$385 range, and technical resistance in the $420-$430 range, I believe that we go higher longer-term. The vastly improving fundamentals of this market also force me to believe that sharply lower prices are not at all likely; making selling out-of-the-money puts a most promising trade, along with buying futures on dips in price.

The US Senate has passed legislation equalizing the tax treatment on investments in the precious metals. Heretofore, all such investments were considered as "collectibles", and subject to the very highest possible tax rate on capital gains. This measure still awaits passage in the House of Representatives, and signature by George Bush. The passage of such tax relief could have a significant effect on the precious metals, allowing small investors to buy and hold with the same tax treatment accorded to stocks and bonds.

On to the Commitment of Traders reports, as of June 1st, both futures and options:

Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
85,309 34,163 126,498 212,541 61,637 26,740
+846 -12,117 -10,598 +4,495 -4,184 -6,315

The gold price was up $6 in the reporting period as open interest dropped moderately, a classically negative signal. Indeed, the bulk of the buying was done by speculators covering short positions, not a healthy recipe for further price increases. Long commercials were sellers into the rally as short commercials were small buyers. The ratio between long specs and short specs is now 2.4 to 1, a historically neutral number.

This report reinforces my opinion that gold is simply in a trading range, as the rally seen two weeks ago was simply some short covering, not the fuel that feeds a continuing trend. And, I look for this to continue for a bit of time. The gold market should continue lower from here, although not by very much. Recommendations will follow.

Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
33,547 7,822 20,185 77,238 40,586 9,258
-1,472 -196 -625 -527 -1,521 -1,738

Silver fell in price by a few cents during the relevant period, as ALL categories of traders reduced their positions. Trading seemed almost lackadaisical compared with the frenzy of past weeks and silver largely tracked gold and the Euro. The spec long to short ratio is still rather high at 4.3 to 1, and there seems to be a large number of small spec longs. It is no wonder that silver fell in price by 30 cents last week, pushing some of these "hardly-ever-right" small traders out of the market. In the silver market, the small spec longs are the fodder for the cannons and last week was no exception to the general rule.

Look for silver to continue its contraction of open interest and I would expect that it garners less and less interest from the major players. The bull market to $8.50 came and left in a hurry, and I think it will be years until we see its reenactment. Until then, look for a trading range. But, unlike gold, silver option premiums are still very attractive. Earlier in the week, the September $9 calls were trading at almost 5 cents per ounce, a truly silly price. Recommendations will follow.

(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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