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Market Commentary

For markets of June 28th

Based upon 30 day maturities
AUGUST GOLD $403.20 GOLD .00/.50%
JULY SILVER $ 6.127 SILVER .50/2.00%
JULY PLATINUM $806.50 PLAT 1.00/4.00%
SEPT PALLADIUM $227.20    

General Comments:

As terrorist acts accelerated in both Iraq and Turkey last week, as impending economic uncertainties fed the fear and angst of investors, the gold market was able to conquer technical resistance in the high $390's and closed $7.50 higher, perhaps presaging a continuing bull run. Silver continued to slavishly follow gold, up 14 ½ cents. The platinum group metals had a rather quiet week, with both platinum and palladium falling quite moderately in price in rather thin markets.

Last week, it was most apparent that the world awaits the decision by the Fed next Wednesday, and market reaction to their actions will dominate the forthcoming price trends of all the financial markets. It is widely expected that the Fed WILL raise short-term interest rates, but the question is by how much. A quarter point rise in rates is almost universally acknowledged, but there is potential for more, even in an election year. With inflation screaming higher, especially in non-core valuations, it would not surprise me to see the Fed go the half-point. If this occurs, look for the USD to move very sharply higher, and the precious metals suffer. If the Fed raises rates only by market expectations of a quarter point, then the market reactions are much less certain. Either way, expect big quick moves amidst increased volatility in all the financial markets.

While there are those who disbelieve that the USD can rally based upon the most negative economic fundamentals of the burgeoning "twin" deficits, amidst an environment of rapidly rising inflation, the truth is that the MOST important market, at this point in time, is interest rates. Putting aside negative fundamentals, if the financials markets believe that the Fed is being pre-emptive and rather aggressive about fighting inflation, then the Dollar rallies. If investors believe that the Fed is "behind the curve", is slow in dampening inflationary expectations, the Dollar continue to fall.

My sense is that much of the rally in the gold and silver markets last week was due to heightened fear of the transfer of power in Iraq, and such trepidation inspired precious metal purchases. But, history shows us clearly that bull moves in these markets are transitory due to such stimuli. Look back at the charts, time and time again we see that gold retraces much, or all, of its rally as time distances the feared events. The transition of power is an especially potent psychological stimulant, as the world waits, mostly with probably overdone emotion. The price movement higher in these markets was also exacerbated by the re-entry of the large speculative commodity and hedge funds, as their computer systems had them buyers as both gold and silver exceeded their 200 day moving averages. During these quiet summer markets, their large purchase orders had a rather outsized effect on the price. But, as readers of this commentary know, as professionals have learned, it pays to be on the other side of their trade, as they are most often wrong.

From a strategic trading standpoint, my beliefs remain that we are still in a trading range for gold, and that we are closer to the top of the range than the bottom. I think it very likely that we see the $380's far sooner than we see the $420's. But, my opinions are not cast in stone, and the markets, and not my preconceived notions, will dictate my actions. Silver will, most probably, continue to shadow gold, although in vastly more volatile fashion as this market has become very thin.

In a rather bullish note for the gold market, it is now thought that "just perhaps" the German Central Bank may not become sellers of 500 or so tons under the Washington Accord. The new President of the Bundesbank, Mr. Alex Weber, is much more enamored of gold than his predecessor Ernst Welteke. In an interview, Mr. Weber stated that the Bank considers gold a form of "natural hedging against strong swings in the Dollar" and is giving it an important role in the management of its funds. Now, it is certain that the Bundesbank was NEVER enamored of selling off its gold only to see the proceeds go to the government for one purpose or another. The Bundesbank wanted control, but could not keep it under current law. So, like a selfish child clutching his pail and shovel at the sandbox, it is now much less certain that Germany will be a seller of gold.

The Exchange Traded Fund, Gold Bullion Securities, is now edging into success after a shaky start. These shares, traded in Australia and Great Britain, now represent 1.58 Million ounces of gold, about $625 Million in Dollars at current prices. But the real question is how much "new" business has these funds lured into the market, measured against the cannibalization of other investment vehicles. In other words, if investors bought into the fund rather than just buying physical gold, then the net result is zero. But, my sense is that the fund has been successful in the expansion of the market for gold, certainly on an institutional level. I am also encouraged that it appears that investors in these funds tend to be long-term holders, rather than the capricious speculators on the futures exchanges who really and truly do not take physical gold off of the market.

We are also seeing increasing liberalizations of the gold market in both India and China, always a good thing. The gold and jewelry industry in India has petitioned the government for various changes in the law and in import/export taxes that they believe will enable that nation to become more of a global trading center. And, the Shanghai gold exchange will begin trading spot gold on a trial basis on June 28th. As these nations liberalize, as these nations continue to prosper, it is only natural that their consumption of gold will increase, as their cultures treasure this metal as both adornments and investments.

On to the Commitment of Traders reports, as of June 22nd, for both futures and options:

Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
88,366 29,594 116,919 195,516 58,712 38,887
+4,490 -8,652 -4,809 -4,291 +879 +13,504

During the reporting period, where gold appreciated by about $7, commercial interests were rather absent from the market, not surprising during the slow summer months. The commercials basically just moved about 4,000 contracts between themselves, as actual physical buying necessitated sales of futures by the longs, and the buying of short futures by the dealers (commercial shorts).

In an event VERY RARELY seen in this market, large speculative concerns were the major buyers (although mostly as short covering) as their buys were accommodated by the most unlikely segment of the marketplace, the small short speculator. While it is a market negative that the rally in the gold market during the relevant week was basically just short covering, it must be interpreted that the large increase in the position of the small short spec must be considered as a most bullish signal. In the hierarchy of the gold market, the commercials are most often correct about the direction of the market, followed by the large sophisticated commodity and hedge funds, followed by the small speculators who seem to never get it right. And, in fact, so far they have not as gold has rallied some $7 from the close of the reporting period.

Weighing the facts and statistics, I must believe that, overall, the changes in ownership of contracts MUST be considered bullish, and in fact, the market did rally convincingly AFTER the end of the reporting period. The problem with the COT's is that they are dated, they are old information. Yes, if we had this information on Tuesday afternoon, we would be strong buyers knowing that the small specs HAVE to be wrong. And, indeed they were, as prices rose sharply on Thursday and Friday. But, now we are some $7 higher, and certainly the nature of the market has changed. Since we sit at higher prices, I would devalue the bullishness of these statistics, but will still be forced to conclude that there is still considerable room for this market to go higher. If you believe, as I do, that the market always does what hurts the most people, I would imagine that a market move above the $407/$408 level would be enough to force the small shorts out of the market. And then, we fall. This is but one scenario engendered by these statistics, but there are countless others. Recommendations will follow.

Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
32,105 8,529 24,647 69,174 41,883 20,931
-369 -478 +1,617 -5,461 +3,097 +10,284

While the large speculative interests have completely left this market, their place at the party has been replaced by the small speculator. During the week, when silver was mostly in the $5.70's to $5.90's, commercial interests were the largest buyers, demonstrating that actual physical demand is setting a floor at those price levels. Again, as in gold, amazingly, small short specs were the major sellers. And yes, they were wrong AGAIN, as silver is now some 20 cents higher than where they sold short.

My comments for gold hold sway in this market as well, as I am forced to conclude that this data must be considered quite bullish. And again, I would believe that the silver market will go just high enough to shake these small short specs out of the market, and will then, again, fail. Perhaps the move of 30 cents on Thursday (2 days after this data was accumulated) was enough to shatter their convictions, but perhaps not. Recommendations will follow.

While the data above must be interpreted bullish for these markets, it must be remembered that we need to temper our opinions not only based upon the market movements AFTER the end of the reporting period, but on the importance of the upcoming decision by the Fed. I believe it is safe to say that the path of least resistance in the gold and silver is now higher, but the transition of power in Iraq and Wednesday's interest rate news will overwhelm the influences in these markets. However, it is fascinating to study the COT's as these statistics completely explain the bull moves in gold and silver late last week. Trust me; if prices were at or near the price levels seen last Tuesday, I would be a screaming bull as we KNOW that the small speculator almost always gets destroyed. Now that prices have rallied sharply, and some of the small specs have been forced out, my bullishness must be tempered with reason.

Expected trading range: $395 to $408

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

Expected trading range: $5.80 to $6.25

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

Expected trading range: $790 to $840

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

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