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Market Commentary

For markets of July 19th

Based upon 30 day maturities
AUGUST GOLD $406.80 GOLD .00/.50%
SEPT SILVER $ 6.725 SILVER .50/2.00%
OCT PLATINUM $821.00 PLAT 1.00/4.00%
SEPT PALLADIUM $229.55    

General Comments:

The precious metals markets were once again visited by the large speculative concerns last week as several of their worst fears were allayed by the release of governmental statistics. Firstly, as the raft of information was released demonstrating that the US economy was perhaps weaker than previously thought AND that inflation (both PPI and CPI) was well below expectations, the previously held fear that the Fed was embarked on an aggressive campaign to raise interest rates was discarded. And, secondly, the fear that the Chinese economy would sharply slow due to governmental edicts was abated as statistics showed a growth rate of just under 10% per annum. With these roadblocks pushed to the side, the large funds became buyers, pushing the precious metals markets higher in rather thin summer trading conditions.

In the gold market, their aggressive buying was met with aggressive selling by the commercials and prices actually declined by $1.10 week over week. While the financial press has recently been chock full of predictions and forecasts of a most imminent rally in gold, in some cases calling for a technical breakout above $432 per ounce, such appears not to be the case. Long term readers of this commentary, and students of the markets, have learned that the large speculative funds, and speculators in general, are most usually wrong this market, and the commercials most usually right. For my part, I still see the gold market as a trading range affair, with good support now resting in the low $390's and almost impenetrable resistance at the $412 to $415 price levels.

And, all in all, most major analysts share my view that the secular bull market in gold has not died, but is simply resting for a bit. Historically, it is not uncommon for the gold market to enter a period of consolidation that can even take years to play out. In a recent survey of 24 analysts conducted by Reuters, their forecast of the average price of gold for 2004 was $404.50 (only about 2 Dollars lower than current levels) and their forecast for 2005 was $402.50. In other words, it is most probable that we have entered a TRADING RANGE market, where the money is made by buying dips and selling rallies and selling out of the money puts and calls. Staying long, or staying short, is most likely the wrong approach in the upcoming months. Investors and speculators must tailor their strategies to this new reality in order to profit rather than stubbornly adhere to those approaches that worked fabulously when gold was in a CLEAR bull trend. I think it best to believe that this is the case in the gold market until it proves us wrong. Remember the first rule of commodity trading; a trend is a trend until it stops being a trend.

The change of heart among most professionals and analysts in the gold market, from clearly bullish to most cautious, is due to the realization that hard-core investment demand has NOT emerged, even though political and macroeconomic conditions should have created a tidal wave of buying. To quote Ross Norman of the Bulliondesk.com, "the expectation of a sustained rally was based on the assumption that a retail and wholesale investment market would be launched, and indeed gain momentum. The market has failed to inspire the investment community and so the indomitable laws of supply/demand are reasserting themselves and gold is re-establishing itself in a rather uninspiring trading range". My sentiments exactly. This commentary has long bemoaned the evidence of investment demand in the market, and pointed out that we sorely needed the participation of the investment world in order to see significantly higher price levels. After all, in the grand scheme of things, it is the users who buy price dips, the producers who sell price rallies, but only the speculator/investor who buys at ever increasing price levels, chasing prices higher.

While the long speculators were most unsuccessful in procuring higher prices in the gold market, they succeeded wildly in silver, with prices up 25 cents week on week. This market continues to be the darling of the speculative crowd, with their activities pushing prices up to unrealistic and unjustified prices, only to see massive declines in price as we have recently experienced. Please remember that when silver was trading in the $5.70's and $5.80's, we saw very significant buying by the commercials, demonstrating that the physical market was healthy at those price levels, that actual commercial and industrial demand was setting a floor. Now, we are seeing the opposite, with specs pushing the market around. I am certain that historical precedent will once again hold, and that sooner or later, at some price level or another, that we will revisit the pattern of sharp rallies and even sharper declines. When the specs lose patience with their long positions, when they want to get out, there will be very few willing to accommodate them.

As fears abated about the Chinese economy, the platinum group metals were again interesting to speculative concerns, with platinum up $12.20 for the week, and palladium up $4.25. While fundamentals remain strong for platinum, and rather poor for palladium, both of these markets appear to be near the tops of their recent trading ranges, although most thin summer conditions, along with speculative fervor from the Far East could certainly drive them a bit higher.

There are some rather uninspiring changes in the fundamentals of the gold market, although just slightly bearish. It appears that the monsoon in India, for which that nation depends upon for its agricultural and economic health, is not as good as hoped. This, along with the recent sharp decline of the Indian Rupee, will moderate previously rather bullish expectations for physical offtake from the worlds largest demand center. Next, the expected rush of buying from China continues to be most elusive, with general market liberalizations and higher incomes STILL not able to propel gold demand much past 210 tons per annum, the level at which it has stayed since 1992. To quote Kamal Naqvi from Barclays', "The reality is that in the competition for growing Chinese disposable incomes, gold is very quickly losing market share....we can expect China's income spend on gold to continue to decline". As an aside, I know of no other market where bulls continue to spin fantastic tales of "soon to emerge" massive demand, without the benefit of hard facts. Gold continues to be a market of emotion and hope for many rabid bulls, but successful traders must put aside such avaricious emotions, and trade on the facts.

The World Gold Council-backed Gold Bullion Securities Exchange Traded Fund is set to expand into Germany, a prime target of potential investors, as regulators have approved its prospectus, paving the road for future distribution. Although this ETF now has enjoyed some success, now holding 1.635 million ounces of gold, it has not as of yet, met the overly high expectations of many in the market. And, still no word on this fund's introduction into the US, certainly the most attractive market.

On to the Commitment of Traders reports, as of July 13th, for both futures and options:

Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
114,326 17,204 117,672 256,400 64,470 20,864
+32,465 -12,711 -7,047 +43,129 +2,624 -2,376

With open interest up some 37,000+ contracts, ALL categories of specs were serious buyers, and ALL classes of commercials were major sellers. This can not be a good sign for continuing higher prices, as the commercials know this market way better than the usually emotion laden speculators. Any loss of upward momentum, or any bearish news, will send this market lower, back to support in the low $390's. I would be a rather confident seller here, although in small size. Other recommendations will follow.

Long Speculative Short Speculative Long Commercial Short Commercial
38,921 3,414 18,385 80,922
+7,266 -3,502 -1,407 +9,087

Again, as in gold, we see that the rally has been WHOLELY speculatively driven, with specs on the buy side, and the commercials on the sell side. While the specs can and probably will drive prices higher, again, any loss of conviction on their parts in holding long positions will see this market dive. I would be a most cautious bear in this market. A close under $6.50 basis the September contract should be enough to rattle their cages.

Expected trading range: $392 to $408

Based upon the COT's, and based upon a gut feeling about this market, along with technical considerations pointing to a rally in the USD, I remain slightly bearish. We are near the top of the trading range and small short sales look right. Look to sell at $407 or higher basis the August contract, with stops at $412.50. If uncomfortable with outright short positions, look to sell some out of the money calls, perhaps at the $430 level basis the October contract. Remember, we are characterizing this market as a trading range now, and NOT a bull market. Call our offices for specific recommendations.

Important chart support comes in $398 to $400, and if that fails, as I feel it will, look for this market to approach the bottom of the recent technical uptrend channel in the low $390's.

Expected trading range: $5.80 to $6.75

With the capriciousness of the large funds, the volatility of this market in thin summer trading conditions, it makes recommendations difficult. Although I remain bearish, I am cognizant that the foolish funds could drive prices well higher before they cascade lower.

For those with high risk tolerances, try selling a close in Sept silver below $6.50 with a stop at $6.58 and a target in the $5.90's. Also, selling December silver calls at $8.00 or $10.00 seems also to right, although in small size. Call our offices for recommendations.

Expected trading range: $790 to $840

Prices seem rather strong here, and if gold and silver decline, then it is likely that platinum will as well. I really don't want to get short this market, so we will wait for a buying opportunity later.

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