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Market Commentary

For markets of July 16th

CLOSES INDICATIVE LEASE RATES
Based upon 30 day maturities
AUGUST GOLD $390.50 GOLD .00/.50%
SEPT SILVER $ 6.345 SILVER .50/2.00%
OCT PLATINUM $816.00 PLAT 1.00/4.00%
SEPT PALLADIUM $222.75    

General Comments:

As strongly suggested in last week's commentary, the precious metals suffered sharp declines due to long liquidation by the speculative community as the Chairman of the Fed, Dr. Greenspan, gave a most promising assessment of the economy and for its future. In retrospect, once again we saw that it pays to take the other side of the trade when speculative excess is abundant. All in all, the precious metals simply shadowed the USD, falling as this currency rallied sharply. With the Euro down by almost 3 ½ cents for the week, with the Dollar Index up 216 points, the precious metals, following historical precedents, had no chance.

And, as expected, the gold market performed even worse, falling by about 4%, down $16.30 for the week, as compared with the loss of about 3% for the Euro. The silver market was walloped for 38 cents last week while the platinum group metals also declined, although their losses were rather minimal, platinum at minus $5 and palladium down by $6.80.

The gold market continues to daze and confuse many traditional analysts, who peer into the changing fundamental supply/demand criteria, who stubbornly persist in their beliefs that gold will soon carry the "terror premium" allegedly demanded by the marketplace, who see accelerating inflation rates in the USA forcing gold into a new wave of a bull market. But, all this is just a manifestation of the ancient emotions of hope, fear, and greed, anathema to the professional trader. The truth is simply that gold has been, and is, simply the flip side of the USD. While some days it might perform better, or on other weeks worse, at this point in time gold investors/speculators are simply foreign currency traders. Historical correlations and precedents bear this out in most convincing fashion. One day this will change but not for now.

Now that market prices have retreated sharply, I must admit that my bearishness in the precious metals markets is waning. While further declines are still possible, I am no longer quite as certain of the direction of these markets. There is some reason to believe that gold may hold in the $388 to $390 range, and silver perhaps bottoming in the $6.20 territory. And platinum may indeed elicit some buying interest near the $800 level. But still, all signs for the metals do point slightly lower, although not overwhelmingly. However, all depends on the fortunes of the USD, and if the raft of upcoming economic statistics does indeed show an improving US economy, Dr. Greenspan's most optimistic appraisals will become more firmly believed and the USD will rally, and the precious metals will fall a bit further. My sense is that the USD rallies, and gold is forced to longer term support in the low $380's, silver perhaps to the $5.90's, where they will become solid buys again. All indications, all technical considerations STILL show the precious metals to be in trading ranges, not in bull or bear markets. And, as such, the money is made by buying dips, selling rallies, and continuing to be a seller of out-ofthe- money puts and calls at advantageous times.

During the week, Jessica Cross, chief executive of Virtual Metals, a most celebrated analyst of the precious metals, deflated the hopes and aspirations of gold bulls by stating that this metal is currently trading close to its long-term equilibrium price and is unlikely to stage a significant move in either direction. She stated that the main threats to the gold market are firstly, the marked reduction in the repurchase of forward sales by the producers, which represented 1000 tons of gold taken off the market in the last 3 years, and secondly, a reduction of the hopes of many that investor interest would accelerate during these tumultuous times. Such forecasts are perhaps further assurance that gold has entered a new paradigm.

Grass roots purchases of physical gold by investors continues to be most elusive, with the ETF's in London and Australia performing well below expectations. Sales of gold coins in Japan continue to fall, with just 93,616 ounces sold during the first 6 months of 2004, down 17% from the same period a year earlier. With the government of Japan soon to eliminate its guarantee of insurance on bank accounts, hopes were for greater demand, but as always the case, the eyes of the eternally optimistic analysts were larger than the stomachs of the Japanese public.

On to the Commitment of Traders reports, as of June 20th, both futures and options:

GOLD
Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
116,566 17,177 125,340 265,569 63,230 22,391
+2,239 -27 +7,668 +9,169 +761 +1,527

With gold virtually flat during the relevant week, and with open interest rising just moderately, there was little reason for the specs, whether they were long or short, to do much of anything. The commercials went about their usual business, just trading positions between each other. The sharp decline of the market occurred AFTER the ending date of this report, so we can expect that the current information looks much different. The week before, I interpreted the COT's bearishly, and as such, the obvious imbalances of the market eventually forced prices lower, although not in the week noted above.

Although the net long speculative position was only 10.59 million ounces, compared with a 12 month high of 19.63 and a low of 4.92, showing perhaps moderation of speculative excesses, it is the ratio between the total spec longs and the total spec shorts that perhaps tells the story a bit better.

SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
46,465 3,978 18,900 87,073
+7,544 +564 +515 +6,151

Silver was up 22 cents during the reporting week, forced higher by the large speculative funds, and please note not only who took the other side of the trade, but look carefully at what subsequently occurred. Yes, the commercials were the sellers, and yes, prices then fell sharply, proving once again that not only is this market the darling of the specs, but that they are almost always wrong, and the commercials almost always right. After all these years, it is still amazing that the large specs, and many smaller ones, continue to play. The last time we saw good demand by the commercials was at the $5.70 to $5.90 price level, and I would expect that could considered the "floor" for silver at this point in time. Thus, look to buy against that level, or sell puts at strike prices slightly below those prices.

GOLD RECOMMENDATIONS:
Expected trading range: $385 to $398

It seems that last weeks bearish forecasts were right on target, and traders who follow our recommendations did quite well. But, as noted above, my bearishness is waning quickly and the prospects for further declines back to technical support levels is no longer quite as certain. Let's quantify this as saying that last week I was 90% sure of a decline in the market, and now I am just 30% confident. 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.

I would cover ½ of all short futures contracts in the low $390's, and use a stop at $396 for the remainder, thereby guaranteeing profits on our trades. Look to cover the balance at the $385 price level basis the August contract. Look to sell out-of-the-money puts near the price given above, and start nibbling on the long side of the market. Remember, we are characterizing this market as a trading range now, and NOT a bull market. Call our offices for specific recommendations.

SILVER RECOMMENDATIONS:
Expected trading range: $5.80 to $6.50

Again, we see how this market operates, with the funds driving prices up to unsustainable price levels only to see the physical market disappear, the commercials become sellers, until the inevitable wash-out occurs. Traders who follow our recommendations did rather well. 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.

Again, cover half of the short futures in the $6.20 to $6.25 range, and use a $6.38 stop on the balance, thereby guaranteeing us a profitable trade. Look to cover the balance at or slightly below $6.10. I remain bearish short term on this market, and look for lower prices as the large speculators continue to liquidate. I would become aggressive on the buy side well under $6.00. Option premiums in this market, ESPECIALLY calls, are prices at truly silly levels and those traders with high risk tolerances should consider judicious sales, in small quantities.

PLATINUM RECOMMENDATIONS:
Expected trading range: $790 to $820

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. I am still looking for the $780's for purchases.

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