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Market Commentary

For markets of August 30th

CLOSES INDICATIVE LEASE RATES
Based upon 30 day maturities
DEC GOLD $405.40 GOLD .00/.50%
SEPT SILVER $6.627 SILVER .50/2.00%
OCT PLATINUM $864.50 PLAT 1.00/4.00%
DEC PALLADIUM $215.00    

General Comments:

As strongly suggested in last week's commentary, the precious metals (with the exception of platinum, which will be discussed later) retreated from their lofty perches as these markets were unable to penetrate significant technical resistance levels. Perhaps the gold market, which declined by about $10 for the week, was following the oil price lower, or more likely, this markets decline was a direct reflection of the value of the USD, which rose by about 2% in value. The long-standing correlation between gold and Euro was resurrected. Gold continues to behave as a currency, with brief periods where it rises disproportionately due to increased fear and angst due to geopolitical or macroeconomic events. However, even a casual examination shows that the gold price soon reverts back to its expected value in correlation with the USD.

The gold market has been rather stronger over the past weeks than one would expect basis foreign currency movements. Such strength may be attributed to a greater level of fear in the hearts of investors due to possible terrorism in New York at the Republican Convention, the continuing battles in Iraq with Al Sadr, or perhaps that the report that a major European Bullion Bank continues to be a large buyer of futures contracts, purportedly for an unknown Australian gold producer who is thought to be repurchasing previously sold forward contracts. In what I thought was an extremely well done piece, Frederic Lasserre, of SG Commodities, estimates that the "risk premium" in gold is currently $15 per ounce. With gold currently trading near $408, that projects the equilibrium value of gold back to $392, an important technical support level and roughly my current target for covering small gold short positions.

Using the LBMA website, we find that the lease rates in gold are now at or near 10 year lows, as shown:

1 month

2 months

3 months

6 months

1 year

.104%

.106%

.096%

.124%

.194%

That's right; the nominal derived gold lease rate for one year is 2/10% of one percent. While these statistics are derived, and not indicative of the actual marketplace, they clearly demonstrate that there is little to no demand from either gold producers to engage in forward sales, and no demand from investors borrowing the metal to engage in short positions or to initiate carry trades. Such statistics sharply condemn the notion of some in the market who believe that there exists a very large short position in gold held by some mysterious conspiracy attempting, for rather unknown reasons, to control the gold market. If such large short positions existed, then it logically follows that we would be seeing demand for leased gold, and we are most certainly not. Well, of course all the Central Banks and all the Bullion Banks and dealers could be part and parcel of such a conspiracy lasting years, but, I am reminded of the comment by Plato, to paraphrase, "Three can keep a secret if two are dead".

Silver, on the other hand, remains the playground of the large speculative funds who run the price up or down at will in the thin summer markets. With gold falling, silver dropped by 28 cents for the week, falling from its recent highs at or approaching $7 per ounce. Volatilities remain high and rather wild swings occur with frequency. Anecdotal evidence has actual physical demand rather poor at present but this seems immaterial as the funds swing 100's, or 1000's, of contracts around. The palladium market dropped by $12 per ounce in quiet conditions.

Platinum prices were buoyed by investor interest out of the Far East, and reports of possible strikes by miners in South Africa who again are asking for large raises from the platinum producers. However, Implats, the second largest global platinum producer, forecast a small supply surplus in 2004, for the first time in 5 years. Although the auto sector continues to be a strong source of demand, platinum jewelry demand has fallen sharply in the Far East due to continuing high prices. As an aside, what scares me about this market is that the Auto sector has been picking up their forward purchases, and historically, these companies have usually been buyers right at the very highs, as Ford did in palladium several years ago.

On to the Commitment of Traders reports, as of August 24th, both futures and options:

GOLD
Long Speculative Short Speculative Long Commercial Short Commercial Long Small Spec Short Small Spec
129,085 18,441 118,527 268,835 61,034 31,370
+32,394 -892 -4,643 +30,332 +1,950 +260

Gold was ACTUALLY LOWER for the week, albeit by only a few dollars, as large long speculative commodity funds piled into this market in size. The commercials, as you might expect, were willing sellers at the currently lofty price levels. Open interest was up sharply, a rather negative undertone to a market that actually fell in price. Remember, the health of the physical marketplace is demonstrated by the short commercials. When they are buyers, the physical market is strong. While the ratio of long specs to short specs is a bit under 4 to 1, well down from historic high danger levels, I still see the above data as being a bit bearish. Over the longer term, the commercials are usually right. Of course, such analysis can never portend any news event which could easily push the market higher. But all else being equal, I remain cautious.

SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
50,456 1,819 21,140 95,107
+1,609 -701 +1,004 +3,623

For the second week in a row, the changes in ownership of silver futures was rather insignificant, not surprising for the last weeks of summer. Silver fell in value by 15 cents during the period, but that was not enough damage to encourage the large speculative funds to sell. The commercials shorts seem quite ready to sell at these price levels, although volumes are low. I remain a bit bearish but can not justify taking short positions at this time.

GOLD RECOMMENDATIONS:
Expected trading range: $395 to $415

In gold, I remain bearish as I see prices over $410 as quite near the top of the trading range. Look to sell December gold, in very small size, at $411 to $412, and use a stop close only above $416. Look to cover half of the position at $402ish, and the rest against technical support at $396 or so. Do this trade in small size. Alternatively, sell out of the money calls at the $425 price level basis the December contract. These can be done as naked calls, but only in small size as the threat of terrorism still always lurks.

SILVER RECOMMENDATIONS:
Expected trading range: $6.40 to $6.90

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. 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. Selling way out of the money calls is the only sensible trade I can imagine. Call our offices for specific recommendations.

PLATINUM RECOMMENDATIONS:
Expected trading range: $800 to $855

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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