kaplan on gold ~ must read

prospector asset management____________________________________
1415 Sherman Ave. #504 Ph: (847) 733-8400
Evanston, IL 60201 Fax: (847) 733-8958
E-mail: [email protected]
January 20, 2003
For markets of January 21st
INDICATIVE LEASE RATES
Based on 30 day maturities
CLOSES
FEB GOLD 356.80 GOLD .00/.50%
MAR SILVER 4.810 SILVER .00/.50%
APR PLAT 619.00 PLAT 2.00/7.00%
MARKET COMMENTARY
GENERAL COMMENTS:
As the events of the world continue to unfold, usually in a fearful manner, the gold market has
rallied sharply these last two weeks to press against technical resistance at the $360 price level.
The financial world, which seems to convincingly believe that a war in Iraq is inevitable, has
bought the gold market, the oil market, and has pummeled the USD relentlessly. It is clear that
everyone is standing on the same side of the rowboat, that we see markets that are clearly
dominated by speculative fervor, that now have a very significant “war premium” built into current
prices. We clearly have runaway bull markets in gold, oil, and the European currencies. Prices
are currently well above fundamental supply/demand “value” and the markets are clearly
anticipating perhaps not the worst case, but a very bad one. These are obviously dangerous
markets to trade, more so than has been the case for many years. But, the trend in gold is most
decidedly higher and more and more mainstream analysts are now touting the ownership of gold,
having missed the first $100 move of the bull market.
Trust me, the market is now almost completely dominated by the investor or speculative concern
and physical off take is simply awful. Lease rates for gold remain at virtually zero for the shorterterm
durations and constructive reports of actual physical demand are virtually impossible to find.
Investors and speculators are buying derivatives, or futures, while the actual metal
remains unloved and unwanted. This should not be a great surprise, as “paper gold” is so
much more cost efficient than the underlying precious metal. But, the downside risks of the gold
market have been greatly enhanced not only due to the lack of physical demand at these lofty
price levels but the fact that the current price of gold is maintained solely by the psychology of
investors and speculators. And we know how quickly that can change.
I would still believe that we would see a retracement in the gold price from our current
levels, providing a superb opportunity to get very long this market. Looking at historical
data, please note that gold prices plummeted when the USA invaded Iraq and it was clear that
the war would be quite short. So, IF there is a war, it becomes likely that gold will fall in price. And
IF there isn’t a war, it is clear that gold will lose some of its “war premium”. Either way, we may
go lower. But, there is another possibility and one that the market is screaming to all who listen,
that we do go to war and it becomes ugly. These are difficult times to trade. All depends on the
news, geopolitical events, and the psychology of the speculator.
I would guess that the best course of action is to own some gold at this juncture, just a bit.
Either paid for in full or just slightly leveraged, knowing that you could suffer a loss if the
geopolitical situation of the world improves. Or play the futures markets just a bit, using close
stops on futures contracts or perhaps even buying bull call spreads. The trend is higher but there
is certainly more risk in this market at this time than we have seen in years. While I sincerely
detest buying options, perhaps buying bull call spreads in gold, at this time, makes quite a lot of
sense at this time as it combines limited risk with excellent potential. Clients of the firm and
readers of this commentary are welcome to call to discuss this strategy.
Silver continues to under perform the gold market as its industrial “nature” is now seemingly in
charge. Silver, at around $4.80 per ounce, is the same price as when gold was scraping its most
recent lows at $300. Gold has risen some 20% since then and silver has barely budged. The
gold /silver ratio is now above 74 to 1 and certainly looks to go higher. I do see silver as
somewhat undervalued at current price levels, but I would imagine that the upside is sorely
limited unless this market begins to see some investor and speculative interest, something that is
sorely missing. Silver has donned its “industrial metal” image and significantly higher prices will
not be seen until it regains its crown as a “monetary metal”, much like its much prettier sister,
gold. Until silver can convincingly surpass technical resistance at $5.15 to $5.25, it remains
a trading vehicle and is more related to the health of the economic recovery than to the
demands of speculative interest.
Platinum and palladium have done very well of late, rallying quite sharply. While some bullish
sympathy is, of course, seen with the advancing gold market, these markets are rallying for all
the right reasons and their prices do not, in my opinion, carry a large “war premium”. The
rallies we have seen in these metals have occurred primarily due to fundamental considerations
and look to be VERY advantageous for the more conservative investor/speculator at this time. I
see the downside risk in these markets as much reduced in comparison to the gold market.
Clients of the firm and traders who follow our recommendations are now showing excellent markto-
the-market profits in these markets and I continue to look for much higher prices.
There has been much talk among traders and analysts of late about the correlation between the
values of the shares of the gold producers and the price of gold. While gold remains a dollar or
three below its 5-year highs, the gold stocks are still 30-50% off their highs seen earlier last year.
It was once strongly believed that the gold stocks PREDICTED, or led, the price of gold, but this
correlation is now very dubious. Could it be that the gold shares are telling us that this rally in gold
is not to be believed? Doubtful, as gold continues to rally while they falter. What I believe is
really happening is a realization of the fact that these two markets are not as positively
correlated as many gold bugs would like to believe.
Central Bankers continue to sell gold into the market, thumbing their nose at the humiliating
experience of the British Treasury who sold half of their gold reserves at an average of $275, now
about $85 less than the current price. Canada, Netherlands, Portugal, and the Swiss sold gold
into its rally in December. It seems that the $100 rally in gold only encourages the Central Banks
to continue selling their gold reserves even though it is the best performing asset on their books.
They are selling their winners, and holding onto their losers such as the USD and equities.
This makes very little sense in the current geopolitical environment and speaks volumes about
the market “savvy” of these purported professionals. I am frankly amazed that there has been no
public outcry from the citizenry of these nations due to the actions of their Central Banks,
especially the British.
It would appear that the Central Banks will certainly continue to be sellers into this bull market in
gold and that there are few Central Banks willing to add to reserves. Oh yes, China and Russia
are adding gold to their reserves but, MOST IMPORTANTLY, they are NOT buying gold in the
open market, using hard currencies, but only buying internally produced gold for their native
currency. Look, if you were a Central bank, and had the chance to add gold to your
reserves for paper money that you could print at will, you would, of course, do it. This is
the case with both Russia and China. They are not entering the global market and spending
Dollars, they are buying internally produced gold for their local currency, while other Central
Banks are selling gold for USD on the open market. It is strictly a one-way street. I would expect
continued selling by the Central Banks, perhaps even accelerated as time goes by, and these
sales depend upon the willingness of the speculative crowd to buy. However, history teaches us
that the Central Banks, who should the sharpest in their knowledge of the markets and of
the economy, tend to be sellers at the bottom and buyers at the top. Perhaps they are just
leaning against the wind.
Platinum and palladium will most likely go higher next week as the workers at Norilsk, the
Siberian concern which produces some 70% of the worlds palladium and about 20% of the global
production of platinum are now threatening a strike unless their demands for pay raises and
longer vacations are met by management. The union is asking for a raise to a monthly salary of
$853 per month, about a 20% raise from current levels.
Gold producers continue to be the MAJOR buyers of gold in this market, far out shadowing
the demands of the speculative crowd for physical metal. As per Virtual Metals and Haliburton
Mineral Services (sponsored by Rothschild), the international global hedge book, representing
some 65% of global production, continued to shrink in the 3rd quarter of 2002 to 2692 tons, falling
by some 15 tons. Still, all in all, about 2700 tons, counting just 65% of the total, remain either to
be bought in the market to offset gold previously sold forward, or delivered into the market. If
mathematically computed to about 3600 tons, this comprises just less than 2 years of total global
production of gold, still a really hefty amount. AND, given the fact that stockholders of gold
producers now consider ANY hedge to be complete anathema, it would appear that the demand
for gold from this sector would continue to be evident. Andy Smith, who has been the most
accurate, as well as the most controversial, gold analyst in the business notes that hedge
book reductions by just four of the largest gold producers contributed 4.9 Billion USD of
gold demand, while purchases of gold eagles, inflows into USA mutual funds that invest in
mining concerns and Comex speculators total only $730 Million USD. It is most important to
know exactly where the demand is coming from, and it is not the physical marketplace, it is not
India or China or Japan, it is from the very gold producers who should, naturally, be sellers of
gold who are now forced to be buyers. It certainly is a most strange world.
On to the Commitment of Traders Reports, as of January 14th, for both futures and options:
GOLD
Long Speculative Short Speculative Long Commercial Short Commercial
94,090 28,889 77,934 190,643
+347 +1,341 -428 -3,389
Small Spec Long Small Spec Short
78,102 30,595
-884 +1,082
While the ownership of gold futures contracts on the exchange barely budged last week, it is
most evident that everyone is standing on the same side of the boat, that the speculative
crowd is very long at present. Spec longs have commitments for 17.2 million ounces of gold vs.
the speculative shorts with 5.9 million ounces. If, and that is a very big IF, we begin to see a
change in investor psychology that forces some long liquidation, we will see a very sharp decline
due to the fact that physical demand is nonexistent at these price levels. But, if the news and
geopolitical events worsen, gold will go higher. So far, the longs in this market have demonstrated
that they will not be shaken out of this easily and their resolve seems quite sturdy. All said earlier,
all depends on the news.
It is also worthwhile considering how the internal structure of this market has changed over the
past several months. Please understand that no one with an IQ higher his shoe size wants
to be short the gold market. Just a little bit of buying of gold pushes it higher than it would, let’s
say, 6 months ago. This makes for a dangerous scenario IF the longs ever want to get out; there
are not natural shorts to sell to. The entire structure has changed.
SILVER
Long Speculative Short Speculative Long Commercial Short Commercial
46,529 8,321 19,924 87,650
-130 +1,457 +2,569 +1,623
Small Spec Long Small Spec Short
36,406 6,888
+379 -262
As in gold, there was little change in the ownership of contracts on the exchange during the
reporting week. Speculative longs are long 414 Million ounces vs. the speculative shorts at only
76 million ounces. This ratio, at 5.5 to 1 bespeaks the mood of the market as totally one sided.
But, silver has not performed well recently and I wonder how much longer the resolve of the long
speculators will hold. Clients of the firm and traders who follow our recommendations, are delta
neutral in this market and I will wait for lower prices to re-enter.
PLATINUM
Long Speculative Short Speculative Long Commercial Short Commercial
5,739 1,275 806 6,716
+632 +3 -506 +178
From the above numbers, it is shocking clear that the large speculative concerns have grabbed
hold of this market. The platinum market is very thin, and the funds, with Billions of USD in their
coffers, can move prices easily. My sense is that prices are going much higher. Platinum has
better fundamentals at this point in time than either gold or silver and I would think that long
positions could entail less risk. I also highly recommend palladium for some accounts. Please
consult our offices for specific recommendations.
GOLD RECOMMENDATIONS:
Expected trading range $345.00 to $358.00
Good technical support exists around the $349-$350 price level with superb support in the low
$340’s. The $357-$358 price level has, so far, successfully thwarted all rallies and should be
seen as VERY SIGNIFICANT resistance. Day traders should pick their points carefully and use
rather tight stops. Staying on the long side makes a whole lot more sense. All movement
within this range is almost inconsequential and trades should only be taken against or
through these numbers. Expect greatly enhanced volatility and watch the foreign markets
carefully. And, of course, the news will make the market. These are dangerous times for day
traders especially if you take the short side.
For position traders, the times are difficult to judge. I would like to start buying gold in the $342
range, building a position all the way down to $328, but that may never happen. Lets buy at the
numbers listed above, OR buy a bit on a close over $360 using a $4 stop. If gold drops a bit,
aggressively sell out of the money puts at $325 or $330 to replace the positions lost to the options
we sold. And, now is the time to buy some insurance, buy some bull call spreads, but only
in smallish quantities as buying options is rarely a good idea.
SILVER RECOMMENDATIONS:
Expected trading range $4.74 to $4.85
Day traders should be playing the range here. Short positions in silver are a lot less
dangerous than short positions in gold it would seem, so when you want to be long, buy
gold, and when you want to be short, do it in silver.
Position traders, and traders who follow our recommendations, are now delta neutral on
silver, waiting to reestablish long positions at lower prices. On dips, sell out of the money
puts.
PLATINUM RECOMMENDATIONS:
Expected trading range $610 to $640
Clients of the firm, and traders who follow our recommendations, are still long both platinum and
palladium with superb mark to the market profits. I would be buying more as both markets move
into new highs, but only a bit. Platinum looks to want to move to the $640 to $650 range and
partial profits should be taken at those price levels. I am long term bullish on palladium and
continue to recommend adding, carefully, to positions for a long-term move.
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