GOLD 0.51% $1,391.7 gold futures

Kaplan on gold

  1. 470 Posts.
    For those who don't read this guy regularly at Kitco or many of the other gold related sites... Worth reading I think

    prospector asset management____________________________________
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    October 6, 2002
    For markets of October 7th
    Based on 30 day maturities
    DEC GOLD 323.30 GOLD .00/.50%
    DEC SILVER 4.490 SILVER .00/.50%
    JAN PLAT 556.90 PLAT 2.00/6.00%
    Over the past week, the precious metals markets continued to “mark time”, remaining within wellknown
    and well traveled trading ranges, and effectively ignored the carnage occurring in global
    equities markets. With the S&P down 29% for the year, and the NASDAQ down another 40%, the
    gold market is garnering the interest of both investors and speculators, BUT STILL does not the
    required strength to penetrate the “brick wall” of resistance at $328-$330. Gold was up $2.20 for
    the week, but any price movements within the current range tend to be rather immaterial. Silver,
    suffering from its “industrial” nature, was only marginally lower, about 1 ½ cents while platinum
    and palladium managed to eke out small gains.
    From a longer-term perspective, this bull market is gold is very different from others seen
    historically. In researching past rallies in gold, the one almost virtual constant is that lease rates
    have risen either as a precursor, or coincidentally, with gold prices. Not in this case, not in this
    case at all. Gold lease rates, especially the shorter maturities, are at virtually zero and have
    stayed at historically low price levels for months now even as gold prices have moved
    consistently higher. Most mainstream gold analysts now believe that the “pool” of leased
    gold available to the marketplace is roughly slightly higher than 5000 tons, about two years
    of global annual production, and apparently a larger quantity than currently demanded by
    borrowers. Such statistical evidence only gives further justification to my hypothesis that this bull
    market is fueled solely by the investor/speculator and that physical offtake, or physical demand, is
    rather unimportant in the establishment of the gold price. Such investment buying takes place in
    the most efficient marketplaces available, the futures and derivatives marketplace, and shuns the
    high cost inefficient physical market. It is critical for a trader to understand the inherent
    structures and the “drivers” of a market in order to effectively trade it, and participants in
    the gold market must take to heart that gold is now, more than before, a speculative
    vehicle at these prices levels and prices will be governed by the psychological mindset of
    the investor, not the commercial/industrial user.
    Another quite fascinating fact about the secular bull market in gold that we have been
    experiencing is that the biggest buyers have not been the industrial/commercial users, as their
    demand has dropped mightily as gold prices have risen, as global stock markets decline, and as
    economic conditions deteriorate. While investment in gold has risen a bit over the past few years,
    it is still at paltry levels, even though gold prices have risen some 30% off their lows. The biggest
    buyers of gold have been the gold producers, who are buying back their previously sold
    forward contracts. And now for the good news, industry sources estimate that there is still about
    3000 tons of gold still resting on producer’s hedge books that could, theoretically, be bought back.
    With the current hatred of hedging by producers, their purchases will continue to be a most
    supportive factor to the market, especially on dips.
    The gold market also suffers from the demand elasticity of its major source of demand,
    jewelry. A recent study has shown that for every 1% rise in the price of gold, jewelry demand falls
    by almost 3%. Recent statistics, and demand trends, would belie the extent of this correlation, but
    it is most certainly a relevant factor. This diminishment of demand, as we forge to new higher
    prices, requires an ever-greater level of investment demand at each higher level. With global
    equities markets falling, with the USD forecast to continue its decline against most major
    currencies, with the drums of war now resonating loudly, investors are being drawn to the luster
    of gold, but not in yet sufficient numbers to completely offset the drop in jewelry demand. The
    gold market, as seen by recent prices, remains extremely well fine tuned, and rather comfortable
    at these price levels. It will take an “event” to force us higher, but the probability of such an event
    is now quite high given the state of the world.
    If one assumes that the historic inverse correlation between the value of the USD and the value
    of gold will continue into the future, then it is crystal clear that gold must rise, as the USD must
    fall. The current account deficit of the USA is now about 5% of GDP, and according to a study
    done by the Federal Reserve, EVERY country that has seen a current account deficit of
    greater than 4% has seen its currency devalued. Now add the huge deficits created by the
    spending spree of our current administration, the possible repatriation of assets by foreign
    investors in the US markets, and it seems certain that the USD will head lower in value. This will,
    over the longer-term have a substantial supportive effect to the gold market.
    Gold and silver are still locked in the trading ranges noted in earlier commentaries, gold prices
    between $318-$320 (where physical demand and short covering occur) and the “brick wall” of
    technical resistance at $326-$328 (where physical demand simply evaporates and long
    speculative liquidation occurs). Silver prices are still seemingly locked into the $4.50 to $4.70
    prices levels. Such trading ranges tend to become self-fulfilling prophesies, but from a technical
    standpoint, the longer we stay within a very well-known and well-traveled trading range, the
    farther and faster the price will travel once we break through, either on the downside or
    the upside, from the support or resistance levels. Meanwhile, selling calls on futures owned,
    and selling out of the money puts in both silver and gold continue to work splendidly. Clients of
    the firm are asked to call for specific recommendations in options tailored to their risk/reward
    The number of speculative longs, in the gold market, on the floor of the exchange in New York is
    approaching historic highs, not seen since May of this year. While traditional analysis would say
    that this could be a dangerous impediment to rising prices, perhaps it is wiser to say that perhaps
    the global economic and political landscape is now more dangerous that before, and that such
    interest in gold can be highly justified. Comparing the overbought conditions of the past to
    perhaps the “overbought” conditions of the present, without compensating for external influences,
    must yield faulty conclusions. The gold market, perhaps the best barometer of global fear and
    concern, is always difficult to forecast, as it is impossible to pin point the quickly changing level of
    investment and speculative concern. I would guess that it is more important to judge the
    resoluteness of the speculative longs in the market in maintaining their positions, rather than the
    absolute number of speculative longs.
    There has been much talk among the rabid silver bulls that now that the US government has
    depleted their inventory of silver, that now that the US Mint will be buying silver in the
    marketplace for the first time ever, that such actions will force silver to much higher levels. Sorry,
    but I just don’t see it. If the Mint uses 10-12 million ounces of silver per annum, that amounts to
    just slightly over 1% of total annual production, and recycling, of silver. Such an immaterial
    amount of silver does not even begin to compensate for the loss of demand for silver in jewelry,
    and in industrial usages, in a faltering economy. And current price levels of silver demonstrate the
    validity of my statements.
    Norilsk, the largest producer of palladium in the world, announced that it has no plans to curtail
    the exports of this metal in the foreseeable future. The last 5 years or so has seen the Russians
    attempt to bull the price of palladium by withholding the availability of palladium for a goodly part
    of the beginning of each year. Now, such machinations were also attributed to the lack of export
    permits or some such foolishness, but now it appears, after palladium prices have fallen almost
    70% off their highs, and with industrial demand well below current production levels creating a
    surplus in the market, that the Russians just may continue to sell, as their chances of falsely
    creating a bull market seem remote.
    On to the Commitment of Traders reports, both futures and options, as of 10/01/2002:
    Long Speculative Short Speculative Long Commercial Short Commercial
    68,560 22,444 67,140 158,998
    -709 -2,071 -5,325 -10,049
    Small Spec Longs Small Spec Shorts
    62,243 16,502
    -6,402 -315
    As open interest dropped by over 10,000 contracts, large speculative interests were resolute in
    their commitment to the market while small speculators pared their long positions by 10%. Long
    commercials were sellers of their futures, a recurring annual feature of the gold market during the
    “jewelry” season, as they took delivery of their physical gold previously hedged. Commercial
    shorts were buyers, a rather good sign.
    All in all, I look at the above numbers as somewhat constructive, as the market seems
    perhaps a little less overbought than previously. But, just a little. It would appear that
    speculators are not willing to add to their already significant long gold positions UNTIL we can
    surpass the technical resistance levels of $330.00. And, I would expect them to be rather willing
    sellers at any prices approaching those price levels. There is still risk on the downside if these
    speculators/investors become disenchanted with the future prospects of the gold price. If such
    occurs, then we could see a rather sharp sell off. This dovetails quite neatly into the historic
    implications of a long lasting “trading range”. Once we break out, it is going to be a quick and
    rapid price movement, in one direction or the other.
    Long Speculative Short Speculative Long Commercial Short Commercial
    29,765 12,717 23,668 60,715
    -2,211 +1,877 +2,865 4,897
    Small Spec Longs Small Spec Shorts
    28,292 8,292
    -2,152 +1,522
    While not much occurred in this market during the relevant week, with open interest only dropping
    marginally by about 1,500 contracts, long speculators were sellers while the short commercials
    were most willing to accommodate their selling. It is most apparent that the recent sell-off in price
    in this market has been caused by the liquidation of long positions by speculators, who became
    disenchanted or disgusted that silver had performed so badly, especially in relation to the gold
    market. As the commercials tend to be right this market, and the speculative interests wrong, I
    still recommend silver at these prices. The current gold/silver ratio is above 70 to 1, and,
    historically, I believe that silver is quite cheap at current levels. It may take some time for silver to
    regain its stature, but I believe that the risks of ownership at current levels are quite low in relation
    to the possible gains.
    Long Speculative Short Speculative Long Commercial Short Commercial
    4,039 1,033 1,222 5,261
    +89 +8 -175 -354
    The last several weeks have seen two major features in this market that has forced prices higher.
    Firstly, we saw a spate of borrowing that pushed lease rates into the 12% range for 30 day
    maturities, and significant commodity fund buying in the US and Europe, while the Japanese
    public were basically sellers. Now that the borrowing has completely ended, and lease rates have
    returned to whence they began, I look for this market to fall to the support levels in the $540’s.
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