Kaplans take on the gold drop

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    This is now old news, I know but for those who don't regularly read Kaplan it's interesting to see how his commentary stacks up the day after. Note that he predicts the near-term rise limit in gold to $325. Just to show how dangerous it is to predict the POG, gold is currently around $326! Not that Asian trading probably counts for much....

    Chuck

    June 5th, 2002

    For markets of June 6





    CLOSES
    JUN GOLD 322.10
    MAY SILVER 4.945
    JUL PLAT 549.80


    INDICATIVE LEASE RATES (based on 30 day maturities)
    GOLD 0.25% / 0.75%
    SILVER 0.25% / 1.25%
    PLATINUM 3.00% / 8.00%


    General Comments:

    I am writing this commentary at 4:00 A.M., instead of yesterday afternoon, as I wished to gain some perspective of yesterday's extremely sharp sell off in the precious metals. Gold shed over $9 in value in just 36 hours while silver fell about 20 cents. The debacle began on Tuesday night, with one fund selling 5000 contracts of gold in the most unlikely, and most illiquid, time period of the day, just after New York closed and before the Far East was open for business. The market absorbed this selling quite well and gold and silver opened for trading in New York down a bit, but not much. Then the selling accelerated, with prices dropping through technical support level after technical support level. At each price, more and more sell stops were executed, snowballing the decline.


    I have been contemplating whether or not this sort of decline could have been anticipated, and after considerable thought, my answer is no. Since silver broke over $4.71, basis the July contract, the market saw new highs on 8 out of 11 days and while the uptrend was indeed quite steep, there was no indication that the market was "rounding out a top", or tired of its success. In gold, the market again made new highs on 8 out of 11 days. And, on June 4th, traded above the $330 level in spot, a supposed technical resistance level. Interestingly enough, if the market had taken a week to achieve the losses we posted yesterday in the precious metals, it would have been seen as a beneficial retracement, as a necessary and valuable correction in a bull market. Instead, the entire decline was seen in one day.

    The sharpness of the decline naturally stoked the flames of emotional responses in all the participants of the market. In an interview with the financial press, I commented that "the market is just shaking out all the "weak hands" and I refused to be one of them". As such, for the discretionary accounts of the firm, I cancelled all stops and just watched. And it turned out, so far, to be the right move. The next 24 hours will be crucial for the gold and silver markets. If we can hold current levels, more or less, than I am confident that the bull market will continue, albeit at a much slower, and perhaps more sustainable rate. I would expect that the New York market will see quite a bit of margin call selling first thing in the morning, but a higher close would be most positive.

    For the next week, or perhaps longer, I would imagine that we will enter a period of consolidation, as prices base and traders and speculators lick their wounds. As such, strategies must change. Instead of the roaring bull seen over the past two weeks, we will revert to buying dips in the market and selling rallies within the trading ranges that the market will trace out. My guess is that silver will trade between $4.86-$4.88 on the downside and $4.98 to $5.00 on the upside. Gold should trade no lower than $318 and will be hard pressed to trade over $325.

    Perhaps I am horribly wrong about my perceptions of the market, but I do see yesterday's events as rather an aberration. Truthfully, I would have been quite concerned IF the USD was sharply higher in value, it wasn't. I would have been concerned had the stock markets been sharply higher, they weren't. I might have been worried if suddenly all the tension and fear abundant in the world had abated, unfortunately it was not. In my 30 years of professional trading, I have been through many such gut wrenching experiences as yesterday, and experience has taught me that the best course is to put aside emotional prejudices and stay with the positions taken in the light of reason and intellect. But it is never easy to do so.



 
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