Precious Metals

Over the past several weeks, as the equity markets continued their death spirals to lower price levels, and as the USD continued to decline against most all major foreign currencies, many precious metals bulls were dismayed that gold and silver were languishing, seemingly taking no notice of the surrounding debacle in other financial markets. This commentary has, repeatedly, taken the view that it was just a matter of time. And on Friday, our forecast was justified as gold rocketed up almost $7. Silver prices rose in sympathy and closed up 7 or so cents.

For the week, gold was the star performer, up $8, with most of the gains occurring on Friday alone. Silver prices, which had dropped earlier in the week to technical support levels, only to rally on Friday, closed up a bit over one cent. Platinum and palladium were surprisingly quiet, with platinum down $3.40 for the week as palladium rose by $4.

The external macroeconomic changes in the financial world seem certain to propel gold and silver higher. On Friday, the US trade deficit set yet another record at 37.6 Billion USD, up 4% from last month and is demonstrating that money is flowing out of the US at an increasing rate. The stock markets in the US continue to collapse at breath-taking speed as disenchantment begins to grow among investors. And, most importantly, I do not expect these trends to change. I look for the USD to continue to lower prices and for the stock market indices to continue their incredibly vicious bear market. One can tell that the declines of the markets still have a way to go, over the longer-term, as investors are, incredibly, still rather confident that the bull will be resurrected soon. All the advice one hears on CNBC and from the financial press is that this is just a correction, soon to be over. Please note that if the stock market indices are lower this year, which is almost a certainty, we will have seen a bear market for 3 straight years, not seen since 1939-1941 (the beginning of WWII) and for three years during the Great Depression of the 1930s. To say that this is a correction is simply more disinformation and lies from the Wall Street firms.

To get off on a tangent, I see the stock market as doomed. If one believes, as I do, that markets have more to do with psychology than reality, that perception is more important than facts, then certainly investor psychology will only worsen as events unfold. Pardon the language, but you are only a virgin once. Confidence and integrity, once lost is impossible to regain. First, investors learned that some of the Wall Street analysts were simply shills and touts, without integrity or any prescient ability in the market. Secondly, investors were shocked to learn of the fraudulent practices of some accounting firms, who completely shirked their responsibilities to uncover corporate misdeeds, and who were happy to conspire with corporate management for the benefit of a large fee. And then, you have news of corporate scandal after corporate malfeasance hitting the markets. Add to the recipe the fact that, since early 2000, the DJIA is down about 32%, the NASDAQ down 81%, and the S&P's down almost 50%, and one can sense that all hope is gone for a vibrant long-lasting recovery. Even if the economy begins a substantive turnaround, the damage has been done to the equities markets. Confidence has been destroyed.

As the economic and investment cycles change, from a complete worship of paper assets from the 1982 to 2000 era, to a beginning desire for hard assets, investors will begin to seek refuge from the cataclysm in other markets and will buy the precious metals. This process is still in its infancy as such paradigm shifts in psychology take a whole lot longer to take hold than one would think. But, we are seeing recommendations for the purchase of gold from respected analysts that would have seemed impossible in years past. Last week, Morgan Stanley's global strategist, Mr. Barton Biggs joined the goldbugs, in years past thought of as the lunatic fringe, in recommending gold. In his words, "I have never believed in gold, for all the conventional reasons, but now I am changing what's left of my mind. I think that there is a plausible case that a professionally managed portfolio could realize returns of 15% real per annum in the difficult environment ahead." Continuing with his quotes, "In a bleak world, gold could beat almost everything else, it certainly is possible that gold can return to its long-term equilibrium inflation price of $500 per ounce." OK, if that doesn't rock your world, global investment bank HSBC recently published a report on the gold market in which their analyst predicts that gold could have an upside of $100 to $200.

As the mainstream analysts begin to recommend gold, as investors weary of their failures in traditional investment vehicles begin to push some money into the gold market, we could certainly see some excitement, in my opinion. While such analysts may indeed be coming to the party a bit late, better late than never.

The turnaround by Mr. Biggs is attributed to Peter Palmado, chief of Sun Valley Gold, who authored a report that states that it is not the USD that predicts the gold price, but the stock market. Since 1988, the price of gold has had a negative .85% correlation with the S&Ps, and since 1994, this correlation has risen to .94%. So, if you are bearish on the stock markets of the world, then it must follow that you are bullish on gold.

Recently, the acclaimed international precious metals consultancy, GFMS, identified China and India as the critical swing factors in the silver market. China, being a major seller of late, and, India, being the largest consumer in the world. It is estimated that silver demand in India has risen by over 20% this year. While the prospects of a declining global economy may deter silver prices from rising due to lessening fabrication demand, I would believe that it is probable that silver prices will largely shadow gold prices in the coming year. And the possibility exists that silver will gain a patina all of its own among investors.

The platinum and palladium markets are a bit on edge at present due to a report that Russia may do away with export quotas on these metals and may, believe it or not, actually disclose the levels of stockpiled product, formerly a guarded state secret. In thinking about this disclosure, while it is true that the World Trade Organization is pressuring Russia for these liberalizations in order to acquire membership, I would hazard a guess that Russia would be unwilling to do so if they believed that the release of such information could possibly hurt the market price. So, it would not be foolish to perhaps believe that Western analysts expectations of the size of the Russian inventories of platinum and palladium are perhaps, just perhaps, larger than the reality. Nevertheless, it will be at least a year or more before any such proclamations or disclosures are made. Right now, it is just posturing and propaganda.

During the relevant week, gold was higher by a scant $1.60 and open interest declined by about 9,500 contracts. Trading volumes were light and, by all accounts, not much was happening. Short commercials continued to be buyers, thereby validating our precepts that it almost always pays to follow their lead, as gold prices rocketed on Friday. Large Long speculators continue to be steadfast and resolute in their positions, staying with their positions even as we had been in a consolidatory phase in the markets. I see this as most constructive.

I remain friendly to this market, but all will depend upon the actions of the USD and the equities markets. There is heavy resistance overhead and I cannot foresee getting through the $330 price level easily. To this end, discretionary accounts of the firm, and many clients, have judiciously sold calls at both the $320 and the $325 level, pocketing huge premiums available and moderating our formerly huge long gold position. These options expire in just a matter of weeks. I would now be looking to add selling some put options, if and when, we see just a bit of a retracement.

. Speculative interests continue to drive this market and will probably continue to do so. As mentioned earlier, deteriorating global economic conditions are a most negative factor while investor interest, along with sympathy from gold, continue to support the bull case.

As usual, I see silver as a trading market. Buy the dips and sell the rallies and never get married to your position. Last week, discretionary accounts of the firm were sellers of the September $4.90 puts options, which are now worth less than half of our sale price, generating nice profits. I would now look to buy a bit of silver if we see lower prices. I would guess that I would be a buyer at about $4.98 to $5.01 and a seller at $5.09-$5.11. Just trade the range.


As prices were lower in the week, long speculative concerns were sellers while the trade were buyers at these relatively low prices. This is, as readers of this commentary know, a most bullish scenario in my opinion. I remain steadfastly bullish and am looking for the move into the $540s basis the October contract.