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Aussie Commodity Corner


Spot Gold 397 Spot Silver 5.98 2pm NY Monday Feb 2

Good afternoon and another wild day on the metals exchanges of the world. I noted in Todd's "Random Thoughts" that 6% of Americans would call in sick today, after the Super Bowl... Fair call, but what percentage of us were just a little tardy charging out of the blocks today and maybe missed an hour or so? Guilty as charged.

A friend, down here from North Carolina for a holiday, enjoyed a lunchtime game in 30 Celsius temperatures over a glass of Chardonnay and a kilo of prawns... not quite the typical Super Bowl experience, I'm told.

Metals Mayhem

Seems there is a pattern emerging in the metals the past few days. Asia and Europe are very steady, if not up a few bucks during the US night, but metals cop a hiding as the US markets wake up. Fundamentally, nothing has changed in the past week or so except sentiment. Sentiment changes can and do hurt, short term, and can be summarily altered. Supply-Demand fundamentals in metals can't be.

Gold has been on a rollercoaster the past week. Today was a holiday in India so we get no info, but on Friday the premiums were sensational for imports and we shall look forward to the actual import data to come to hand. India, as the world's biggest consumer of gold is a buyer at these levels and the wealth effect from their buoyant stock market and strong currency, gives gold bulls continued back-up. The Shanghai gold exchange is doing a roaring trade with gold down here at $400. Istanbul imports rose a few hundred percent last week as the dollar price fell. The same cannot be said in the US where it appears some large player/players are betting large that gold's day in the sun has been and gone. We'll see. The 200 DMA is about $380.

With all the Central Bank noise about gold and the wild price gyrations, there may be some similarities to the London Gold Pool explosion of the late 1960's when the Central Bankers of the world were previously put to the sword. Nixon learnt the rules of supply-demand versus the dollar, in no uncertain terms. Ouch. We should compare the situation, over the coming days.

Silver linings

The size of the commercial short position (as reported in the latest Commitment of Traders report) is somewhere north of 400 million ounces, which is more than at any other time the past 10 years. If the longs want to take delivery of their silver, there will be a mad scramble as the shorts must deliver real metal. It does not exist in that size in the Comex warehouses (in fact it is a few multiples of the entire Comex stock). There could be a good old fashioned squeeze in the making, if the longs demand delivery.

Then again, maybe there is a secret stash of silver somewhere in the world that is being liquidated. I would guess it wouldn't be Mr. Buffett's well publicized holding, judging by his most recent interviews on the state of the world. When Mr. B bought his 130million ounces of silver, he took delivery. It was a big deal back then and still is for the silver market. Yet commercials are currently short some 3 times his holding. Go figure.

Silver sub $6 is something I didn't expect to see given the fundamentals. As previously mentioned, these sell-offs can be deeper and longer than most would expect so I guess we could push lower and I see 5.90-85 as next support and then again some 20c lower. On the topside one could expect the strong support of 6.10 will provide resistance on the way back up.

Silver equities, hmm, there aren't many of them and they've copped a beating but they are, in my opinion and certainly not advice, a most practical way to gain exposure to the silver price. Futures, if you don't have deep enough pockets, can kill you due to timing and one off events. A silver mining company (with known reserves) is a call option that doesn't mature. The payoff is appreciably less risky, from where I sit.

The HUI hasn't been hammered as one would expect with gold 10% lower than a week or so ago, although there are some standout producers who have been knocked some 50% off their highs (not explorers, real producing goldmines). Am looking at the size of short positions in some of these stocks. The gold equity market is so small that any sort of covering could propel these companies way higher. It's my contention that we are seeing hot money run from the sector but it will fly straight back in on any sentiment change which could come from any of a number of directions.

My best guess is we see some volatile range trading in gold and silver with $400 and $6 as a fulcrum. 67 ounces of silver buys an ounce of gold today. I also keep an eye on the Dow/Gold ratio. In 1978 when it really hit the fan, an ounce of gold bought the Dow. Today it's about 26 ounces. Could we go back to 1-1???

Platinum is still north of $800 per ounce. The base metals are still buoyant and took little notice of the "strong dollar" with Lead over $800, Copper over $2500 and Ally still above $1600 ... these are all at or near highs for this rally. Nickel is off some 10% from its high yet some 50% higher than Oct 2003.

The dollar is still below 106 Yen even as the Bank of Japan announced that they'd thrown 68 billion bucks at it in January alone. Where would it be in a free market? In my opinion, sub 100 for starters. The dollar has rallied against the Euro quite impressively the last couple of days. But look in the scheme of things, it's still at 1.24..... 4 months ago it was 1.07, not exactly a "strong dollar" in my books.

position in gold, silver, euro

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