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Metal Merchant



Gold $384 Silver $5.85 May 25, 2004 1 am Sydney time.

Apologies for last week's absence, everything is sweet down under again and I am glad it was a pretty quiet one in the metals. It should be noted that whenever I have been on any sort of leave of longer than a couple of days, the metals market has reacted violently, and usually down! Not so last week, with a small $8 or so gain for the week. Silver had a quiet week, for silver. Better than big bad red numbers, for sure.

So what's news in the metals? For a start, the open interest numbers and the COT suggest there has been some new sizeable short positions opened in Gold. Again, that is just the paper gold market which will see more and more volatility as fast money enters and exits, depending on whatever technicals come into play, be it the current flavour of the day - the 200dma or any of a myriad of others like Elliot Wave, Fibonacci's, proprietary actuarial models, astrology, chicken entrails .. whatever busts your chops... Sentiment will play a massive role in the direction of the metals markets going forward, I expect. Fundamentally, all commodities / tangibles should benefit going forward, as the liquidity provided by the Central Bankers of the world will slosh around looking for a profitable home, and at some stage in the not too far distant future, it will run for the safest home, and that means real assets / production and more directly, real money - gold and silver.(Govt. bonds are just an I.O.U. and even Sir Alan has said recently that Gold is still the ultimate asset of last resort). But we could be waiting a while!

Gold looks to have formed a reasonable base and some of my shorter term indicators are blinking that we may have seen a good bottom in place (not advice). I have good support coming in initially at $382 and then again at $378, with my hourly indicator swinging up for the first time in a few weeks. I suggest it will struggle to bust up through the $390 level..... initially.

There is much speculation regarding possible recent Central Bank selling. The price action certainly would support such conjecture, as the $385ish level has been resolutely defended in the recent week or so. I see that Portugal announced that they had sold some gold recently, apparently some call options that had been granted over their gold, were exercised. That is not "new" supply of gold to the market, as their counterparty would have already hedged out the risk. If as speculated, that it was an option exercise, the "free money" game of collecting option premium by selling call options, which had worked so effectively and profitably for many Central Bankers and Producers over the past 10 years, is now playing out with hugely different results. It was an easy bet, in years gone by, but now the game is different. Inflation is back, bigtime, and I contend that we haven't seen the start of it hitting hard as yet.

The Indian financial markets have been wild since the unexpected election results. I note that premiums were still conducive to legal imports of gold, albeit not as attractive as when gold was $400 a couple of weeks back. Weaker currency could explain much.

Silver had a few peeps down at $5.50 and held, albeit tenuously. Would like to see another pullback into the mid $5.60s for some tech confirmation, and think we have a reasonable chance of retesting 6.15-20 in the near term. Risk is break down thru $5.45. Not advice, just sharing the thought process.

Reckon the metal equities are looking a lot better and would expect that the current week could see further gains, even without much happening in the underlying metals. Seems to be a great leading indicator lately. Interestingly, many are some 20% higher than their blow-out intraday lows of last week, yet gold is only 3-4% higher (not advice).

The high oil price that is being blamed for everything, isn't coming down much from my viewpoint. OPEC already is busting its own quotas by about 2.5million barrels a day (or about 10%) and the Saudi's have a pretty crappy heavy / sour crude that is a bugger to refine into useful stuff like Diesel, Gasoline and Jet fuel. Refining capacity is a big problem, but the increasing supply of dollars being spewed out of the Fed is the real issue. Producers appear to require more dollars in payment for their oil. That the dollars are just promises to pay, backed by nothing but the issuers ability to tax its own citizens (and a bloody big gun), just exacerbates the issue. Maybe the old "how many barrels of oil gets an ounce of gold" question is worth revisiting. Check the last 50 years, not just the last 20. Swapping a finite resource like oil, for infinite money/wealth like gold/silver appears a no brainer to me, but then again there are plenty who question whether there is a brain in this skull at all. Me too, occasionally!

Interestingly, tonite on the local news there was a report about the decaying standards/services of one of our State government entities. It may have been the hospitals or the public transport system or the Sydney water problems or the teachers' strike over wages..take your pick of any of a dozen departments... anyway, the NSW State Premier Mr Carr replied to some question.." look, you just can't create money out of thin air".....really? Sure you can, just ask Sir Alan how to justify it and then roll the presses. It's happening all around the globe. It's called "reflation", but anyone with any sense of history knows that a debasement of the currency through increasing its supply without a corresponding production increase, is just a confiscation of the wealth of those that save in that same depreciating currency. The property bubbles are an example of the liquidity running at real assets, but it is dangerously debt funded with high LVR (Loan as % of valuation). It's a pity that property isn't a very liquid, fungible or transportable source of money or wealth. Many will soon find the blowtorch applied to their tender bits, as a result of interest rates inexorably grinding higher and higher. Property prices can go down even during massive liquidity injections and low interest rates, and when there is little or no equity as a buffer, it cuts way deep. Ask Japan or Hong Kong about their recent experiences.

"Own the debt of a man, own the man". ... I think old Willy Shakespeare wrote that in the Merchant of Venice... but then again, English literature is not even close to a strong suit for me...

I guess the rest of the day will be pretty quiet but will be looking for gold to keep pressing the $385 level, notwithstanding any silly stuff in the currencies.

I note the Pistons are in the last four for the first time since I "inherited" them in about 1993 or so, but then again it's only basketball... why don't they just play the final 2 minutes and say the scores are tied at 100 to start with?

The horse that won the Preakness is either a freak or the "class of 2004" is pretty weak. I don't know, but I look forward to the Breeders Cup races when the Europeans turn up ... one of the better Aussie born and bred horses is in England to race in the two big sprints in June-July... bought by one of the shieks a month or so back, for $22 million, having won 7 of 10 races down here. Wish I had one in the stable just like him! If the tracks are dry, he will blitz them. You heard it here first.

Good to be back on deck 100%, and hope you all enjoy the rest of your day......they are warming up, I hear.

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