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Gold $388 Silver $5.90 May 7th 2004, 2am Sydney

G'day. The hockey season finished for me yesterday, a few weeks early as usual. Certainly getting used to it over the past 6 or so years. I note that 2 of the final four hockey teams are from those great traditional ice-hockey cities.... San Jose and Tampa Bay. The only ice they've seen down there comes in a cocktail. Amazing.

Japan was back today from their golden week holidays. Silver copped a 10c hit in Asia and gold was well supported around $392 after some initial selling. Europe was pretty quiet with fairly stable precious metals prices, before both metals were hit hard in early New York trade. Gold retested the $387 level pretty quickly and it appears well supported at this stage. Silver dropped another 15c and found some bids in the low-mid $5.80's and is off some 4% from yesterday's close. Silver is still finding its feet after the past few weeks drubbing and should remain volatile, although maybe not the 40c days we have seen recently.

Some dollar strength will be offered as to today's selloff which has some merit for sure, but to me there appear to be large shorts determined to drive prices lower, or as witnessed the past couple of sessions, defending the topside around $394. Open interest still remains large at about 250k contracts and there has been little reduction in the last few days. Maybe there will be a break to the topside that could be very violent if these aggressive shorts cover in the same way as they originally entered their trades. Who knows if or when?

Physical premiums in India are way above normal and suggest that much importing of gold and silver is taking place at these prices. The Indians, as the largest consumers of gold in the world, are seeing their incomes grow quickly, their currency appreciate and their stock market at very high levels which should support continued strong demand for the metals in the near term.

I noted yesterday that Taiwan's foreign currency reserves grew to US$227 Billion ... They could buy all of France's, Germany's, Italy's and the IMF's gold ...for cash. Sure there must be reserve diversification within Central Banks and all, but this illustrates just how little gold there is in comparison to the flood of dollars out there, especially in gold friendly regions such as Asia.

Technically gold and silver don't look too flash. Risk is for another dip in silver down to $5.60ish and maybe even down to $5.10, which would totally reverse the rally of the past 6 months, all in a few weeks. It would certainly appear unusual that a commodity market rallies 50% over a fair timeframe but then just collapses back to where it all started, with little fundamental changes. What acted as a catalyst for the selloff? It got too far ahead of itself after the late upside acceleration, and a healthy correction was justified- but 30% is a little frightening. Gold could test the $355 level but to get there would require much physical gold to be transferred to the East. One would imagine that any move down there should be relatively brief, but you never know in these markets. Just my humble take...

The AMEX Gold Bugs Index (HUI) got destroyed late yesterday with aggressive selling across the board. Some stocks had a 10% hi-lo turnaround and the selling continued this morning. We did catch some bids around midnite my time and clawed a little higher before more selling appeared about 30 minutes later. Seems to me that someone big is exiting a good sized portfolio. The levels of some of the metal stocks certainly have me sitting here with an itchy trigger finger but I don't want to be a premature speculator and jump in too quickly (not advice).

Just heard someone talking on Bloomberg and they were talking currencies. Dunno who or where from, but I did hear that they are looking for a USD/EUR strengthening to 1.12. Should this eventuate, one would expect some sort of corresponding pullback in the metals although it would again require large amounts of physical gold being transferred to the usual suspects. I see that the Aussie dollar and South African Rand have been hit hardest of all today... the miners with local currency costs should be a little happier today although the metals shares don't reflect such.

Seems that all the other central banks are moving their rates higher with some fear of inflation, but not the Fed. What does the Fed know that the Bank of England, Australia, New Zealand (and others who have recently jacked rates up) doesn't?

Enjoy the rest of the day....


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