A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050(March 9, 2000) METALS: March palladium futures soared to $835/ounce on February 22, due largely to the continuing lack of Russian sales. Prices have moved lower since that time. However, the decline was at least partially engineered by the Tokyo Commodity Exchange (TOCOM), where the metal is primarily traded. TOCOM officials froze the price of palladium at its February 23 close, and mandated that all subsequent trades be for position liquidation only. They don't plan to restart open trading before the TOCOM board meets on March 15.
The Russian situation remains unresolved. An official with Gokhran, the State Depository for Precious Metals and Gems, stated last week that acting President Putin had finally signed the required paperwork authorizing platinum group metal exports. But traders doubt metal will be shipped before April 1, because the annual bilateral talks between Russian exporters and Japanese importers are reportedly stalled. We strongly advise against speculating in the palladium market, but remain friendly toward platinum. The lack of Russian platinum and strong demand should remain supportive. While we would avoid positions prior to a sale of platinum group metals, we believe platinum could return to $500 this spring.
The Dutch National Bank completed its planned sale of 100 tonnes of gold last week, then stated that it would not return to the market as a seller before September. With Swiss sales unlikely to start before April 1 and the next UK auction scheduled for March 21, official sector selling could be greatly diminished over the next two weeks. In addition, if miners reduce their hedge selling in the short term, the spot gold market could tighten considerably by mid-March. The UK recently restated its intention to continue auctioning off its bullion, scheduling six additional sales for May 2000-March 2001. This was no surprise and did not affect prices.
The U.S. Federal Reserve seems to be an unintentional foe of gold rallies. Alan Greenspan and company have raised U.S. interest rates by a full percentage point since last summer, thereby making investment in U.S. interest-bearing instruments increasingly attractive.
Theoretically, the resulting purchases of dollars should boost the currency's value. In fact, the March U.S. Dollar Index futures reached 106.63 Wednesday, thereby topping the June 1989 high (at 106.56). That move put the index at its highest level since late 1986.
The higher interest rates are meant to forestall inflationary pressure in the U.S. economy. Given the general belief in a link between gold prices and inflation, the Fed's moves may be diminishing bullish sentiment toward the yellow metal. Furthermore, the higher interest rates directly increase the cost of owning gold. We continue to believe gold rallies will be very difficult to sustain while the U.S. economy and the dollar remain robust.
The silver market will probably be well supplied in 2000. As mentioned previously, the Chinese government gave permission to two companies to export a total of 280 metric tonnes of silver this year. In addition, Mexico's equivalent to the EPA recently ended production restrictions on Industrias Penoles, the world's largest silver miner. Soon afterward Penoles stated that its year-2000 production would reach 76 million ounces (2,364 tonnes) of silver, topping year-ago levels by 12 million ounces or 18.7%.
COMEX warehouse stocks have soared lately. They had fluctuated in the 72-75 million-ounce range for months, but have jumped to over 106 million in the last two weeks. The silver is apparently being transshipped from Europe for rather obscure reasons. The stock increase and the slide in gold values probably caused the March 6 contract's recent dip below $5.00. We would not be surprised by further tests of that level.
Dan Vaught
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