wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza,
New York, New York
(June 9, 1997) METALS: PLATINUM AND PALLADIUM--Increased supply
tightness in palladium and platinum and related soaring prices
dominated the precious metals complex last week as Russian and
Japanese representatives continued week-long negotiations of
related sales contracts. There were no authoritative indications of
when Russia would resume platinum and palladium shipments to Japan,
although it appears mid-July might be a reasonable target. However,
prices are likely to continue setting new highs over the next
several mouths.
Japan is one of the world's largest consumers of platinum and palladium and generally obtains much of its supplies from Russia on an annual contract basis. Formalization of these contracts has been delayed this year, due partly to bureaucratic and political obstructions in Moscow. However, the resultant price surge in these metals certainly has been a plus for Russia's faltering economy.
Two main perceptions are in play. One adheres to Russia's long-term
concept that palladium prices should be kept sufficiently moderate
to preclude substitution of the metal in its technological and
autocatalytic applications. Russia produces about 60% of the
world's palladium and 25% of its platinum. The second belongs to
the Russian opportunistic school of thought, which would try to
maximize profits now by withholding supplies because the country
needs the money and these officials may not even be here tomorrow.
The story is far from over.
SILVER--Silver firmed in response to platinum's strength. We
continue to view silver as the most logical candidate for a
straight forward upside move because it is unencumbered by
extraneous matters such as the potential for extreme volatility in
the platinum group metals and gold trader concerns over possible
central bank sales.
GOLD--Gold's central bank sales problems abated (probably only
temporarily) as Germany's Finance Minister Theo Waigel and
Bundesbank President Hans Tietmayer reached an agreement of sorts
on the time frame for revaluing that country's gold reserves.
Tietmayer appeared to be the victor as the revaluation appeared to
have been postponed to a later date. We view revaluation as
inflationary because it creates more money.
The constructive feature for the gold market in this scenario
ultimately will be the sharp focus it has placed on the unstable
situation for the European Monetary Union that may ultimately lead
to European currency shifts and a stronger dollar.
PRICE OUTLOOK--Turmoil in the palladium and platinum markets is
rumored to have resulted in some defaults on futures obligations,
the extent of which remain unclear. Such conditions sometimes breed
a flight to safety. However, the extent to which this flight might
encompass gold remains unclear. Hence, our range for August gold is
a moderate $343 per ounce to $360.
We expect silver prices to continue trading higher, and would buy
July on a setback to $4.75 per ounce, risking 20 cents, with $5.40
as an objective.
We remain sidelined in platinum and palladium, which has been our recent tactic, as we expect extreme volatility to continue.
COPPER--Copper came under downside pressure after earlier reaching a high of 120.00 cents per pound, basis July. Some uncertainty surfaced over Chinese purchasing plans, which had previously been described by market watchers in extremely bullish terms.
As we've noted recently, a seasonal decline in copper demand occurs
in the United States and Europe during the summer, and an awareness
of that factor may have discouraged some buyers, especially in the
hedge fund area. However, the supply line is skimpy and any
increase in demand shortfall in production would lend support even
during the summer hiatus.
Meantime, the market appears lethargic. It is largely ignoring the
labor strike at Inco's Sudbury mining operations in Canada, which
produces about 100,000 tonnes of copper annually. It also is
shrugging off news of labor unrest in some Chilean operations as
well as the recent production constraints in that country due to
bad weather conditions.
We remain friendly toward copper because we expect the U.S. economy
to remain expansionary, noting that April factory orders rose 1.2%
as well as the recent report of a sharp rise in May consumer
confidence. This economic environment should keep demand rising
while warehouse stocks remain at relatively low levels. We remain
long July copper from 115.55 cents and would add to that position
at about the same level, with an initial objective of 120.00 and a
secondary target of 125.00.
Bette Raptopoulos
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