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(July 2, 1997) METALS: GOLD–There is going to be a temptation to buy gold as it wends it way to the basement. This tendency is known as the moth to the flame syndrome, and usually treats traders just about as well as the flame treats the moth. Since the central banks of the world are selling gold, ask yourself what you know that they don't before you place the order to buy. A new 4¼-year low added to the gloomy mood in the gold market. Fund selling, central bank selling of physicals and a good stock and bond market are all obstacles that gold will have to overcome to stage a move higher. Hedge selling is likely to be intense on any rallies of substance.
RECOMMENDATION–For the near future, look for rallies, but they are selling opportunities. August gold has resistance near 338, 342, 346, 352 and 354-355. Most traders should stand aside. Aggressive traders could sell August gold in the 338-342 area with stops of 2-3 dollars or over 347, looking for a decline to about 330, possibly lower. If you're a long-term bull, I have to say you should probably stay on the sidelines until the market acts like it's going up rather than down. If you are unconvinced, consider October or December calls, as they are relatively cheap due to low volatility.
SILVER–New lows were achieved for the silver market this week, but as the market has been range bound, I suspect that downside is limited, and rather than signaling a move lower, we just saw stops tagged. Silver may have downside in its future, but I suspect that it is of limited duration.
RECOMMENDATION–Most traders should stand aside or trade the range with a downward bias. Trend players should stay on the sidelines. Range traders should consider buying September silver on dips to the mid-low 460's with stops of 5-10 cents, looking for a rally back to the mid-upper 470's, and selling September silver there with stops of 5-10 cents, looking for a decline back to the low 470's, mid-460's. More aggressive traders might hold onto short positions. If you're bullish, buy a pullback to the low 470's with stops under 460. Objective is open. Long-term option bulls, could consider buying December calls, but at this point there seems to be nothing on the horizon that suggests higher prices.
COPPER–Wednesday options will expire on the LME, and it is possible that we will see quiet sessions until they are expired. The three-day weekend may also slow the pace. LME stocks grew. It seems unlikely that copper will resume it's uptrend now, as U.S. usage slows in the summer (buying is typically done well in advance of needs, so while it seems that summer is peak usage, that's copper that was already purchased), and the Chinese remain absent from the market. Specs were overwhelmingly long, and exacerbated the break. Conversely, supply forecasts have been lowered in the last couple months, and that was assuming no production problems. As we've been in a strong demand era for copper, downside could be muted overall.
RECOMMENDATION–Support near 108.00 basis September held the market, but overhead resistance near 112.20-114.00 will remain tough sledding. For the time being, conservative traders should stand aside and keep an eye on September or December call prices. Aggressive traders might sell September copper on rallies to about 112.00-114.00 or so with stops of 100-200 points. Look for a decline back to 108.00 or so. If the market breaks to the mid- 106.00's, aggressive traders could consider buying with stops of 100-200 points or under 101.00. Objective is open, but a move back to the upper 108.00's to perhaps 109.90 or so is possible.
M. Steven Morgan
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