wmeubank@ocp.kcmo.com
Jerry F. Welch
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 3, 1997) METALS: PRECIOUS METALS–The alternating scenarios for gold that we have discussed recently appear to be developing in the aftermath of the stock market sell-off: (1) a shift to liquidity, which would include the sale of gold holdings by individual investors and hedge funds to offset stock market losses, and (2) liquidation of gold positions to raise cash to cover stock market margin calls.
These two development often occur in the first leg of a stock market decline. The second phase, which may now begin to develop, includes the purchase of precious metals (starting with gold) as alternative investments and as safety assets. Gold prices have held relatively firm during the stock market sell-off. However, sharp price declines welcomed the earlier news of a proposed sale of 1,400 tonnes from Switzerland's reserves in 1999.
Meantime, countries experiencing banking and currency problems may be inclined to sell gold to prop up their faltering finances. However, the reverse side of this argument (which may dominate in the longer term) is that central banks will realize gold's role in supporting their currencies. They may then also begin to call in their gold loans, and thus supplies may tighten.
Silver and platinum came under pressure due to their role as industrial metals in a global scenario that now implies slower growth and, hence, a decline in demand for those metals. The anticipated supply tightness in platinum and palladium due to Russia's declining availability will now be put on hold. However, these metals may receive support in their role as safety assets, especially when gold prices firm.
Given the prevailing unstable financial environment, we believe gold has made its lows. we anticipate support at $300 per ounce, basis December, with the caveat that it is a “currency” of last resort and may be sold as such by countries under duress.
We recommend long positions in gold and silver, anticipating the following range: December gold, $305-340; and December silver, $4.50-$5.20 per ounce. In January platinum, where the less expansionary economic outlook is likely to sporadically pressure the market, a broader range of $312-$420 per ounce is anticipated.
COPPER–Copper prices remain in a narrow range, impacted adversely by the weakness in global equity market and the resulting implications of lower industrial demand.
Our projection of a negative “ripple” effect from Southern Asia's currency devastations toward a related decline in copper consumption has moved rapidly and expanded. (I would reiterate however, my view that the “ripple” effect on Hong Kong's Hang Seng Index was more than that; The Hang Seng Index was looking for an excuse to decline on political fears related to U.S./Chinese acrimony.)
Copper warehouse stocks have remained somewhat stable, at times declining. However, the focus has now turned away from that price determinant to the bleaker demand side. Meantime, supply constraints continue to emanate from New Guinea and possibly Chile.
We are short-term bearish on copper, looking for initial support at 80.00-82.00 cents per pound, basis December.
Bette Raptopoulos
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