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(August 14, 1997) METALS: GOLD–Gold continues to keep an eye on the bond and stock markets for a clue to its direction. Action in bond and stock prices could begin to offer support. Producer selling is noted as being overhead. There are some signs that funds are re-entering short positions on this rally. Central bank selling is fading into the past, and there has been some buying in the physical market on dips into the 320's. Stay alert for increased volatility. There are stops building above the market, and if I know they're there, so do the funds and the floor traders. However, I still suspect that this is primarily a bear market rally. Part of the reason I reach that conclusion is based on the relative action of gold versus silver. In silver, funds were short 29,000 plus and long 19,000. Lopsided to the short side to be sure, but in gold, they were short 68,000 plus, and long 11,000 plus. The numbers suggest that recent action was short- covering. If silver had substantial positions on the short side I would have suspected much the same type of rally. It's absence makes me wonder about gold's rally. The failure to take out resistance levels also makes me careful. The most positive thing I can find for gold is that small specs are net short by a small margin, and may suggest the market is over on the downside for now. While a break in the stock market may encourage short-term buying, it still doesn't imply a reversal of trend for gold, only a blip. We still need to see follow-through to give us a bullish sign.
RECOMMENDATION–Not a very promising performance in the gold market, but as I mentioned, I'm a little concerned that the recent highs could be taken out. If you're conservative, stand aside. As I've said many times, don't be surprised by buying on the lows, bottom fishers like the poor, are with us always. Buying on the highs, rather than selling is the tip-off that something important is occurring. For the near future, aggressive traders might continue to sell October gold on a test of the 330-332 area with 2-3 dollar stops or over 332 or 335. The chart is becoming more attractive, but has not yet given a signal. If October gold takes out 333.00 convincingly on the upside, it will suggest that a low is in, and a rally to 337-341 could occur. Breakout traders might buy October gold on an upside penetration of 332.80 with sell stops of 2-3 dollars or under 325 or 323. Be alert for an immediate failure. If gold needs a stock market break to attract buyers, they may not be strong hands. Conservative bears should buy near the money October or December puts if this rally occurs. October gold has resistance near 330-332, 336-338, and 342. Long-term bulls could consider buying December calls near current levels. While I'm not particularly bullish at this time, calls are cheap, and gold's downmove has stalled out, at least for now.
SILVER–Another failed silver rally. The chart is interesting but remains inconclusive. Be cautious if playing long silver, as funds may be waiting for a solid rally to sell in to. Options could be the best vehicle if silver eventually stages a solid rally. I remain a bit concerned that silver, like gold, is trying to take out stops above the recent range.
RECOMMENDATION–Still range bound. Most traders should stand aside, but if you are very aggressive, consider selling September in the 445-455 area with stops over 460 or 470 or of 5-10 cents, and/or buy the mid-low 430's with 5-cent stops. Support may appear near 440 and 434. Resistance is 457 and 464 or so, with further resistance near 468-470. If you're a long- term bull, consider buying December calls.
COPPER–Copper made new four week lows, with stop-loss selling and a worsening chart picture cited. New interim lows in the copper market are not positive, but the market is holding better than I would have suspected. However, it is making lower lows, not a positive sign. Analysts are divided in their expectations for copper. Earlier I read back to back comments from analysts, one bullish based on demand, the other bearish based on supply. In my view, copper stocks on the LME and the COMEX are ample for current needs. Supply isn't an issue, and usage is a bit slow now. However, if demand picks up, copper could spark a moderate move higher. Production, which previously had been forecast to outpace usage by a fair margin, has been recently forecast to be more in line with usage. This suggests that if any supply disruptions occur or if usage is greater than anticipated, copper could have a good upside move in its future. If China reappears in the market as a buyer, expect copper to sit up and take notice. Overall, I am optimistic about the prospect for higher copper prices down the road. However, for the near term, I am becoming more bearish. I suspect that most traders have been looking to the long side, and it may be premature.
RECOMMENDATION–This market is not for everyone right now, and most traders should stand aside until copper either breaks out to the upside or the downside. Support in the mid- 104.00's basis the September has finally been taken out, but the chart is still a bit questionable. We are approaching the level from which copper staged its last rally. Aggressive range traders might sell rallies to the 106.00-108.00 area with stops above 110.50 or 112.50 or of 100-200 points, looking for a break back to the 102.50-103.00 support level. Be alert for reversals as this level is approached. Aggressive traders could also consider buying September copper in the 102.50-103.00 area with stops under 101.50 or of 100-200 points. However, I remain negative. Resistance remains near 110.50 and 112.50. An upside penetration of 112.50 is positive, and implies the low is in, and a rally back to the 123.00 is possible. Conversely, September copper taking out 104.20 suggests a break to about 101.50, and if that level is taken out, it is very negative, and implies a decline to the low 9700's. Option traders might buy September or December calls on pullbacks for the long pull.
M. Steven Morgan
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