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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(September 22, 1997) METALS: PRECIOUS METALS–Precious metals recovered moderately last week from recent sharp declines that brought gold near this year's critical support area of $320 per ounce. The downside movement was fueled by talk of central bank gold selling. As usual, these rumors are not able to be verified. However, if they are true, the sales likely will be made public in due course, as per International Monetary Fund (IMF) and governmental requirements. If gold prices recover only moderately, such an announcement would likely have a modest negative impact on prices.
In the months ahead, we expect a scenario of underlying bearish sentiment attributable to the recent decreased commitment to gold on the part of central bankers, but impacted periodically by numerous other, fresh factors. Also, because central banks still hold a great deal of gold, we suspect that they would not want to see the metal's price decline too dramatically.
The other factors that may come into play include inflation and the continued surge in equities markets. The inflation issue will not go away. Federal Reserve Board member Laurence Meyers recently discussed his view that inflation fundamentals have not changed. He pointed out that when unemployment rates remain below a certain level (6%, or possibly 5.5%) for a sustained period of time, wages and prices begin to rise. If the economy continues to grow at an annual rate that exceeds 2.2%, higher inflation appears even more likely, according to these broad economic concepts.
The surge in the equities markets may have a two-pronged impact on precious metals prices. A negative impact may stem from investors having been focused on stocks, thus ignoring other types of investments, including precious metals. On the plus side, increased stock market volatility may encourage a shift to alternative investments, including precious metals. Should any concerns arise over the possibility of a large sell-off in the equities markets, gold buying could be the result.
SILVER–Silver prices were choppy, initially declining in sympathy with gold and fueled by fund activity. Subsequently, silver recovered as investors began to take note of the large drawdowns in COMEX silver warehouse stocks, which fell by 18 million ounces since the beginning of September. Initially, there was suspicion that the drawdowns were not due to rising demand but rather an intentional move to support silver prices. However, it appears that the silver is being shipped overseas, in part to cover short positions. Meantime, silver supplies are extremely tight.
Logically, favorable U.S. economic data and the stock market surge should be supportive for silver as an industrial metal that flourishes during “good” times. Clearly, however, it has yet to liberate itself from its knee-jerk response to gold price fluctuations, despite the current variance In their respective fundamentals.
PLATINUM AND PALLADIUM–These markets continue to fluctuate amid sporadic uncertainties governing the supply issue. Russian shipments have resumed, but users are wary of future curtailments. We still consider the availability of Russian supplies the major issue for these markets. We believe inventories of platinum and palladium have been eroding and production remains low and is likely to decrease in the months ahead.
Meantime, the European Community is talking about developing more stringent auto emission controls that would require larger quantities of platinum and palladium. The sources of these metals are limited primarily to Russia and South Africa. A modest quantity also is produced in Canada and the United States.
PRICE OUTLOOK–We remain sidelined in gold as we expect prices to trade in a narrow range between $320 on the downside to $390, basis December. Although the silver market is likely to remain volatile, we would be inclined to probe the long side just above $4.60 per ounce, risking about 18.0 cents with an initial objective of $5.05. We are sidelined in platinum and palladium, with ranges of $415-$440 per ounce for October platinum and $180-$220 for December palladium.
COPPER–Copper recovered late last week from an earlier sharp decline to 93.30 cents per pound in the December contract that was fueled by a continued rise (up 29,000 tonnes since early September) in warehouse stocks. Demand for the metal generally begins to rise on a seasonal basis in the fall, resulting in a drawdown of inventories that had accumulated during the slow summer season. However, the recent rise in stocks casts a negative tone to this market.
Other bearish factors included:
(1) The uncertainties surrounding currency weakness in several southeast Asian nations that may likely lead to a decline in economic growth and a related decline in copper demand. The possible ripple effect of a slower economic growth in Japan is critical because it is a major copper consumer.
(2) The level of demand from China remains an uncertain issue that could impact either side of the market, but so far has been viewed negatively. China is likely to need imports of about 300,000 tonnes of copper in 1998 via the finished cathode product or concentrates and scrap. One view is that China will begin to buy as prices decline. The other is that it holds ample inventories for the moment.
Our concern is focused on the potential for a decline in Far East demand if growth in that region slows. At this juncture, the picture is unclear. Meantime, U.S. demand is likely to remain robust, and further U.S. economic growth may well offset possible declines in Asian copper consumption.
Supply constraints are likely to be felt in the months ahead as shipments have been curtailed from the large Ok Tedi copper mine in Papua New Guinea. A drought there has caused a drop in the water level of Fly River, which is used to ship copper to its ultimate destination in Europe and Asia. Weather-related problems also have been impacting adversely on some Chilean copper mining operations.
We are sidelined, reassessing the demand side of the outlook equation. However, we anticipate a range in December copper of 92.50 cents to 102.00 cents.
Bette Raptopoulos
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