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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(October 23, 1997) METALS: Precious metals remain a sleeper. With all the chaos taking place in international currency and stock markets, expect the precious metals, and especially precious metal stocks, to again come to life by no later than the end of first quarter 1998. The big money I know of internationally is diversifying into precious metal holdings. Continued chatter about producer and central banks selling has pressured gold. If U.S. interest rates move higher, it could pressure gold and silver. Recent weakness in platinum and palladium has also dampened enthusiasm for gold and silver. Nevertheless, silver warehouse stocks are at a 12-year low. If demand picks up, silver should soar. Uncertainty about Russian deliveries of palladium and platinum keeps these two metals volatile. Cycles favor higher precious metals markets beginning in early 1998. Deflation favors higher gold and silver prices, particularly during a time of monetary chaos. Central banks now holding gold at less than 25% of their reserves is significant. Central banks sold $2.5 billion of gold in 1996. In a deflation, where countries are devaluing their currencies, gold prices should move higher. Fundamentally, 70% of gold is used for jewelry and the arts, 20% industrial, 8% dental. Mexico produces most of the world's silver, 2.4 million kg, Peru 1.9 million kg, the U.S. 1.6 million kg. India consumes 3 million kg of silver a year, the U.S. 4.1 million kg, Japan 3.4 million kg annually. Jewelry is the main source of platinum demand at 1.5 million ounces. Catalytic converters use 1.8 million ounces of platinum a year. Japanese jewelry is responsible for 80% of the world's platinum use. Chemical, electrical, glass and material industries use 4.8 million ounces of platinum a year. Russia produces 5.8 million ounces of palladium and platinum a year, South Africa 5 million ounces, North America 695,000 ounces. Thus, Russia and South Africa produce 90% of the world's platinum and palladium. Copper inventories, at their highest level in 19 months, have pressured copper prices and held them low. Chinese demand has not come into the market.
RECOMMENDATION–Investors who purchased December 1997 gold and silver call options–hold. Partial profits taken on strength. Investors who purchased core holdings of gold and silver coins and mining stocks on weakness–hold. Partial profits taken on strength in the mining stocks. Futures investors long December gold use $319 open protective stops. Add to gold long positions on a strong close above $330 and $340. Futures investors long December silver use $4.77 open protective stops. Add to long positions on a strong close above $5.10.
R.E. McMaster, Jr.
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