wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) METALS: SILVER AND GOLD–Silver and gold prices surged last week on what we are tentatively characterizing as a shift to alternative investments by hedge funds and individual investors in response to rising volatility in the equities markets. We have frequently discussed such a likely reallocation of assets in major investment portfolios, and our initial reading of last week's price action suggests that this shift may have begun. The recent strong performance of gold company stocks reinforces that view.
Other bullish factors for gold include the currency crises in Southeast Asia as well as the uncertainties surrounding the controversy over a single European currency (ECU) due to be implemented in 1999. In recent years, such currency instabilities have led to a strengthening of the dollar as the ultimate safety asset. However, gold buying also has surfaced on these concerns.
Last week's rally began with a surge in silver prices due to an unexpectedly large 2.7% rise in August durable goods orders. The potential for higher inflation and increased industrial demand supported silver. In addition, the market focused on recent steady declines in COMEX silver warehouse stocks and related supply tightness in London, which was attributed to a rise in Mideast demand.
We have consistently indicated that the upside move in precious metals would be led by silver, even if the fundamentals for gold were just as bullish, because silver did not have to deal with the bearish implications of central bank gold reserve selling nor reports of producer selling.
Silver rallied sharply on Monday. Gold played catch-up, moving to three-month highs of $342 per ounce, basis December, on fund short covering and investment fund buying. Meanwhile, the Gold/Silver Index (XAU) at the Philadelphia Stock Exchange rose sharply, reflecting rising interest in gold company stocks.
PLATINUM AND PALLADIUM–Platinum and palladium took some of their price cues from the gold and silver markets while sporadically fluctuating on concerns over Russian delivery rates. Because Russia is the world's largest palladium producer and the second largest platinum producer (South Africa ranks first), platinum group metals remain highly vulnerable to Russian sales strategies (if one can dignify them as such).
We expect prices to move generally higher as these supply uncertainties continue, certainly throughout this year and most likely into 1998. Russia and Japan are planning to initiate new sales contract talks later this year, and Russia's on-again, off-again patterns may intensify the market's concern over supply availabilities.
PRICE OUTLOOK–Producer selling may continue to sporadically place a cap on gold prices, but our view remains that if the fundamentals are sound, the market can easily absorb such selling. In the interim, we would expect December gold to trade in a range of $330- $332 on the downside and $345 on the upside. We would be inclined to probe the long side not far from the lows of the range.
We continue to recommend long positions in December silver, now anticipating a broader range of $5.05 per ounce to $5.60. While we remain sidelined in platinum and palladium, we are inclined to buy near the lows of the following parameters: January platinum, $422- $460 per ounce; and December palladium, $185- $220.
COPPER–Copper fell to a nine-month low of 93.20 cents per pound, basis December, late last week, reflecting concerns over a 225% rise in warehouse stock levels over the last three months. Earlier, December copper had met strong resistance near the 100.00- cent level following a sharp 4.25-cent rally supported by commodity fund buying and heavy short covering. However. the market surrendered much of the gains during the following sessions, despite some tentative indications that the rise in copper warehouse stocks may be slowing.
Opposing fundamental forces have participants uncertain about the markets next direction. On the negative side, stocks at the London Metals Exchange (LME) and COMEX continue to rise; also, uncertainty dominates the economic outlook for Southeast Asia and Japan, especially in the building and construction industries. On the plus side, U.S. demand remains favorable, while Germany's economy appears to be recovering. In addition, the copper market is likely to start feeling the impact from closure of the Ok Tedi Copper Mine in Papua New Guinea as the year progresses. Finally, weather-related production constraints attributable to the El Nino phenomenon remain supportive.
Some of last week's volatility can also be attributed to turmoil at the LME, in which a large backwardation and tightness in the zinc market has been defused by actions taken by LME officials.
Meantime, Zambia. a significant-sized copper producer is negotiating the sale of some of its major operations to a multinational consortium that includes South Africa's Avm1n, Ltd., Canada's Noranda, Phelps Dodge from the United States and the Commonwealth Development Corporation.
Given the dichotomy we continue to see in the copper market, we remain sidelined. For the short term, December copper prices are likely to fluctuate between 92.50 and 100.00. with a subsequent probing of the 102.00-cent level.
Bette Raptopoulos
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