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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) METALS:Inflation concerns voiced by Federal Reserve Chairman Alan Greenspan last Wednesday sent precious metals prices higher, a move that gained further support from sharp declines in both the equity and bond markets. In his testimony before the House Budget Committee, Greenspan indicated that: (1) U.S. economic growth was unsustainable (2) expectations of continued stock market gains were unrealistic; (3) the Fed had not ruled out a hike in interest rates in the short term; and (4) the greatest threat remained the reemergence of inflation. Although such a scenario would be construed as generally bullish for precious metals, gold's upside move was relatively moderate in lightly traded markets.
Additional bullish factors included:
–Firmer crude oil prices and a rise in the Commodity Research Bureau (CRB) Index.
–Increasing stock market volatility, which is likely to enhance gold's role as an alternative investment.
–A continued rise in the Gold/ Silver Index (XAU) at
the Philadelphia Stock Exchange, suggesting possible shifts to gold stocks for safety.
–Reports of military activity in the Mideast, centered recently on an attack on a United Nations convoy near Iraq.
Subsequent to Greenspan's statements, European central banks raised their interest rates, dealing another blow to stock and bond markets. The prospects for higher U.S. interest rates suddenly loomed large again–temporarily we believe–and pressured gold and silver markets lower.
In addition, when gold prices move higher, producer selling possibilities intensify, keeping fund managers cautious and extremely prone to taking short- term profits.
SILVER–Fund buying led silver higher as supplies remain tight in London. However, the sharp declines in COMEX warehouse stocks appear to have abated. We expect silver to continue responding to gold prices (although outperforming them) in the months ahead.
PLATINUM AND PALLADIUM–Platinum and palladium have been firming on fund buying, which, in these thinner markets, has had a substantial upside effect. Favorable factors have centered on underlying concerns about the possibility of further disruptions in Russian supplies. Annual contract negotiations between Russia and Japan for 1998 deliveries are expected to begin in December; uncertainties governing these talks also are likely to impact on the platinum group markets.
Dampening the bulls' spirits was a report released late last week by Vladimir Rybkin, head of the Russian Finance Ministry's precious metals section. Rybkin responded to western worries about Russian supplies by saying that the country's reserves of platinum group metals were at normal levels. Still, our view remains that Russia's platinum and palladium inventories have been progressively depleted in an attempt to cover production shortfalls.
Long term, fuel cells that contain platinum and create cleaner energy likely will contribute to increased use of the metal in the years ahead.
OUTLOOK–Longer-term factors that will be affecting precious metals prices include:
1. Rising political conflict in Russia, where President Boris Yeltsin is under duress from a large Communist representation in the Dumas (the lower legislative house). These delegates have been criticizing the government and appear to be aiming for a confrontation over censuring the government's economic program.
2. Currency fluctuations that may occur as the European Community continues to tackle its integration toward a single currency. The unanswered questions may create unusual volatility in the global currency markets as well as realignments outside of Europe.
We expect a “sea change” in upcoming months whereby investors, hedge funds and commodity funds expand their participation in these markets in response to uncertainties and fluctuations in the financial markets.
We recommend long positions in gold and silver near the lows of our trading ranges. We expect gold to obtain support within a range of $325-$340 per ounce, basis December, as it begins to emerge as an alternative investment. Fund buying is likely to move silver to the highs of our range–$5.05-$5.60 per ounce. The platinum group metals should remain volatile. However, given the supply tightness we envision for the coming months, we would be inclined to be buyers near the lows of the following ranges: January platinum, $422-$460 per ounce; and December palladium, $190-$240 per ounce.
COPPER–Copper continues to trade in a narrow band between 93.00 cents per pound and 100.00 cents, basis December, responding primarily to the negative implications of continued increases in London Metal Exchange (LME) warehouse stocks, which are up more than 200,000 tonnes since the end of June. However, sporadic indications of Chinese buying as well as several sources of potential supply constraints have been providing some support.
Portugal's modest-sized Neves Corvo copper mine, which produces about 107,000 tonnes per year, has been threatened with a strike unless miners are granted shorter hours. Negotiations are to resume this week. The company is 51% owned by Somincor and 49% by the Rio Tinto group.
Meantime, shipments from the Ok Tedi copper mine in Papua New Guinea remain constrained, and other weather- related supply problems have been surfacing occasionally.
The major uncertainty for the copper market surrounds the shaky economic prospects for Southeast Asian nations that have experienced currency problems, which could decrease their demand for copper. A likely future economic slowdown may also adversely impact Japan's economy and Japanese copper consumption.
The copper market is likely to remain focused on warehouse stocks. Last week, increases in LME and COMEX warehouse stocks moderated, suggesting a possible period of stabilization ahead, followed by initially moderate drawdowns. The markets have been lightly attended in recent sessions as major players have been participating in functions surrounding the annual LME dinner in London, thus, we would look for this week's data to provide further price direction.
Over the next few weeks, we expect December copper to remain within its recent range of 93.00 to 100.00 cents, We remain sidelined.
Bette Raptopoulos
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