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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(August 14, 1997) METALS: Clearly, the trading public has been too bearish on the technically oversold silver and gold markets. Gold and silver are trying to bottom. Retests of the bases of support are underway. December gold needs to close strongly above $333, December silver above $4.62, to turn the intermediate trends up. A weak close by December gold below $320 and by December silver below $425 will turn the intermediate trends back down. It is noteworthy that minor weakness in palladium and platinum have not hurt the precious metals this time around. The trading public is too bullish on platinum. I have a series of turning points projected for gold from now through December, the first series clustering August 27-28. What could lead to a bull market in precious metals? U.S. inflation, a Middle East oil and military crisis, an international financial/currency crisis, a change in trend out of paper assets into hard assets, the Far East Asian currencies (which are in chaos) going on a gold standard. Another stimulation for a bull market in gold is that one-third to one-half of the world's gold mines at current price levels cannot produce gold at a profit. A mining strike in South Africa, at the world's second largest platinum producer, strengthened both platinum and palladium prices. Gold sentiment is the lowest in three plus year, with speculators holding their largest short positions in gold on the COMEX ever. Speculators in COMEX silver hold their largest short position in 12 years. Thus, we should see a bounce in the precious metals. Consolidation should be seen as bearish. In silver, industrial demand remains favorable and COMEX warehouse stocks have declines. Russia is still not able to provide the platinum and palladium necessary for global needs. Copper stocks on the LME have risen to their highest level since October and are still rising. Strength in stocks and the U.S. Dollar have continued to hurt precious metals, as has low inflation. Gold adjusted for inflation is at record lows. Gold in terms of its long-term trading range is in the bottom 10-15%. Gold in terms of sentiment has never been this bearish, with only 14% bulls. Gold has two anomalies also pushing it down: one is central bank selling, which is a one-time event, and two is the strong U.S. Dollar which has been pushed higher due to the currency crisis in both Europe and Asia. All this has led to additional speculative and commodity fund and foreign selling of gold, as well as futures contract forward selling by mines. Commercials in silver are the largest net long in three and a half years and sentiment in silver is the lowest it has been in three and a half years. Supply/demand fundamentals for silver and gold are bullish. The supply of gold provided annually by the mining industry is being absorbed by jewelry. It will be important to note if we have an end of year loss selling in gold stocks. Also, if the stock market goes down, mining stocks could fall as well. Homestake selling gold short for the first time ever comes at a time we are seeing the lowest sentiment in gold by the general investing public in the last three and a half years while commercials are net long, the longest net long position held in three and a half years. Sounds like a shift.
RECOMMENDATION–Investors who purchased December 1997 gold and silver call options–hold. Investors who are purchasing core holdings of gold and silver coins and mining stocks on weakness–hold. Futures investors profitably short August gold take profits. Partial profits taken on weakness. Futures investors short September silver take profits. Partial profits taken. Futures investors may purchase December gold on a strong close above $333 with $324 open protective stops, holding for test of $340-$350. Futures investors may purchase December silver on strong close above $4.60 with $4.39 open protective stops, holding for a test of $5.00-$5.30.
R.E. McMaster, Jr.
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