silver -ted butler's latest

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    January 18, 2005

    Get Up, Stand Up

    By Theodore Butler

    (The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

    The most recent Commitments of Traders Report (COT) confirmed expectations that the flush out of the technical funds from the long side of the COMEX gold and silver markets is complete. In fact, the latest report indicated that the tech funds had even established short positions in gold and silver. It goes without saying, of course, that the dealers have covered short positions hand over fist.

    From the top (the COT of December 7), the dealers have covered 100,000 net short gold futures contracts and 37,000 net short silver futures contracts (even more if options are included). That’s another way of saying the tech funds liquidated 100,000 long gold futures contracts and 37,000 silver contracts. In ounces, that’s the equivalent of 10 million gold ounces and 185 million silver ounces. That’s far more silver than exists in total world known bullion inventories. It was this technical fund selling that caused gold to sell off $40 and silver $1.50+.

    Now that the technical fund selling/dealer short covering appears complete, most of the risk has been removed from the market. The all-clear signal has been given. We are now at one of those rare points when there is no obvious reason to defer purchase. Of course, I could be wrong temporarily as tech funds continue to sell short and we violate the last remaining moving average in gold (the 200 day at $410-ish. In silver, all key moving averages have already been decisively broken.) However, if we enter into a significant down-leg from here, I will acknowledge my miscalculation, although silver will be an even better buy then. I just want to be clear that this one month+ price smash in gold and silver looks done to me.

    The current COT also seems to confirm my suspicion that some large strong hands have entered the silver market on the long side, replacing the mercurial tech funds, which change positions about as quickly as weather forecasts change. This greatly increases the pressure on the dealers, who will have to sell short even more the next time the tech funds come back to buy. While I have no way of predicting if some of these new strong longs will stand for delivery of actual metal, they could, in sharp contrast to the tech funds, who never accept actual deliveries. Whatever happens, the emergence of new strong-handed buyers in silver isn’t good news for the silver dealer wolf pack. But it is great news for the rest of us.

    So, once again, the dealers completely snookered the tech funds in gold and silver, extending the dealers’ unblemished win streak. All that remains to be seen is if the dealers go short on the next rally. Long time readers know that my pet theory is that the dealers are smart enough to quit the game when their short positions are relatively small (like now), and we then explode in price on a selling void or vacuum. (The alternative is that the dealers are too dumb to recognize the true danger in being short silver and will be overrun when they have a full short position in place.) That the tech fund/dealer tango is becoming more widely known to outsiders may persuade the wolf pack to abandon the silver manipulation.

    To that end, the news this week that silver miner First Silver Reserve (FSR.TO) doubled its silver bullion holdings by buying an additional 100,000 ounces, is good news. Not only does this purchase reflect the value the company obviously sees in silver, but the timing of the purchase suggests the company understands just what moves the silver market, namely, tech fund/dealer selling and buying on the COMEX. The new purchase also reflects on the diametrically opposed opinions of the silver market and responsibilities to shareholders held by the silver mining community.

    While it is gratifying to see some silver companies attempting to stand up to the manipulators, it is baffling that those companies, which purport to be industry leaders, namely, Pan American Silver, Coeur d’Alene, Hecla and Apex Silver, still haven’t lifted a finger. Baffling and shameful, in my opinion.

    I mean, I understand why the COMEX and the CFTC have to look the other way, and pretend there is no manipulation, no matter how compelling the evidence, because it’s too late to fess up. I understand why the dealers continue to fleece the tech funds, because they’ve never lost. I even understand why the tech funds continue in their metal trading follies, because they’re remaining true to their systems and trading disciplines, as loyal technicians.

    But for the life of me, I can’t understand the level of human pride and arrogance displayed by the managements of these four silver companies, in pretending that all is well in the silver market, in the face of all that has evolved. I can’t understand how they can cast their responsibilities to their shareholders aside, to at least try to right some very obvious wrongs. Thank goodness that other silver miners have chosen another path.

    When the silver price explosion commences (shortly, I believe), I would imagine that the fortunes of all silver companies would be lifted in the rising silver tide. But I hope that it is not forgotten that those who may have hastened the end of the manipulation in silver chose not to do so.
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