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The latest Commitments of
Traders Report (COT) confirmed that the technical funds completely abandoned
the long side in silver, removing the major downside risk to the market.
Also, these funds ran strongly from the long side in gold, especially when
you extrapolate for trading action since the report's cutoff
date, 10/7. While it is possible to see further long liquidation in gold,
tech fund long liquidation is over in silver. All that remains to be seen is
if the tech funds can be tricked onto the short side in silver.
Once again, the COTs explained the recent sell-offs
in gold and silver. On the surface, all appeared normal, the tech funds ran
and the dealers covered their shorts to the downside. The dealers maintained
their record of never having capitulated and having to cover their shorts on
the upside. But there was something about this recent COT episode that was
notable to me, namely, that I came away with the feeling that the dealers
just barely pulled this one off. It was not a resounding victory for the
dealers, nor a crushing defeat for the funds. If you
track closely the run up in silver and gold prices over the past couple of
months and then the sell-off, and study the prices that each side established
and liquidated their positions, it looked like a wash. Especially in silver,
I have the feeling that the dealers were glad to cover a big chunk of what
was an historic net short position. The price was secondary. Getting off the
short side, as much as possible, was their primary goal.
Ironically (and perhaps heretically to those who've read my past writings on
the subject), I get the sense that the COTs will
not work in the future as they have in the past, especially in silver. I say
this for a number of reasons. For one, as I have always maintained, the
coming silver shortage will, at some point, trump the COTs.
It feels to me, like that physical shortage is very close. Two, the COTs have become a mainstream analytical tool. While
trying to decipher who is long and short will always be a worthwhile endeavor, I think any tool loses effectiveness the more
popularly it is embraced. (Mind you, I'm certainly not abandoning the study
of the COTs. I'm just speaking out loud on some growing
reservations of mine, even though they have worked fine to date.) Lastly, the
COTs will lose their effectiveness if certain
market segments don't behave within historical patterns. For instance, if, as
I suspect, the small trader category in silver increasingly represents
participants who are attracted to the low price for fundamental and value
considerations, this segment becomes the strong hand and will not liquidate
at even lower prices. This would represent a decided break with past
historical patterns and render this aspect of the COTs
worthless.
Perhaps because of my growing unease with long-learned analysis of the COTs, and my sense that things will play out differently
than they have in the past, I find myself asking the question - is this the
mother of all buying opportunities in silver? Not from a fundamental
perspective, of course, as the answer is a resounding yes. The deficit, the
nonexistent inventories, the law of supply and demand, the extreme low risk,
the extraordinary high profit potential, etc., are the reasons behind that
resounding answer. That's a given. I'm talking about timing and near term
price expectations. This is something I prefer not to do, because I never
want my sense of near term pricing to ever cause anyone to become unbalanced
and, if I am wrong, lose a long term, sure thing position in silver. While I
can be wrong short term on silver, the long term is guaranteed by the
fundamentals and the deficit. And the manipulation.
Ever since the price of silver burst upward at the end of July, I was
consistently wary that it was the real move, simply because the tech funds
had gotten so long on that move quickly and the dealers the reciprocal short.
That is no more. The tech funds are off the long side completely, and all that
remains on the long side are the hard core non-technical large speculators
and the previously mentioned small pit bull longs. As I mentioned at the
outset, the only remaining question is will the tech funds be tricked onto
the short side? I don't know. If I did know, I could easily tell you the
bottom in silver. So let me tell you what I do know and what I suspect.
If the tech funds don't go short, then this is now the mother of all buying
opportunities ("MOABO") in silver. If they do go short, when they
are done shorting, then will be the MOABO. The good
news, no the great news, is that they are not long. The good news is that if
they do go short, it should not take prices much lower than we are now.
That's not because the tech funds are smart (as you know, I think they're as
dumb as dirt), but because their mechanical rules prevent them from
initiating new short sales too far below the moving averages, currently
around $5.10. It would take a lot of time, probably months, for the dealers
to engineer the tech funds to the short side of silver, based upon historical
patterns. I don't think the dealers have the luxury of time.
To be clear, what I am saying is either we are at the MOABO right here and
now, or we will be, pretty soon, right around these price levels, or just a
bit lower. I don't see a lot to be gained, price-wise, by waiting. I am no
longer wary, as I have been for the past two months. The market structure is
better positioned for this being a bottom than at any point in the past few
months. Of course, if I'm wrong, I'll apologize. Just don't over-leverage
yourself to the point where a near term setback will cause you to jettison a
long term silver position.
I think a key factor in the timing issue will be the disposition of the
December silver call options. There are roughly 45,000 open calls due to
expire on November 24, less than six weeks from now. That's the equivalent of
225 million ounces of silver, a huge amount. You may recall that I wrote
about these options at the beginning of the year. There will be a concerted
effort by the shorts to prevent these options from expiring in the money. If
they succeed, we will have to wait until the expiration to explode. If they
fail, all hell could break loose to the upside.
Of course, I am assuming that on the next silver rally, the dealers will not
allow the tech funds to get long (or cover their shorts, if the tech funds
are tricked into going short), by the dealers themselves selling short big on
that rally. This is the essence of the MOABO - the dealers don't short and
prices vault upward. This hasn't happened yet, and this is why we haven't
moved higher in silver. The dealers always sell. Or, at least, they always
have sold. One day, for sure, they won't.
I think that day is close. For one thing, their game is becoming more obvious
to more people. Almost 1300 people took the time to add their names to the
petition to Attorney General Spitzer. For a strong, continuing manipulation,
that's not good. A manipulation doesn't thrive when many ordinary folks are
aware of it. (By the way, when I get around to writing my book about silver,
those names will be recorded therein). Another thing suggesting we are close
to the end of this silver scam, is the lack of any type of rebuttal by
anyone, but especially the CFTC and the COMEX to my very constructive
suggestion of eliminating the possibility of a silver delivery default by
making sure that the longs and shorts in the current delivery month are able
to perform by first notice day.
Since this is such a simple and constructive proposal, I think some people
may be taken back by its very simplicity, and I have been asked to better
explain my solution. So let me explain what I'm talking about. For silver
(and other commodity) futures contracts, the delivery period begins at the
very beginning of the contract month, as that month comes due, and lasts
until the very end of that month. First delivery day is at the start of the
month, last delivery day at the end of the month. The short contract holder
has the option of deciding when to deliver, from first delivery day until the
very last day, if he so chooses. I'm not proposing to change that. What I am
proposing is that the exchange certify that by first
notice day, those holding short contracts in the current delivery month
actually have the goods to deliver. If not, then that short must close out
his position, or roll it into a more deferred month. To be fair, I am also
proposing that any long position holder have the full cash value of the
contracts he holds deposited by first delivery day, so he too is certified to
take delivery, or the long must close out his position or roll over. This
would eliminate completely, the chance of a delivery default. This would be a
very good thing.
As it stands now, current rules allow the longs and shorts to
"bluff" each other in the current delivery month, with neither
being required to prove they can perform their delivery requirements. This is
insane and irresponsible. If we get to last delivery day, and either party,
but particularly the shorts, can't deliver, we have a default. That's the
worst thing that can happen. It is what I am trying to prevent. You would
think the NYMEX/COMEX would be very receptive to my solution, considering
their track record. Three years ago, the price of platinum soared 60%, in two
days, from $500/oz to $800, because the shorts in the April 2000 contract
couldn't deliver on a measly 40 contracts, on the two last delivery days. The
shorts' bluff was called. Were my solution in effect, this could never have
happened.
As if this relatively recent delivery month debacle isn't enough of a reason
for the NYMEX/COMEX to step up to the plate and do the right thing and adopt
my delivery month solution, there is also the blackest of black marks marring
the NYMEX's history. I'm talking about the 1975 Maine Potato disaster on the
NYMEX, where a once vibrant market was shut down forever because of a
delivery default against the May contract. Yeah, the shorts couldn't deliver.
As unbelievable as it sounds, even with this market infamy tainting the
history of the NYMEX, exchange officials are trying to look the other way to
a fair and surefire solution to prevent a recurrence. You would think they
would have adopted my solution on their own, long ago.
Whether the NYMEX and the CFTC do the right thing, or not, is something that
they will have to live with. Certainly, they will never be able to say they
didn't have the opportunity of making COMEX silver default proof. For the
time being, silver investors should concern themselves if we are facing one
last opportunity for the investment ride of a lifetime.
Theodore
Butler
www.investmentrarities.com
(No one can safely predict the future and
it’s possible that Israel
Friedman’s Butler’s
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be
suitable for your consideration.)
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