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Nevada''s gold production down 5 percent, silver production down 24 percent
By Ted Butler
April 27, 2004
Like a guillotine, the commercial dealers beheaded the
tech fund longs in COMEX gold and silver over the past
week and a half. It was the tightly disciplined wolf pack's
finest moment, thereby making it the free market's worst.
Make no mistake -- there is a war for money and financial
survival in the metals that includes both yours and the
manipulators'. They won a key battle but in winning that
battle they may have lost the war.
In gold, the dealer wolf pack lured the tech funds into
the long side of COMEX gold futures to the tune of some
100,000 contracts and then engineered the funds into
dumping those contracts at roughly a $20-ounce loss.
By trading as one coordinated and non-competitive unit,
the wolf pack functioned as the ultimate market maker.
(The problem is that commodity law prohibits market
making in the COMEX's open outcry and auction
market system.) In COMEX gold futures alone (not
including options or off-COMEX transactions), the dealers
made, and the tech funds lost, some $200 million. That's
a pretty big payday, even for the cohesive and illegal
market-making manipulators.
Anyone who doesn't see the back and forth between the
mindless computer-driven tech funds and the scheming
dealers as revealed in the commitment of traders reports
isn't paying attention. This all can be seen in the public
record. And speaking of the public record, let me be
clear that I have no sympathy over tech fund losses
(or the dealer wolf pack's gains). My concern is solely
about the conversion of what should be a free market
into a private bucket shop, where massive paper trading
swamps all real-world developments.
Unlike gold, where the obvious intent was to take as
much money from the tech funds in as short a time frame
as possible (and influence silver), the wolf pack's goal in
smashing the silver price was not short-term profits.
Since the beginning of this year, this is the second time
that the dealers have hoodwinked the tech funds in gold,
letting them get long big, then yanking the rug out from
under them and reaping hundreds of millions in profits.
In silver there was a different pattern. The tech funds were
basically long big in silver (with the dealers short) and
that position structure was maintained until the past two
weeks. In other words, the tech funds were fully positioned
on the long side of COMEX silver at $6 in January, and held
that position up through $8 on the upside, only now
liquidating, on the return trip down to $6. The dealers held
the reciprocal short position throughout these past few
months, covering just in the past two weeks.
What does this tell us?
The wholesale tech fund silver long position liquidation has
not been at an actual loss to them, as it has been in gold,
twice since January 1. (This week's COT will tell us more.)
True, the $2+ price crash in silver was a horrendous drop in
open profits for the funds and other leveraged speculators,
but because the funds got in so early, they are basically
liquidating on a break-even basis.
Don't get me wrong -- the profits the funds gave up in silver
were awesome, some +$300 million in COMEX silver futures
alone -- but they still represent a loss of profits, not actual
losses from their original entry points.
Conversely, the dealers didn't actually book profits in
covering their short positions in this huge silver price drop,
as they did in gold. But they did recoup hundreds of millions
of dollars of open losses on their silver short positions.
Certainly, for anyone who has ever held a big losing open
position, breaking even can be a huge victory. Add in the
big recent profits from gold trading, and the dealer wolf
pack seems way ahead. They should be declared the
victors in these recent metals battles.
But the war the dealers are going to lose is the war to
continue their manipulation of the silver market.
Why do I say this? Precisely because of the way the
dealers behaved the past few months. It was not
technical fund and speculator buying that drove silver to
the recent highs, contrary to popular opinion. The funds
were fully positioned on the long side from the beginning
of January. It wasn't a case of these funds piling onto the
long side of silver that pushed prices up.
It was something else.
Perhaps it was stress in the industrial wholesale market,
or maybe one key dealer broke from the pack, or perhaps
it was behind-the-scenes pressure from the regulators.
But it definitely wasn't the normal fund buying on the long
side.
The dealers were out big money on their silver short
position at the highs. Very big money. So much money
that they had to engineer something special. The main
"something special" that the dealers engineered in silver
was a dramatic and historic selloff -- more than 25
percent in less than two weeks. They did this by agreeing
among themselves to collectively pull all their bids at
times, forcing the liquidating funds and other leveraged
speculators to sell into a void.
The proof of my statement -- on the way up, we didn't have
one 25-cent COMEX gap-up opening in the six month
$3.50 rally, yet we had four 25-cent or greater COMEX gap
downs in the week-and-a-half +$2 smash. That's with no
real silver world news. That price pattern is not possible
without collusion among the dealers. Period.
The important point is that the dealers were stuck on the
short side of silver big-time, and they had to do something
drastic to get out. Which they did with the dramatic price
crash. But that's exactly why I think they're about to lose
the silver manipulation war.
Having been staring into the abyss at the recent highs in
silver, the dealers are not likely to put their heads back into
the lion's mouth and re-short silver in a big way again. I think
they aren't interested in the risk, nor the potential regulatory
attention of being that short in silver, ever again.
These dealers aren't stupid. They know they never had, nor
could get, the real silver to back up their massive naked
shorts. They know people are wising up to their manipulative
silver tricks. They know there are now more than 3,200 names
on the silver petition to New York Attorney General Eliot
Spitzer. They know that hundreds of people have written to the
Commodities Futures Trading Commission, and neither the
CFTC nor anyone else has been able to provide answers to
simple questions about the silver manipulation.
Most importantly, the dealers know how tight the silver
physical market has become with recent delivery demands.
To get to the mother of the mother of all buying opportunities
in silver, it was mandatory to have the market crash first in
order to flush out as many funds and other leveraged
speculators as possible. This forced liquidation, in fact, is
precisely what enables the dealers to cover as many of
their silver shorts as possible.
But that crash and forced liquidation has come and gone
and no longer represents a potential bone-jarring selloff. It
does not appear likely that the funds, having liquidated the
majority of their long positions, will now go short, and it
looks like we're very much back to dimes to the downside,
dollars to the upside.
It is not just the suddenly more favorable risk/reward ratio,
created by the sharp selloff, that leads me to suggest that
this is the mother of silver buy points. I believe that the
dealer wolf pack does not want to endanger their very
survival, by going short big in silver on the next turn to the
upside. If so, we could be on the threshold of something I
have long contemplated and written about.
That something is a meltup, caused by a wolf pack selling
void, similar to, but much greater in magnitude than the
coordinated wolf pack buying void we just witnessed to
the downside. The wolf pack's recent near-death experience
at the recent highs surely made a big impression on them.
I don't think they want to play this silver manipulation game
any longer.
Many have written to me, asking what will prevent the dealer
wolf pack from continuing the silver manipulation, by
continuing to short on future silver rallies?
My answer is two-fold.
One, the dealers did not make money on their last short
campaign in silver. They escaped with their financial lives.
They had to pull out every trick in the book to break even.
This was not lost on them, as they had to realize just how
deep in the hole they were.
This was very much different than any silver shorting
campaign by the dealers in almost 20 years.
More importantly, the about to emerge silver shortage, courtesy
of the structural deficit, will eventually blow the shorting scam
out of the water. The only question is when does physical
silver trump the paper shorts. The dealers know better than
anyone how tight the industrial physical market has become.
That's part of their business. They know that demands for
physical delivery will overpower a paper short position. Since
they have been struggling for more than a year to meet
COMEX delivery demands, and now face extreme difficulty
in meeting two particular Canadian delivery demands, the
time for a sea change appears close at hand.
But what if I'm wrong and the timing of the certain coming
physical crunch is somewhat off into the future, and the
dealers do sell short on the next rally?
The great thing is that won't matter. Silver is still vastly
undervalued, the risk is still dimes to the downside, and
we'll still get a rally, albeit not the big one. What makes
this buy point so attractive is the low risk, as the dealers
will sell, if they sell at all, only on higher prices. But if I'm
right, and the dealers don't sell, we will be adding dollars
per ounce in the blink of an eye, and the mother of buy
points will be a fleeting memory.
I heard from heavily leveraged speculators who were
damaged and shell-shocked by the crash. Let me offer
some words of a constructive nature. Leverage has a
place only if you have the emotional stamina and risk
tolerance for such. Especially at times like now, when
so much risk has been removed from the market by the
price drop and tech fund exit, leverage might be in order
for those so inclined.
Leverage necessarily involves borrowing of some type.
You borrow money to get a bigger bang for your investment
buck. My suggestion -- separate the borrowing function
from the buying function of a futures contract, and you
will immunize yourself from the manipulative tricks of the
dealer wolf pack. Specifically, buy real silver from your
dealer, or take delivery on futures contracts, and borrow
from your bank to the extent you wish to leverage.
Obviously, you must be able to service the debt
comfortably. This way, you will own the silver outright and
have a separate debt which you are responsible for, but is
not directly related to the silver. Don't borrow from the
same place where you buy and hold your silver. Ever.
By buying from your dealer, and separating the borrowing
function, here's what you'll accomplish. For one, you will
have no Dec. 31 mark-to-market tax liability. Two, you will
be holding precisely the form of silver that will come to be
in greatest demand, real silver. The coming move to
backwardation, where cash silver trades for more than
futures contracts, will benefit real silver holders the most.
Three, you will protect yourself from arbitrary exchange
rule changes limiting delivery or increasing margins. Four,
you will be less likely to over-margin yourself, as profits
will be harder to pull out as prices rise.
The big problem with futures is that, when it's going your
way, the gains are intoxicating. You pile up money so
fast and it's so easy to remove the money or spend it
buying more contracts that you inevitably get in too deep,
with a much bigger position than originally planned. It is
at that point, invariably, when the sharp selloffs occur and
positions must be jettisoned. But doing it the way I
suggest will prevent you from removing profits easily, or
buying more. Stay away from pure futures and pyramiding
them as silver climbs.
No, I am not encouraging folks to speculate in silver. I am
offering this suggestion only for those who are going to
speculate in futures or leveraged contracts anyway. If
you're going to do it, at least do it right, or where you
improve your chances for success.
I was surprised to hear from folks who were speculating
and got hurt (lost their leveraged positions), since I never
publicly suggested to do so. I don't want to see people
get hurt in the future. My advice for the vast majority of
folks is to buy real silver on a cash-and-carry basis. It is
your greatest insurance against volatility and manipulation.
And do it soon, before the best buy point in history
becomes history.
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Free sites:
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http://www.minersmanual.com/minernews.html
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