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New chief of Bundesbank casts doubt over German gold sales
By Ted Butler
Tuesday, June 22, 2004
The market structure in the COMEX metals (gold,
copper. and silver) remains intact and exceedingly
bullish. The latest Commitments of Traders Report
(COT) confirms the commercial dealers have fled
the short side in all three in unusual amounts. The
big concentrated commercial traders have their
smallest net short positions in recent times. While
no one can predict the exact day of liftoff to the
upside, the COTs have been a remarkably accurate
indicator of major price directions in these
markets. Now they are indicating a low probability
of a big downside and a high probability of a major
move to the upside.
In order to get a sense of where we now stand in
the COTs, it might be instructive to compare current
readings to where we stood at different points in the
recent past. The rule of thumb is the smaller the
dealer net short position, the better structured the
market is to move higher. The larger the dealer net
short position, the more chance there is of a sleigh.
The trick to interpreting the COTs, in my opinion, is
to guess when the dealers are at the maximum
point of buying (covering shorts) or selling short
and are about to reverse and go the other way.
Because the principal counterparties to the dealers
are the brain-dead tech funds, the dealers enjoy the
advantage of buying on the way down and selling on
the way up, precisely because the tech funds do just
the opposite. The dealers will take the opposite side,
in any quantity, of whatever the tech funds wish to buy
or sell, so poor is the tech funds' trading record in the
COMEX metals and their programmed behavior. In fact,
interpreting the COTs is also a guess as when the
tech funds are done buying or selling, and when the
dealers will start harvesting the tech funds positions.
As you may know, for the past six weeks or so, I have
been under the impression that the dealers have
effectively bought back as many gold, silver, and
copper shorts as they will be able to buy back.
As of the latest COTs, the net short position of the
dealers are the smallest they've been in a while. You
have to go back to when silver was under $5 to find a
similarly small dealer net short position. Likewise in
gold, the dealer net short position currently is as
small as it was when gold was under $340 an ounce.
Most importantly, in each, the concentrated net short
position by the big dealers is even smaller now, on an
equivalent basis.
One thing to remember is that once the metals' COTs
are configured a certain way, bullish or bearish, it has
always been just a matter of time before the dealers
prevail and clean the tech funds' clock. As I've said
before, the next time that the tech funds beat the
dealers, will be the first time. However, this does not
mean that a bullishly structured COT, like we have
now, can't possibly get more bullish. All it would take
to get more bullish would be lower prices,
accompanied by further tech fund selling and dealer
buying. That can always happen.
But the important point is that lower prices and more
tech fund selling from here does not alter the bullish
structure, it only strengthens it. I hope everyone is
clear on that point. When I come out and pound the
table for a market bottom (like I have for the past 6
weeks), that does not mean we can't go lower
temporarily. It just means we are at a price level
where, once again, it is dimes to the downside and
dollars to the upside, in my opinion. Further, the
current market structure suggests to me that we
could be days away from an explosion to the upside
in gold and silver, as the key moving averages are
about to be penetrated. I base this on my expectation
that the dealers will not aggressively short the next
true silver rally.
You might want to compare this COT market
structure approach to other more conventional
approaches to the market, such as charting and
technical analysis. In case you haven't noticed, I don't
recall ever writing about such approaches for analyzing
the markets. This is not because I don't consider these
forms of market analyses to be legitimate, as I look at
them constantly. It's because all these analyses are
predicated upon price and price movement. These forms
of analyses assume that all you have to do is study the
price, and nothing else.
I have trouble with that assumption for a number of
reasons. For one, I truly believe that the price of silver
is manipulated, and therefore, studying the price
movements alone would likely be frustrating. Also, were
one to invest in silver solely based upon "good" technical
price movement, one would seem obliged to sell on "bad"
price movement. That seems counterintuitive to me. I
prefer to invest on a value basis, where the underlying
real worth of an item is misrepresented by the price. In
that case, if the price moves lower still, the item is more
valuable on an investment basis (all things being equal),
and should not be sold because of the new lower price.
Lastly, while I do admit to the self-fulfilling aspect to
charting and price analysis and its use as a timing tool,
it must be remembered that if the majority adhered to this
approach, there is no way massive numbers of investors
could all practically enter and exit markets as small as
silver simultaneously. And, given my anticipation that
the real move in silver is destined to be explosive to the
max anyway, that dilemma is magnified. Certainly,
there is no way I could ever adopt a public stance of a
timing-only approach to silver, for all the reasons
mentioned. Real silver, on a long-term buy-and-hold,
is the sure thing.
It's not just the COTs that are structured magnificently
in silver. All the other important factors, centered around
the supply/demand fundamentals and the deficit and
general awareness of these facts, seem to be kicking in.
In fact, there is only one missing ingredient in the whole
silver equation -- the price. Please think about that for a
moment. The only thing preventing the investment world
from recognizing the great value and importance of silver
is the final confirmation of price.
If the price of silver were many times greater than it is
currently, there would be universal acceptance of the real
silver story. There would be no doubts concerning hidden
inventories. No one would be asking, "if the fundamentals
are so good, why is the price so low?" If silver was well
into the double digits in price, it would be common
knowledge as to just how critical is this material. If the
price was right, silver would be mainstream. Certainly, I
wouldn't be writing the kind of articles I write.
But it is that one missing ingredient, the price, that
creates not only the doubts, but the opportunity. If silver
investors weren't in the distinct minority, there would be
no outrageously depressed price. The reason the
manipulators have succeeded as long as they have is
because the low price has lulled the investing world to
sleep. Let's face it -- the first and foremost consideration
in any investment is the price. The average investor is
not interested in doing his own thinking and homework.
When he looks at silver for the first time, like the first
time he looks at any new potential investment, the main
thing considered initially is the price. Perversely, in
investments, low and stagnant prices are an immediate
turnoff. Very few will dig deeper to see if the low prices
are legitimate or not. That's just the way it is.
It is this lack of price validation in the silver equation that
keeps the majority away, to the benefit of the minority.
But it will not stay that way forever. Sooner, rather than
later, we will get the price move up that excites the
majority and confirms to them that silver is a good
investment. But that can't occur with silver as good of a
value as it is now. It must come well off the bottom. It will
remain dollars to the upside then, but not dimes to the
downside.
The trick to investing in any undervalued asset is to
position yourself while it is still undervalued, before it is
validated by price. You have to be early. When the current
missing ingredient in silver is no longer missing, the
low-risk opportunity will be.
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Free sites:
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http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
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