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Gold ETF attracts $419 million in first three days
By Theodore Butler
Tuesday, November 23, 2004
http://www.investmentrarities.com/weeklycommentary.html
When I first picked the title for this article, I had this
nagging thought that I had used it before. Sure enough,
I looked in the archives and there it was, dated
September 2, 2003. I just think I had forgotten about it
because I have written about 60 articles since then.
Just to make sure I was recycling the title in the proper
context, I reread a few of my articles, starting with that
one.
It's amazing how similar today's situation is with the
situation then. I'm referring, of course, to the market
structure, as defined by the COTs. As we were at the
time of the original article, we are still in what has
been a high-risk zone, with extreme technical fund
long positions and dealer short positions in silver
(and gold). Also just as we were then, there is no
way of knowing for sure how it will be resolved. Will
the dealers get overrun (for the first time), or will the
funds again fold and liquidate positions at lower
prices?
If it does get resolved in the manner it has always
been, then we should also be presented with another
"mother" buy point. Of course, it may not play out
that way, as the fundamentals in silver are so powerful
and compelling that it's hard to imagine these
COMEX paper trading games continuing to
manipulate prices. Whether we get that one last
selloff before we explode in price, or we just explode,
remains to be seen. You must be prepared for either
event. Real, fully paid-for silver is good, no matter
what.
The big December COMEX options expiration has
come and gone (today), with no big fireworks. It was
somewhat unusual to see so many call options in
gold and silver expire in the money, but my best
bet at this point is that all it has done is confirm
and accentuate the extreme COT position.
The resolution of this extreme mismatch between the
funds and the dealers will dictate short-term price
action. While these positions are open (which they
are), it is premature to declare which side, funds or
dealers, as the eventual losers or winners. Picture it
as a giant poker game in which the pot keeps
growing, due to raising and re-raising, but all the
cards haven't been turned over yet. Let's declare
the winner when the last card is turned.
We know that the usual resolution would be if the
tech funds start selling at lower prices in the relative
near future. In that case, the dealers get to cover
many of their short positions and this gets them
"off the hook."
But what other resolutions could there be?
Well, for instance, events in the cash market could
become so tight that some dealers could break rank
with the wolf pack and stop selling short or even
begin to buy back short positions. Then prices
would rise, either explosively if a dealer
short-covering panic erupts, or more gradually if the
rest of the wolf pack maintains discipline. In either
event, the tech funds could eventually close out their
long positions at current or higher prices and would
be declared the winners in gold and silver for the first
time.
My point is that regardless of the outcome, that
outcome is not here yet.
Although I write much about the COTs and the
short-term resolutions, I hope everyone recognizes
that this is divorced completely from the long-term
resolution of the silver situation. One is concerned
with short-term gambling, the other with the long-term
certainty of the law of supply and demand. The very
last thing that a long-term silver investor should do
when the COTs suggest potential short-term trouble
is to even think of selling. While the temptation may
arise to sidestep a temporary downdraft, it is not a
temptation to succumb to, except for the most
speculative.
(By the way, there is nothing wrong with short-term
speculation; just don't let it disrupt long-term
commitments.)
Silver at $7.50 is cheap on a long-term basis. It's not
the price that's the potential short-term problem, just
the big poker-pot sitting in front of the COMEX
paperboys.
Lately the markets seem to be dominated by talk and
price action of the dollar against other currencies. It
is hard to deny the apparent connection between
movements in the currency markets and gold and silver.
Yet long-time readers know that I comment little on
currency movements. I can accept the notion that if
the dollar falls tremendously against other currencies,
or in purchasing power, items bought with dollars will
tend to "rise" in price. This is an argument that is
widespread and logical. And I have previously admitted
that it can be a bonus reason for buying silver.
While this argument is important, one reason I don't
write about it much is precisely because it is a
widespread argument and I wouldn't be bringing anything
unique to the table by writing about it. I do try to
confine my writings to those things I think would be
most educational and thought-stimulating.
Secondly, I don't write about the dollar and currencies
because they are not unique to silver (or gold). Admittedly,
currency adjustments can and do impact the value of all
commodities, including the metals, precious and base
alike, but these adjustments are macroeconomic in
nature and are not peculiar to the specific supply/demand
of any commodity. If, for instance, someone buys any
commodity solely because of expected dollar weakness,
he would be better served, in my opinion, to skip the
commodity and confine the bet to the currency he thinks
will appreciate the most against the dollar.
Most importantly, I don't focus on the dollar because to
do so would shift the focus from where I feel it should be
-- on silver's very special supply/demand fundamentals.
This is akin to my reluctance to write about silver in
terms of charts and technical analysis (the COTs
excepted). My reasoning is as follows; if one allows
currency (or chart) considerations to be the main
determinant for buying silver, then one must also abide
by currency or chart signals to sell silver. That is
something I'm not prepared to do. As long as the real
supply/demand fundamentals of silver suggest it is
severely undervalued, currency and chart signals
matter little in the investment decision process.
Finally, great investor interest has been generated in
the new gold ETF (exchange-traded fund) introduced
on the New York Stock Exchange. For those not familiar
with the issue, this is a securitization for gold bullion,
or in other words, the creation of an investment vehicle
in which gold can be bought and sold in common stock
form. I am going to confine my comments as to what
it may mean for silver. Because of this new gold ETF,
there has been speculation as to whether an ETF will
be created for silver as well.
On one hand, because silver is cheap and you get so
much physical mass for your money, silver would be
ideal for an ETF -- professional storage combined with
the ease of purchase in common stock form. No
worries about where to keep it and in a form open to
every type of investment account, retirement and
custodial included. In fact, an ETF actually makes
more sense for silver than gold, inasmuch as storage
is much more of a problem in silver. After all,
$100,000 worth of gold weighs less than 20 pounds,
while $100,000 worth of silver weighs about a
thousand pounds.
But I doubt we will see an ETF for silver soon, or ever,
mainly because it would be too disruptive to the price.
A legitimate silver ETF, in which real silver was
purchased for the fund, would launch the price
skyward. In the first three days of the gold ETF on the
NYSE, more than 28 million shares (translating into
2.8 million ounces) were outstanding, and the fund
reported that it held more than $1.25 billion worth of
gold. Now there's no way that a silver fund could
match the gold ETF's first days' numbers.
Even if you allowed for a year's worth of trading of a
silver ETF, and not just the first three days as in the
case of the gold ETF, there doesn't appear to be
enough real silver in the world to enable anyone to
buy $1.25 billion dollars' worth, or 168 million ounces
-- not unless the price were shockingly higher. Seven
years ago Warren Buffett bought 130 million ounces
of silver, causing the price to almost double in six
months. Due to the structural deficit, we have about
a billion ounces less in world silver inventories than
then. If Buffett's purchase caused the price to double
seven years ago, what would a larger purchase do to
the price today?
This highlights one great difference between gold and
silver -- that silver is much more price-sensitive to
investment flows. More than a billion dollars flowed
into gold in the first few days in the gold ETF on a
remarkably orderly price basis. If that were
attempted in silver, the impact on price would be
incalculable, as the entire visible silver world
inventory is currently valued at less than a billion
dollars.
Considering the facts about silver, common sense
would seem to dictate that it's only a matter of time
before serious investment money discovers it. Make
sure you get there first.
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