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Canadian dollar falls as bank drops pledge to lift target rate
By Ted Butler
Tuesday, December 7, 2004
http://www.investmentrarities.com
The current COTs indicate no basic change in the extreme readings in
gold and silver. The tech funds are very long and the dealers are
very short. The outcome is still very much unresolved. It is true
that the dealers are sitting on significant losses and the tech
funds have very large open profits in gold and silver, but it is
only when these open positions are closed out that will we know, who
won and who lost.
For many weeks we have been at these extreme COT readings, but the
passage of time, alone, does not bring about a resolution. Only
actual close-outs of positions brings resolution. In the beginning
of this year, the silver COTs remained at a negative extreme for
months, before the vicious sell-off in April resolved the COTs to
the downside. This has always been the outcome. The tech funds
didn't actually lose in that episode, if you remember; but they
did give back all the hundreds of millions of dollars of open silver
profits. How it turns out this time we will be able to judge only
with the benefit of hindsight.
The moving averages are trending higher, so the tech funds will get
sell signals at higher price levels than a month ago, if we go down.
This would seem to suggest that the funds should get out with some
profits. I can't pinpoint it, but I get the feeling that if the
dealers can engineer a sell-off, it will be a real "thumper" to the
downside, designed to deprive the funds of any profits. That is not
a certainty, of course, and there will be plenty of time to
celebrate if, instead the dealers get overrun. As much as common
sense favors silver as a better value than gold, in a severe sell-
off, silver will likely accentuate the move to the downside. Silver,
after all, generally moves more than gold, either up or down.
So far, while the situation is somewhat "tight", it does not appear
that the December COMEX delivery will be a problem in gold or
silver. Of course, the delivery runs until the end of the month, so
I may be premature. The copper delivery looks very tight, with open
contracts in the spot delivery month greater than warehouse stocks
after one full week of delivery. That's something I don't
recall witnessing before, but that's a different subject.
I'd like to be very clear about something. I don't focus on
the COTs in order to predict short-term price movements. I think
folks should focus on silver long term. But it's hard for me not
to
recognize the close connection of the structure of the market, as
defined by the COTs, with meaningful short-term price moves. At the
very least, I hope everyone realizes that if we do sell off sharply
(or rise sharply, for that matter) it will be because of the
resolution of the current extreme COT readings.
More importantly, I hope everyone recognizes that it is the paper
short position on the COMEX that is the prime force in artificially
depressing the price of silver. Without this paper silver short
position, the price of silver would be many times the current price.
Even after the big December options expiration and a full week of
deliveries, the gross short position (futures and calls) on the
COMEX is still over 800 million ounces, greater than world annual
mine production and known world bullion inventories combined. As I
have pointed out repeatedly, this absurd and obscene short
configuration exists in no other commodity. If anyone is looking for
a sign that the silver manipulation exists no more, look at this
COMEX short position. When the short position in COMEX silver is
comparable to the short positions of all other commodities, relative
to production and known inventories, there should no longer be a
silver manipulation. Let's see what the price of silver is, when
this COMEX silver short position is in line with all other
commodities. There has been an outsized COMEX silver short position
since 1983; more than 20 years in which the silver short position
has been "off the charts" when compared to any other commodity.
The question is how will we get to a reasonable relative short
position in COMEX silver; will the dealers panic to the upside, or
will they first shake the tech funds out in a sell-off and refuse to
short at that point? This is what is unknowable. But there could be
an accident to the upside, as recent events suggest.
Another milestone was created in the past week, when it was learned
that a previously unknown trader racked up losses of more than $550
million in oil trading, the biggest derivatives loss in years. The
dubious distinction went to the Singapore arm of the state-owned
company, China Aviation Oil Corp., who bet against rising oil prices
and as a result, had to seek protection from the courts. Press
reports indicated that the company just started trading oil
derivatives this year, and had quickly built up a naked short
position of the equivalent of over 50 million barrels of jet fuel
and covered those shorts at the recent historical highs. Simple math
indicates they lost $10 per barrel.
What's noteworthy about this story, aside from it being the first
derivatives debacle involving China, is what it may tell us about
the modern financial world and the connection to silver.
Complicating the story are public allegations that officials at the
parent company were aware of the losses and did not disclose them to
investors when they sold a 15% stake in the subsidiary for over $100
million, a month before the bankruptcy. There may be a lesson here
for potential investors in Chinese companies.
That a single trader could, once again, control such a large
position and generate such sudden and shocking losses is unnerving.
Also troubling is that this trade was all about speculation, and not
legitimate hedging. China Aviation is a buyer and distributor of jet
fuel, not a producer, and has a monopoly franchise in supplying over
100 of China's airports. As such they would appear to have a
price exposure to the upside, and if they were hedging, they should
have been buying derivatives for protection to the upside. Instead,
it was short positions that did them in. Clearly, they were engaged
in rank speculation.
Also remember that China has been a big seller of government silver
the past few years, single-handedly satisfying the deficit. This
dumping of silver has made no legitimate economic sense, especially
considering China's incredible consumption of all world raw
materials. It often turns out that things that make no apparent good
sense at the time, really look dumb later on; whether it's an oil
buyer going massively short, or a country dumping a valuable
resource cheaply, only to have to scramble to buy it much higher at
a later date.
The real lesson here for silver, is for those dealers who continue
to sell short, in any quantities required, in order to control and
depress the price of silver. These dealers, just like China
Aviation, have no legitimate economic purpose in selling short.
These dealers don't own real silver and have no exposure to the
downside; their exposure is all to the upside. It is precisely
because of this exposure to the upside that they must sell short to
prevent the price from reaching fair-market value and protect
themselves against losses. But this is clearly illegal.
Unlike China Aviation, where there was no clear regulatory apparatus
and whose trades were done in secret, the silver dealer wolf pack is
operating under a clear regulatory (the CFTC and the NYMEX/COMEX)
regime and those silver short positions are publicly known. That
makes the silver situation much more noteworthy and historic.
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