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Murphy''s ''Midas'' commentary discloses the Arab world''s Sprott report
By Ted Butler
InvestmentRarities.com
Tuesday, March 1, 2005
The most recent commitment of traders (COT) report reflected
continued deterioration, or a buildup in dealer net short positions
in silver and gold, as should be expected in strong price rallies.
While it is true that we are no longer at the recent low-risk entry
points in silver and gold, we are nowhere near the extreme high-risk
points of the past, when the dealers held historically large and
dangerous net short positions.
It is important to put the analysis of the COTs into proper
perspective. First, they should be used to help determine where we
stand on a short- to intermediate-term basis (weeks to months). The
COTs are not much good either for daily or very long-term analysis,
and should never be substituted for long term supply/demand
investment considerations. The COTs change all the time; long-term
fundamentals don't. Most importantly, the COTs are factual and
objective readings on the holdings of the various categories of
traders, while the analysis of that data is necessarily subjective
(including mine).
With that caveat, here's where I think we currently stand.
In gold, from the top of the market in December, the dealers covered
130,000 net short contracts on the $50 decline into the lows at $410
a few weeks ago. On the subsequent $25 rally, they have re-shorted
up to 50,000 contracts (extrapolating from the Tuesday cutoff).
We're still much closer to the bottom, COT-wise, than we are to
the top, but we could experience increased price volatility.
It's easier to make a call when we are at COT extremes and those
extremes have been very reliable indicators all along. I'd still
expect new price highs in gold and an extreme COT top formation
ahead.
In silver, the dealers covered 44,000 net short COMEX futures
contracts (220 million ounces) on the big price decline from the
December price highs, to the early February COT readings. Since
then, on the subsequent one-dollar-plus price rally, the dealer net
short position has grown by around 13,000 contracts, also still much
closer to the bottom than the top.
Bottom-line, there is much more room to the upside than the downside
in silver, but there is also more of a chance of downside temporary
shakeouts and selloffs than existed at the former extreme low dealer
net short readings. Could we experience a selloff that would violate
the moving averages and get the tech funds to sell aggressively
enough to bring us back to extremely favorable COT levels? Yes.
Could we march ahead to significant new highs from here? Yes.
Increased price volatility is a fact of life.
I have detected, at least in silver, dealer attempts to engineer a
selloff over the past week, but that doesn't mean they will be
successful. More importantly, since we are closer to the bottom in
the COTs, even if the dealers are successful in rigging a selloff,
my sense is that such a selloff is likely be to short and sharp and
not a drawn-out affair. Therefore, the most prudent course would
seem to be to hold all positions (speculations included) and ride
out any selloff.
It is important to remember that the past reliability of price
movements of gold and silver dictated by extreme readings in the COT
is another proof of manipulation in these markets. There is nothing
random, free-market, legal, or economically legitimate about the
price-setting tango between the tech funds and the dealers. In fact,
it is as far removed as possible from what is mandated by commodity
law. How the producers of real silver tolerate this activity is
beyond me.
Just this past week I had the occasion to review the quarterly
earnings reports of two high-profile silver miners, Pan American
Silver (PAAS) and Hecla Mining (HL). For the fourth quarter the
price of silver averaged $7.25/oz. and gold averaged $440/oz., much
higher than we've seen in recent years. These are basically prices
only dreamed about a few years ago.
Additionally, the price of co-products, like copper, zinc, and lead,
were also very high relative to recent years. Unless I'm reading
these earnings reports all wrong, when you strip away all the one-
time events, these companies are still not able to earn a real
operating profit at these prices.
There are a few points I would like to make.
One, it would appear the cost of producing an ounce of silver for
these companies is more than $7.25/oz. and not the silly low cash
costs always trumpeted. Two, shareholders don't benefit anywhere
near as much as management when a company produces at a real loss.
Three, these companies, along with Coeur d'Alene and Apex Silver,
still haven't lifted a finger to combat the obvious manipulation
in silver, and that has hurt shareholders.
Finally, I have received a large number of e-mails regarding my
article, "Where's Your Silver?" Unfortunately, I have been unable
to respond personally to all of them. Many asked what I thought
about specific storage programs and pool accounts. There is no way I
could or would comment on such specific accounts. I tried to be
clear in the article -- if you don't have serial numbers and weights
on any thousand-ounce bars you have paid for, assume that there is
not real silver backing your account. It is up to you to determine
if you are comfortable with the future financial health of the firm
holding such unbacked accounts.
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