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Murphy''s ''Midas'' commentary for May 3 posted in the clear at GoldSeek
By Ted Butler
InvestmentRarities.com
Tuesday, May 3, 2005
I'm trying to avoid the short-term analysis of price movements. But
the recent swoon in the price of silver by some 40 cents and the
change in the market structure on the COMEX require comment. While
I'll be the first to admit that I did not fully expect this blip to
the downside, the one-week selloff in silver has dramatically
improved the market structure. I'm convinced that the tech funds
were selling (and selling short) and the dealers were buying
heavily. This is the stuff of major bottoms.
You won't see this improvement in the most recent silver Commitment
of Traders Report (COT), as the selloff commenced immediately after
the Tuesday cutoff date. But daily volume, open interest, and price
patterns suggest to me a major (10,000 net contract) improvement in
the market structure since that report. We're now in
dimes-to-the-downside, dollars-to-the-upside mode.
In gold, the tech funds did finally enter the long side, according
to the latest COT, but I am still unsure of their true position, as
I still see evidence of a new large trader(s) in the non-commercial
category. While this still means that there are a number of possible
outcomes, I am left with the feeling that this new trading force is
stepping ahead of the dealers on both the buy and sell side, trying
to capture some of the brain-dead tech funds' capital. This may
explain the sharp but relatively small moves in gold recently, as we
thrash above and below the tech funds' moving-average signals.
Another recent development has been the unusual delivery pattern
emerging in the May silver contract. On first notice day only seven
deliveries were tendered, the smallest in COMEX history, in my
recollection. As I have previously written, simple economics
dictates that the first delivery date in all commodities is usually
the heaviest delivery day, as the deliverers gain nothing by waiting
and lose the use of funds by not delivering at the earliest
opportunity. One can't help but assume that real silver availability
was lacking to account for such a small number of first day's
deliveries.
The second day showed a sharp increase to 1,519 deliveries, followed
by 312 today. The larger second-day deliveries indicate to me that
someone bought silver in the roll-over migration just before first
delivery day, similar (but on a smaller scale) to the "great
snookering" we saw in last July's delivery episode. There are still
more than 3,000 contracts open in the May contract, so we'll have to
watch developments closely. One day we are going to have a delivery
problem, mandated by the structural deficit.
As recent events have made clear, it is normal to pay close
attention to COMEX delivery periods. This unusual May delivery
pattern comes on the heels of the move in the March contract to a 3-
cent premium at the end of the delivery period. Right now May is
tighter than was the prior March contract. We have more unresolved
open interest and the spreads are tighter in May than they were in
the March contract at an equivalent time. That doesn't mean May will
get tighter from here, as the March contract did, but it bears
watching. Combined with the dramatically improved COT position in
silver, it's hard to imagine a more bullish backdrop.
Let me throw in one more bullish factor for the real silver
investor. As the recent round of mining company earnings reports
have indicated, it costs a lot more to produce an ounce of both gold
and silver. Due to energy, equipment, and other cost pressures, the
breakeven price for silver at a primary mine appears to be $7 or
higher. That's an increase in the cost of production of some 40
percent in two years.
What this tells me is that silver at $7 today is equivalent to
silver at $5 two years ago. Just as prices below $5 proved to be
excellent buy points in the past, I think the same can be said about
silver prices below $7. An astute analyst said long ago that buying
any precious metal below its cost of production is foolproof. I
think that's where we are in silver.
As long-time readers know, I have had limited success in trying to
get the silver mining companies to address the manipulation of the
price of silver. I have consistently mentioned four companies in
particular -- Pan American, Hecla, and Coeur d'Alene because they
are primary silver producers, and Apex because it is sitting on such
a large cash position. Additionally, the management of these
companies purports to be leaders in the silver industry.
It still amazes me that these companies have done nothing to fight
for their shareholders and bring attention to the silver price-
fixing games on the COMEX. They should see clearly the price setting
that takes place between the dealers and tech funds. Instead, these
companies continue to pretend that the price of silver is set freely
and fairly.
Here's a bit of advice for them intended to help suffering
shareholders: Forget gimmicks like minting your own silver items for
the retail public. Instead, speak up about the wholesale
manipulation on the COMEX.
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