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Wall Street Journal: Selling IMF gold for debt relief is just a scam
By Ted Butler
InvestmentRarities.com
Tuesday, June 7, 2005
As foretold by the structure of the market, as defined by the
Commitment of Traders Report (COT), we have now witnessed meaningful
rallies in several markets, including silver, gold, and copper. Once
again, the tech funds tripped over their own feet in selling down to
the lows and then reversed to the buy side, causing prices to rise.
Predictable.
Now the question is: How far do the metals rally on the back of tech
fund buying? No one can answer that. It's one thing to identify low-
risk buy points, when the tech funds are loaded to the short side,
but quite another when we move away from those low-risk entry
points. As we have just barely penetrated the key moving averages in
gold to the upside, there could be more follow through, perhaps more
than a little. But we have used up several tens of thousands of net
tech fund gold buying power since the Tuesday cut-off, and that does
increase the odds of a relapse to the downside.
Silver moved to the upside first and has been decisively above all
its moving average tech fund buy signals. This has resulted in a
noticeable deterioration in the silver COT structure. In addition to
the almost 20,000 net contract increase in the dealer net short
position in the latest COT report, there appears to be a further
10,000 contract deterioration from the cutoff date. This is not good
news, as it increases the risk of a sharp selloff, as alluded to
last week.
This 30,000-contract increase in the dealer net short position in
silver is equal to 150 million ounces. It increases the total dealer
net short futures position to more than 350 million ounces. As
always, I ask you to put these numbers in perspective. Just the two-
week increase in the dealers' net short position, alone, is
greater than all the known silver bullion in the world, making this
selling the most naked of short selling. These dealers have real
silver backing these short sales like I'm the Easter Bunny.
And all this dealer selling took place on a 60-cent price increase.
This is blatant price manipulation. It is not free-market behavior.
Legitimate sellers should strive to get the highest price possible.
Selling short the equivalent of total known world inventories on a
smaller than 10% rise in price in less than two weeks, is collusive
price control. Period.
It's relatively easy to identify low-risk entry points based upon
COT analysis, as past writings hopefully make clear. And it is
preferable for me to be able to write with the confidence that we
are at low-risk buy points, with a couple of dimes, or so, of risk
to the downside. The recent 60-cent and 30,000-contract rally in
silver has brought us away from ultra-low risk levels. In fact, I
can't help but feel that the dealers let the tech funds off the
hook much more easily than they had to. I hope everyone realized
that, instead of a 60-cent rally, the dealers could have demanded
dollars per ounce. Someday they will.
The real long-term fundamentals and recurring physical tightness
still suggest many dollars to the upside in silver. It is important
for long-term investors to focus on that and not the possible 10%
declines that occur periodically. Those declines may not
materialize, but if they do, they can be put to advantage.
I'd like to follow up on last week's topic, the unusual copper
delivery situation on the COMEX. One day after my article, the COMEX
announced that it was reducing the position limit in the spot copper
month by 50%, to 500 contracts. They didn't elaborate on the
reason for the change, but it is clear that this was a measure
intended to relieve what I characterize as the worst thing that
could happen to any exchange -- a delivery default.
While I can't say I'm surprised that the COMEX has taken some action
(as the copper delivery situation is very serious), it is also no
surprise that they have not employed the best solution available.
Rather than rewrite what has already been written, please allow me
to present the solution that I have long offered. While intended in
silver, the connection to copper should be clear. The title of the
article, aptly enough, is "The Solution" --
http://www.investmentrarities.com/09-29-03.html
Here are some excerpts:
"I have a better solution. A much better solution. My solution,
unlike the CFTC's, is fair. My solution is constructive, in that it
will head off and prevent a COMEX silver delivery default, not
merely react in a panic, after a default. My solution is simple and
cost-free to implement. My solution guarantees market integrity and
will restore confidence in the CFTC and the COMEX.
"My solution is to mandate that both long and short position holders
in the current delivery month COMEX silver futures contracts
guarantee their delivery responsibilities by first notice of
delivery day. For longs, this means the full cash value of the
contracts they hold must be deposited by first notice day. For
shorts, this means receipts or warrants on COMEX-approved warehouse
silver must also be deposited by first notice day. Any long or short
not meeting these requirements must be liquidated by the clearing
member responsible for the account, by first notice day.
"If you think that solution sounds simple, you are correct. If you
think that it sounds fair and balanced, you are also correct. You
would be correct, again, if you thought that it would eliminate the
possibility of a default in COMEX silver. Most importantly, market
integrity would be preserved and confidence restored in both the
COMEX and the CFTC."
This solution applies to copper to a "T." It will be interesting to
see how the ongoing copper delivery drama plays out. I hope it is
clear that if we do have problems or emergencies in COMEX copper
related to delivery, that they were completely avoidable. It is sad
that a real solution to a problem can be intentionally ignored.
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Ted Butler silver commentary archive:
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