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Jeff Dahl: Why should mining exploration companies support GATA?
By Theodore Butler
InvestmentRarities.com
Tuesday, August 16, 2005
There were some very significant developments in the world of gold
and silver, in terms of the market structure on the COMEX, as
defined by the commitment of traders report (COT). The most obvious
development was the stunning deterioration in gold. While generally
expected based upon daily price and volume and open interest
changes, the actual numbers, when reported, caused observers to do a
double take. For instance, while I publicly anticipated a 30,000-
contract increase in the dealers' net short position for the
week, the actual 50,000+ increase was a bit of a jolt.
Extrapolating from last week's cutoff date, it appears another
30,000+ contracts have been added to the dealers' net short position
in gold, putting their total net short position at more than 180,000
contracts. This means that around 100,000 net contracts have been
added to the tech fund long/dealer short position on the $25-$30
gold rally over the past few weeks. Let me be clear -- this is why
gold has rallied in the first place. Of course, with the price rally
in gold has come the creation of much higher risk of ultimate sale
at some point by the tech funds of their new big long position.
Silver has been in an opposite situation compared to gold. Not only
has the price action stunk, precisely because of that poor price
performance; there has been no deterioration in the market
structure. In fact, based upon reported and extrapolated COT
readings, silver's market structure is great, with a reading
suggesting low risk and high profit opportunity.
In fact, we are at an interesting juncture in the relative readings
of the COTs in gold and silver. Never before have we witnessed such
negative readings in gold while the silver readings have been so
positive. Since it is unprecedented that the current relative
structures are at extreme opposite readings, there is no historical
pattern developed to offer guidance for how this gold/silver COT
mismatch will be resolved. The consensus among the published reports
I have seen to date is that when gold weakens, it will exert
downward pressure on silver. Maybe, but I'm not so sure. There
are a number of ways this could play out.
One thing appears certain to me -- the relative COT readings in
silver and gold now fully support the relative actual physical
rarity argument of mine that favors silver over gold.
Speaking of published reports on the COT readings, I am continually
amazed at how widespread (and good) the coverage of this aspect of
market analysis has become. While there are still holdouts to this
brand of analysis, there seems to be a growing tide of believers and
public observers who grasp the concept.
I can't say I'm surprised, since the COTs are based upon such
logical principles and this is why I have written about them for so
long. On the flip side, I also can't help but feel that when
something is finally universally accepted, as the analysis of the
COTs seems to be headed, it must lose its effectiveness at some
point.
But with the tremendous attention being placed upon the COTs as an
analytical tool, there is one thing that I observe that has not been
generally accepted. No one will come right out and state the
obvious -- namely, that the COTs prove that the markets are
manipulated. And that the brain dead tech funds are as much to blame
as the dealers. Don't get me wrong; I still believe that the dealer
community, the silver wolf pack, is as crooked as the day is long.
But the tech funds are almost as much to blame, as they are the
enablers that allow the dealers to continue the manipulation.
I think that those who write about the COTs, and especially those
who promote free markets and the end to manipulation in gold and
silver, are missing an important point when they don't label the
tech funds as an integral component in the manipulation when prices
are rising, as well as falling. I can understand that when the tech
funds come rushing in to buy, as they've just done in gold, causing
prices to rise, that the rising price feels good and bulls are
reluctant to complain about anything that causes prices to climb.
But that is wrong, in my opinion. You just can't complain about
manipulation when the price is falling, if the manipulation process
is in place when prices rise and fall. The manipulation either
exists or doesn't exist, regardless of short-term price
fluctuations.
The key point is that the price moves in gold and silver (and other
markets) only when the tech funds and dealers go at it. The reason
the COTs have been so effective as an analytical tool is precisely
because they measure what causes prices to move. It's not a case
that tech fund/dealers trading is coincidental to price moves. It's
much more than that. Tech fund/dealer trading is why prices move.
It's causal. Because it is not the trading of real producers and
consumers that is setting prices but rather the paper trading of the
tech funds and dealers on the COMEX that is setting prices, the
price setting is illegal. Period.
I don't claim to know the motive of the brain-dead tech funds, but
my sense has always been that they are stubborn and mechanical to a
fault. Others suggest darker motives for how they can persist in a
game that has offered them so few rewards. But motives are secondary
to their actual effect on the market. When they buy, we go up, and
when they sell, we go down. This is against the main intent of
commodity law, which holds that speculators must not set the price.
Those who analyze and write about the COTs should step back and
consider what it is they are actually analyzing. If they are writing
because they have come to believe in the validity of the COTs, they
should reflect on what is it that creates that validity.
So how will we resolve the current dichotomy in the COTs with the
negative gold structure and the positive silver structure?
Since this is an unprecedented situation and no one can point to
history, we are forced to guess or speculate. But we do know certain
facts. We know that gold has an extremely large tech fund net long
position and reciprocal dealer net short position. That gold tech
fund long/dealer short position can grow much larger amid higher
prices (as I suspect) or the move up can terminate not far from
current levels. We can state that we are no longer at the ultra-low
risk levels we were at $25 lower and 100,000 net contracts ago.
In silver, we know that we are at an extremely low dealer net short
position relative to the past year or two. We know that there is a
zero tech fund long position and a very large tech fund short
position, so there is no tech fund long liquidation possible, only
the possibility they will add to their short positions. The only
fuel for selling to the downside must come from the large non-tech
funds in the non-commercials category, the commercials that have
recently entered on the long side in unusually large numbers, or the
small traders. None of these three groups of traders has shown much
inclination of liquidating long positions on selloffs.
While the price action of silver relative to gold has been awful
recently, this price action has been created by the actions of the
tech funds and dealers, which, in turn, have created the unusual COT
structure. You can't get to a bad structure without good (higher)
prices, and you can't get to a good market structure without bad
price action. That's just the way it is.
I'd like to speculate a bit here, but please remember it's just
that, speculation. I've held a core belief, for two decades, that
before we get my long-expected explosive up move in silver, the
dealer wolf pack will cause one final selloff in which they clean
out as many longs as they can. Once the decks are cleared, off we'll
go immediately. That's a big reason I started following the COTs so
closely 20 years ago. That's why I have always recommended only a
fully-paid-for physical position in real silver. You can't get
shaken out on that basis.
Lately, I'm seeing things that tell me we've just seen that final
shakeout or soon will. I get the feeling that the normal dealer
shorting wolf pack has become very reluctant or even afraid to sell
the normal big quantities of silver short. After all, they certainly
weren't afraid to sell short an additional 100,000 contracts of gold
recently. But they completely avoided selling decent quantities of
silver short when they could have done so easily. Instead they
maneuvered the price of silver lower before building up their normal
big short position. That's precisely why we have this extreme
dichotomy between the gold and silver COT structure.
Of course I could be dead wrong in my speculation and I will tell
you in advance what will make me wrong. If we see big dealer short
selling on the next significant rally, then I was obviously wrong
about their being afraid to sell. If that occurs, it doesn't mean
that it's all over for silver, just that my speculative feelings of
the big one being close at hand were misguided. No harm, no foul. If
that happens we'll have to assess the risk.
But if the dealers smell that the jig is up -- and if that is why
they were reluctant to sell when they could have done so easily --
then that's another matter completely. If the dealers don't sell
when the tech funds or others come in to buy, the lid gets blown off
the silver market. That will happen one day. It's just a question if
it's one day soon.
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RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.usagold.com/amk/usagoldmarketupdate.html
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
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(In English)
http://www.resourceinvestor.com
http://www.goldpennystocks.com/
Subscription sites:
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http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
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----------------------------------------------------
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