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Peter Brimelow of CBSMarketWatch notes new Sprott report on market manipulation
By Theodore Butler
InvestmentRarities.com
Wednesday, September 7, 2005
Even though there is almost too much to write about in
silver, I have to force myself to do so, given the
overwhelming enormity of the nation's greatest natural
disaster. It seems shallow to write about silver in
light of this tragedy. My heart goes out to those
suffering and my admiration to those helping. This
will be a long recovery process and we must all do
what we can to help our fellow Americans. While many
seem preoccupied with assigning blame, I doubt that is
constructive. What would be constructive would be for
those of us who are not victims to count our blessings
and pitch in and help on any way possible.
That would certainly include sharing any material
bounty that might come our way by virtue of silver
investment gains. Based upon recent developments,
those gains might be closer than otherwise expected.
The first development is in the market structure, as
defined by the Commitment of Traders Report (COT).
The most recent silver COT was shockingly bullish.
Every category exhibited positive changes, but the
standout was the stunning increase in the tech funds'
short position, which doubled to an extreme not seen
in a couple of years. It appears the recent shakeout
in silver just may be the final one, as the tech
funds' apparently took the dealers' bait and fully
committed to the short side.
Not only was there an increase in the large tech
funds' existing short positions, but there was also a
notable increase in the number of tech funds jumping
on the short side of silver. Since these brain dead
tech funds stand absolutely no chance of delivering
actual silver against their short positions, it's just
a matter of when and at what price they rush to buy
back these shorts. Make no mistake; there was nothing
accidental about the recent selloff to new lows in
silver. It was designed to lure the tech funds onto
the short side. A more bullish COT structure is hard
to imagine.
It appears that the dealers have succeeded in
transferring a sizable portion of the short liability
to the hapless tech funds. The funds are potentially
trapped. Now we await the resolution. As always, the
price action will depend upon how aggressive the
dealers are in selling short on the next rally. If
they don't short aggressively, the price of silver
will explode. If the dealers do short aggressively on
the next rally, the gains will be much more subdued.
In gold, there was a large improvement in the
just-reported COT report on the sharp price decline
below the 50 moving average on the last reporting day,
Tuesday, August 30. But even with this improvement the
gold market structure can hardly be labeled as
bullish, particularly when considering the subsequent
deterioration from the cut-off. It's still a case of
the gold COTs being in dangerous territory, while
silver is in a spectacularly bullish configuration. As
mentioned previously, it is an unprecedented
dichotomy.
As exciting and important as the COT market structure
may be, it is not the only noteworthy development in
silver. There were also unusual developments in
warehouse stock movements and the first few days'
deliveries in the big September COMEX contract. On two
days, over 4 million ounces of silver were brought in
to the COMEX warehouses. While many still assume an
increase in COMEX inventories is bearish, I don't
agree. This silver was brought in because it had to be
brought in, to satisfy delivery demands. If there was
available silver to deliver readily in the warehouses
already, more wouldn't be brought in. Certainly, the
price action seemed to confirm and did not negate my
bullish interpretation, as price rose strongly
immediately after the inventory addition.
The actual number of deliveries over the first few
days were the largest in more than a year, also
confirming overall physical silver demand. More
importantly, the largest stopper, or taker of
deliveries, was none other than AIG, who had virtually
disappeared from COMEX silver delivery dealings, after
long dominating such activities.
Those are the facts; now I'd like to speculate.
Recently, I wrote that I noticed a significant
increase in the commercials' gross long position and
remarked how that could indicate coming physical
delivery demands. In trying to guess which commercials
might be responsible for these new long positions, I
must admit I did not think of AIG first.
My first thoughts were it could be preparatory silver
buying for the pending silver ETF. After all, the
quantities and timing of the unusual commercial buying
seemed to coincide with the filing of the preliminary
prospectus for the Barclay's silver ETF. The buying
commenced within days of the June 17th filing of the
prospectus. Now, I know the silver ETF may never be
approved, as I wrote in "The Coming Silver ETF?," but
a close reading of the prospectus indicates that
Barclays can not issue shares in the silver ETF, even
if approved, without first owning and possessing
actual silver.
Therefore, Barclays cannot wait for regulatory
approval before making arrangements to get the real
silver. It must have a decent quantity of silver in
place before regulatory approval, as the announcement
of approval alone, if it comes, will impact the price
of silver. I still think the silver ETF will be
bullish for silver whether it is approved or not,
because it will prove how scarce real silver is in
either event. Either ETF buying (or conversion from
futures to actuals) will propel silver upward, or the
denial by regulators will only come because they know
the real silver doesn't exist to back the fund. The
denial of even a single silver ETF will prove to all
just how rare silver is compared to gold, where many
ETFs haven't impacted the price. Even the most casual
observer will have to conclude that silver is much
rarer than gold if the regulators deny even one measly
silver ETF, compared to the many in gold, no matter
what the spin.
I still think the silver ETF may be behind some of the
commercial futures buying, and note with interest
that, if true, it highlights how the COMEX is where
silver must be bought, as there is very little silver
available in London or elsewhere. After all, why buy
under the relative glare of COMEX transparency, when
you can do so in the much more secretive London or
Zurich venues? Especially when the prospectus calls
for London storage.
But the sudden appearance of AIG as the major delivery
stopper, after such a long and conspicuous absence,
creates another possibility. (Izzy, my silver
Godfather, from the start of the unusual commercial
buying, favored this other possibility even before
AIG's name turned up in the delivery process).
Considering the regulatory hot water that AIG has
found itself in over the past year or so, this is one
corporation that you can be sure is walking the legal
straight and narrow. It is inconceivable that AIG
would do anything cute at this particular time. For
them to show up as a notable silver delivery
participant after all their legal troubles and past
allegations by me of wrongdoing in the silver market,
means AIG has a compelling reason to do so.
This is speculation on my part (actually on Izzy's
part), but the compelling reason why AIG must take
delivery of silver is because it is obligated to do
so, by virtue of prior lease obligations to Red China.
Quite simply, China may want its silver back and AIG
must return it. AIG is procuring it from the COMEX,
also in the full glare of transparency, as that is the
last remaining place to get quantities of silver. If
this speculation is close to being true, you can be
sure that the quantities of silver needed to be
returned involve a lot more silver than the 8.5
million ounces of silver taken by AIG in the first few
days of the September delivery.
Maybe it's for the ETF, maybe it's for lease returns
by AIG, or maybe it's both, but if this is why the
commercials are buying silver futures in unusual
quantities, this puts real pressure on the physical
market for silver. It promises continued delivery
pressure in the future. Combined with the extreme COT
readings, this is a very volatile and bullish brew.
With silver still below the primary cost of
production, it is not a time to be shy about being on
the long side.
On a personal note, I've fallen badly behind on my
e-mails. I read them all, but haven't been able to
respond to many, particularly those requiring detailed
responses. If you don't mind, please resend your note
if you really need a response.
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