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Resource Investor''s report on the murder of Brett Kebble
By Theodore Butler
InvestmentRarities.com
Tuesday, September 27, 2005
The most recent commitment of traders report (COT) indicated that
the tech funds had, effectively, increased their long position in
COMEX gold back to a record, while the dealers increased their short
position to a reciprocal record. Thus we are in a high-risk state in
the gold market for a selloff down through the moving averages. Of
course, that does not preclude new highs first or tell us much about
timing. And it is always possible for the dealers to be overrun,
though that is still yet to occur in memory in gold and silver.
Although there is continued increased attention and commentary on
COT analysis in gold and silver, I am somewhat taken back by the
underlying current of thought that holds that the COT market
structure is somehow peripheral to why the market moves in the short
term and the great anticipation (hope?) that the dealers will get
slaughtered in a self-induced orgy of short-covering. Don't
misunderstand me -- Seeing the dealers lose big and thus ending the
illegal price dominance of paper trading will be a day of great
personal celebration for me and all free-market advocates. But it
may be premature to dance in the end-zone and slap high-fives. As I
have written previously, these dealers are harder to kill than
Dracula.
It is important to put the COTs into proper perspective. They are
not the underlying force to long-term price movements but rather are
responsible for the $30-$50 intermediate-term moves in gold, in my
opinion. While it is true that gold rose more than $200 over the
past few years with the dealers consistently net short, a close
study of the changes in the dealers' net short position reveals they
largely escaped loss by virtue of trading against the tech funds.
(The long-term rise in gold had more to do with the cessation and
reversal of the idiotic and manipulation practice of metal
leasing/forward selling.)
The dealers' trading success (or at least escape from financial
damage) has occurred in spite of the funds holding enormous open
profits in gold and silver at times, measuring in the hundreds of
millions of dollars, only to lose such open profits in sudden price
downdrafts. It is easy to prove my assertion. Go to the Web site of
what is considered to be the largest tech fund, John W. Henry & Co
(www.jwh.com), and review the lack of profits in their metals'
trading in spite of robust gains in metals' prices these past few
years. I'm not saying the tech funds have lost big, but rather that
they have let big open profits disappear on several occasions and
have nothing to show for all their massive metals trading.
Since the lows in July, when the tech funds held a small long
position and the dealers a small short position, the gold price has
advanced roughly $50. That price advance was caused, according to my
COT-interpretation, by the tech funds' purchase, of more than
100,000 COMEX gold futures contracts (the equivalent of 10 million
ounces). Perhaps I am oversimplifying things, but it seems clear to
me that this 100,000-contract tech fund purchase is precisely why
the gold price rose $50. I say this knowing full well that many
other reasons for gold's rise have been given.
It is this 100,000 contract increase in the tech fund gold long
position and dealer short position that creates the risk to the
downside, as it could be expected that the tech funds will sell
these contracts at lower prices. It is important to state that I
don't know if this will happen, just that it has always ended
with tech fund liquidation when the position has been this extreme.
Maybe it will play out differently this time. To be sure, the
resolution of this extreme market structure, one way or the other,
will be precisely what determines the next short term move in gold
prices.
My point is simple: The $50 gold price increase came because the
tech funds bought 100,000 COMEX contracts, and the price will move
from here, up or down, depending upon who blinks at this point --
the funds, as is usually the case, or the dealers being overrun for
the first time. I don't claim to know how this will play out and
neither does anyone else, but I do know what will determine the
outcome. That paper speculators, funds and dealers alike, and not
legitimate real metal participants, are clearly setting prices is
against basic commodity law.
In silver, there was also deterioration in the market structure, by
close to 20,000 contracts (100 million ounces). While the silver
COTs are nowhere near the historical bearish extreme of gold, it
does give one pause for thought on a near term speculative basis,
especially considering that extreme gold reading. (Long-term core
silver positions and the COTs, like oil and water, don't mix. The
real silver fundamentals are better than ever). But the willingness
of the dealers to sell and let the tech funds "off the hook" by
20,000 net contracts does negate a recent speculation of mine that
the dealers may be unable or afraid to sell short silver in size and
that the big move was imminent because of that. Obviously, I was
wrong, even though we did rally by 80 cents, trough to peak, in the
past couple of months. Eighty cents was not my idea of the big one.
But I am still struck by something that is nagging at me. While the
dealers did sell roughly 20,000 contracts on the so-far modest
silver rally this time, my sense is that they are still reluctant to
sell short the massive quantities they have sold regularly in the
past. There have been times in the recent past when the dealers'
net short position would be as much as 30 to 40 thousand contracts
larger than it is currently, or the equivalent of 150 to 250 million
ounces more than now. As recently as early June, the dealers held a
large 77,000-contract net short silver futures position on the
COMEX. In the past two months, however, the largest net short
position has been in the 54,000-contract level, both in early August
and in the latest COT Report.
Why this seems strange to me is that gold has hit record large
dealer short positions in the past two months, which caused the
unprecedented extreme between the very high dealer short position in
gold and the very small dealer short position in silver. One
interpretation of this dichotomy is that the dealers were eager to
sell gold short into the tech fund buying over the past few months,
sensing they could cause tech fund liquidation eventually, but were
very reluctant to sell silver short at all (at least until the two-
day 40-cent rally incorporated in the most recent COT).
Maybe I'm imagining something that isn't there, and if silver
continues to rally and the dealers do buildup to the large short
positions they have held in the past, then my imagination was,
admittedly, misguided. But if we turn down from current price levels
and the dealers buy back the 20,000 contracts of silver they have
recently sold, then that next bottom would take on particular
significance.
I admit to disappointment that this last rally in silver didn't
explode violently from Day 1. It could have easily done so,
considering the small net short position of the dealers and the
large tech fund short commitment. Who knows, it still may. I
certainly like it better when the COTs are flashing strong buy
signals to compliment the spectacular silver fundamentals. Still,
the COTs were and are, once again, in conformance with the price
action that transpired in both gold and silver As such, it is hard
to disregard the message, at least until that message is wrong. Kind
of like a child learning quickly not to touch a hot stove.
As I have written previously, the COTs are not the be-all and end-
all in the markets. They were never intended to be. Long-term
investors should generally ignore them. Never should anyone dispose
of a long term silver position because of a COT reading and never be
naked short silver under any circumstances. But the COTs do have
their use, particularly for speculative purposes. In my opinion,
they have yet to be dead wrong at important market tops and bottoms.
That's not to say they can't or won't be wrong, just that I
haven't seen that yet.
There's something else about the COTs that bears mention. They
provide both buy and warning signals on a recurring basis. As simple
as that sounds, any alternative guide that doesn't regularly provide
both signals tends to become little more than a feel-good
cheerleading device. I don't need anything to make me more bullish
on silver. And it's OK for the fundamentals to constantly give
strong reasons to buy an undervalued asset like silver (until it is
no longer undervalued), but it would be useless to further rely on a
non-fundamental guide that never issued possible warnings on a short
to intermediate term basis. The COTs may not tell you what you
always want to hear, but they just might tell you what you need to
know.
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RECOMMENDED INTERNET SITES
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Free sites:
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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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