TED BUTLER COMMENTARY

January 7, 2008

Doin’ The Right Thing

Life is a continuous process of trial and error. We try to learn from our setbacks and enjoy the successes. When we attempt to do something in concert with others, we collectively learn from failure or share in the joy of accomplishment. Today, we can all take pride in doing something well. In addition, I believe we are faced with a special bonus – a success that we can also learn from.

A little over two months ago, I wrote an article titled, "A Simple and Constructive Solution" in which I suggested that those interested should contact Barclays Global Investors and ask them to start publishing the serial numbers and weights of the bars held in their silver ETF, SLV. I wrote the article in reaction to the many requests I received from readers asking me if real silver was held in the ETF.

Many of you did contact Barclays. Within a week or two from writing the article, I started to receive copies of e-mails sent by Barclays to those of you who contacted them indicating that they intended to list the bars shortly. True to their word, on January 4^th, the complete bar list started appearing on the SLV web page. http://www.ishares.com/product_info/fund/overview/SLV.htm

Obviously, there was a direct connection between my article and Barclays publishing the silver bar list. This was no coincidence. While I am gratified to have been an agent of change, there are some broader lessons here.

First and foremost, congratulations to Barclays for listing the bars. We all know that it’s rare for people to change the way they do things, simply because they are asked to do so. More rare is getting a large institution to initiate change based upon outside request. This was no small matter. Especially when it involves listing more than 150,000 silver bars. A tip of the hat to Barclays for doing the right thing.

Secondly, congratulations to all of you who took the time to contact Barclays on this issue. I know that without you, no change would have been forthcoming. I could write articles until the cows came home, but alone I would accomplish little. So, high fives all around.

But what has me really excited is what we can all learn from this experience. At the top of the list, is the confirmation of just how important it is to have the serial numbers and weights of all 1000 oz bars that are stored for you. There is a world of make-believe silver out there, pretending to be real silver. Make sure your silver is real, get the serial numbers. Keep it simple – no serial numbers, no real silver.

The most important lesson from this experience is the sense of empowerment you should feel, and what that portends for the future. Cynics have long contended that it is futile to attempt change by writing to the authorities about any issue. That’s nonsense. This Barclays issue proves that important change can be achieved.

The key to change, in my opinion, lies in a compelling and logical argument and collective presentation. Thanks to the Internet, it is easier than ever for people to unite and press for change. That’s the real lesson here.

I am convinced that the most important change that can be achieved in the silver market is the termination of the ongoing manipulation. Specifically, the concentrated short position in COMEX silver must be brought to an end. Terminate the concentrated short position, and the silver manipulation will be history.

In the near future, I will present a simple and construction solution to effectively neutralize the concentrated silver short position. I tell you clearly that, just like with Barclays, your involvement will determine whether that solution is adopted.

COT Update

A reader from New Zealand asked me this week about the status of the market structure in gold and silver, as depicted by the Commitment of Traders Report (COT). It reminded me that I haven’t written about the COTs for months.

It wasn’t an accident that I have not written about the COTs. For one thing, they are used to make relatively short-term market direction guesses. This is at odds with my strong belief that the best chance for success by the investor in silver is on a long-term basis. I just don’t want to be responsible for anyone losing a long-term position for short-term COT considerations.

In addition, the COTs seem somewhat less reliable when historical extremes, either in prices or position, are being established. In gold, that has been the case in both instances. We have seen both record prices and record COT position extremes.

Lastly, I haven’t written publicly of the COTs because there have been more important issues to write about, namely dialogue with the CFTC about the concentrated short position, as well as the Morgan Stanley class-action settlement and the Barclays’ matter.

But that doesn’t mean I haven’t been following the changes in the COT reports closely, or that I think they no longer matter. The truth is, that while the COTs don’t always predict future market behavior accurately and timely, they do always seem to explain significant moves. I think that someday the COTs may not matter much, especially in silver, but I don’t think that day is here just yet. I’m not married to the COTs, when they stop making sense, I’ll stop following them.

The reason that I have long followed the COTs is because they offer the most logical and verifiable data explaining investment flows. In other words, who’s buying and selling on a short-term basis.

It is said that prices are made at the margin. This means that the price of anything changes based upon the buying and selling of only a portion of the total amount of trading in that item. From what I have been able to determine, the price of gold and silver are more influenced by trading on the COMEX, than by any other trading. Yet, few seem to recognize this COMEX influence.

Some examples – in the almost $200 rally in the price of gold since August and through today (extrapolating from the most recent COT), much more net buying took place on the COMEX than in any other venue. Technically-inspired large speculators bought more than 16 million ounces in gold futures, or more than four times the less than 4 million ounces added to the big gold ETF, GLD, during that time.

In the $65 rally in the price of gold over the past two weeks, speculators on the COMEX bought more than 5 million ounces of gold futures (again, extrapolating) versus only 400 thousand ounces added to GLD. During the $50 gold price sell-off in November, COMEX speculators sold 3.5 million ounces net, compared to 300,000 ounces in GLD. As always, the dealers were and are on the opposite side of the speculators.

My point is simply that the accumulation and liquidation of gold (and silver) futures contracts on the COMEX is the prime price driver, principally because more equivalent metal is involved than in any other verifiable market.

So where do we stand now, COT-wise? The latest gold COT Report, for positions held as of Dec 31, shows extreme historical readings in a number of categories. And extrapolating from the cut-off date, it is certain that new extremes have been recorded, due to daily price, volume and open interest changes.

We are at historic highs in large speculative net and gross long positions and the same for dealer net and gross short positions. In other words, the big speculators have never been more long, nor the dealers more short in COMEX gold futures than currently. In addition, the concentrated short position of the 4 and 8 largest gold traders on the COMEX are at decisive new record extremes.

In silver, we are not near similar record extremes in speculative net and gross long positions, or dealer net or gross total short positions, but we are still very close to the critical record concentrated net short position by the four largest traders. Please don’t misinterpret that to think the silver short position is small. The truth is that it is in a league of its own.

I can’t shake the feeling that the commercials, as a whole, are reluctant to let the silver price run as much as gold has run, because they don’t want to sell silver short any more than they have to.

Interestingly, the non-commercial spread position, in both gold and silver, is also near historic extremes. As I have written to the CFTC, it is my opinion that there is no economic legitimacy to these large spread positions. I believe these spreads exist for the sole purpose of artificially understating the published concentration percentage of the market held by the large traders. Neither the CFTC, nor anyone else, has even addressed this contention.

The bottom line - the current market structure is extreme. Yes, the dealers are out a large chunk of dough on their open positions. Yes, the speculators are sitting on a pile of open profits and certainly appear to have the upper hand. We could well be witnessing the final destruction of the dealer shorts in gold and silver. If the dealers move to cover shorts to the upside, at this point, the price action will be much more explosive than what we’ve seen so far.

On the other hand, we are talking about open positions that have yet to be closed out. In other words, it ain’t over, till it’s over. Considering their history and bag of dirty tricks, I don’t feel comfortable in pronouncing the dealers dead until they have a wooden stake through their hearts. Long-term silver positions should be held, but with the recognition we are in high-risk territory.