WEEKLY COMMENTARY

April 19, 2005

No Mistake

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The latest Commitment of Traders Report (COT) in gold has generated great interest, and for good reason. The numbers are out of line with any time in the past. You may recall, that a few weeks ago, I actually labeled the gold COTs as a mistake, so unusual were the numbers. The CFTC assured me there was no mistake. After thinking it over for a while, I now conclude that they are right and I was wrong. I now feel that the report reflects positions correctly. But the numbers are still so out of line with normal historical patterns, that an explanation is called for.

Briefly, what has everyone who closely studies the COTs scratching their heads about in gold is that the dealer net short position and the tech fund long position is extremely large, given the current price level and moving average structure. At face value, the dealers’ and tech fund positions are reflective of a top and not a bottom. After all, at the recent top at around $445, the dealer net short position was about the same (145,000 contracts net short) as their current short position. Normally one would have to be bearish about such a dealer net short position. But I don’t think that’s the case now.

I think there has been a profound change in the gold COTs. While the non-commercial large trader long category is at a level suggesting the tech funds are on the long side of gold in a big way, I don’t think it is the tech funds that are long gold. Yet. I think some other, very large, non-tech fund buyers entered the market and bought what the tech funds were selling on the break from previous highs above $445 in March. Just like what occurred in silver a few months ago. You must remember that while changes in the non-commercial category are almost always the result of tech fund activity, the tech funds are not the only traders in that category. So while most think the tech funds are already on the long side in gold (and silver), I don’t see it that way.

I don’t want to dwell too deeply (for personal reasons) on why I say it’s not the tech funds that are heavily long, other than to say they never got buy signals (until today) and the concentration ratios in the COT for the long side say it isn’t them. The good news, of course, is that until the tech funds do accumulate a large long position, the chance of a major sell-off is slim.

The bottom line is that the COTs in silver and gold must be read with a filter that incorporates a new entry of a speculative trader on the long side. While I think it could be profoundly bullish, it also means we are looking at a new game, with many possible outcomes. Those new outcomes can’t possibly be known at this time, certainly not by me, but I think we may have to throw the old COT guidelines out the window.

Personally, I am very excited about this new game and the new challenges it will provide for accurate analysis. I hope this doesn’t sound selfish, but I am going to take this opportunity to break with a pattern that I have let myself slip into, namely, appearing to offer short term trading suggestions. I know that many have profited off the buy points and caution I have raised at extreme COT readings, and I am happy for all who have profited. I am particularly happy from the feedback you have given me, which shows just how much you have learned. But I never wanted to get into that mode in the first place. I never intended to position myself as offering public trading advice.

My main purpose has been to end the silver manipulation and encourage all to investigate and then buy real silver. So I am going to try to get back to those roots and try to forgo so much detailed public analysis of the market structure, and conduct that analysis on a private basis, where it belongs. I will, of course, publicly deal with market structure when it is unavoidable.