TED BUTLER COMMENTARY

May 13, 2008

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

Here are a few brief observations on the current market structure, as depicted in the most recent Commitment of Traders Report (COT), for positions held as of the close of business May 6. On the surface, there were no big surprises, with slight reductions being recorded in the total net commercial short positions in both COMEX silver and gold futures.

As last week’s article predicted, there was some moderation in the true net concentrated position of the largest traders in the silver market, due to actual contract liquidation and the mechanical contract liquidation as a result of deliveries on the May contract. For those keeping score, the true percentage for the 8 largest traders of the entire COMEX silver futures market (after subtracting all spread positions) dropped to 79% from 83%. While I still believe that 83% will prove to be a high-water mark, 79% is just as outrageous for a concentration in any futures market.

Incidentally, the percentage of the entire market for COMEX gold futures (ex-spreads) held by the 8 largest traders was also 79% (up from 77% the week before). In both gold and silver, the true 79% concentration of the 8 largest short traders is some 50% greater than the reported concentration because the reported figure does not remove all spread transactions. I’m starting to think that only the regulators are fooled by this obvious ruse.

Beneath the surface, however, there were some unusual developments. In silver, the most notable development was that the raptors (the 9+ commercials, other than the 8 largest traders) appeared to take delivery of the majority of the first week’s silver deliveries. I hadn’t seen that before, and it does raise the question of why take delivery? Just about any answer to that question would appear to be bullish.

But it was in gold that the most notable developments occurred and also involved the gold raptors. For the first time I can recall, the 4 largest gold traders sold short a significant number of contracts (7,000) on a general price decline during the reporting week. (While gold prices finished flat Tuesday through Tuesday, three successive multi-month price lows were recorded during that period). This raised the big 4’s net short position to a record 180,000+ contracts.

Never, in my memory, had the largest gold short traders sold on the downside. This does increase their determination to artificially depress prices. One of the standard lines from the CFTC has always been that the large short traders can’t be manipulating the price because they always buy on sell-offs. I’d like to see the Commission spin this development.

Even more interesting was that the gold raptors (the 9+ commercial traders) bought what the big 4 sold short. In fact, these raptors now hold a near record net long position, against the big 4’s record short position. Talk about a dichotomy - commercial against commercial. Since there is no precedent for this match-up, there is no historical track record to offer guidance on the resolution. But it does suggest we are at a critical point.

Also suggestive that we may be at some type of inflection point is how the market structure has evolved since the highs in gold and silver, both in price and extremes in the commercial net short positions, over the past couple of months.

In silver, on a subsequent peak to trough price decline of more than $5, the total commercial net short position declined about 18,000 contracts (90 million ounces) from the COT for positions held as of February 19. There were commensurate reductions in the concentrated net short positions of the 4 and 8 largest traders, although these concentrations are still obscenely high and provide clear evidence of a manipulative crime in progress. As previously reported, there was no liquidation at all in the big silver ETF, only increases in metal holdings. Near term volatility and today’s jam-job to the downside aside, it feels more and more to me that silver may explode shortly.

In gold, the situation is somewhat different. On a peak to trough price decline of $180, there was significant liquidation both in the total commercial net short position in COMEX futures of 70,000 contracts (7 million ounces), and in the big gold ETF of another 2.6 million ounces. Yet, in spite of such significant gold liquidation, the 4 largest shorts actually increased their net short position, as indicated above, to the largest amount ever. This highlights the issue of concentration in gold like never before. While some gold people appear to be awakening to this clear proof of manipulation, most still overlook it.