TED BUTLER COMMENTARY

May 27, 2008

A Few Thoughts

I had planned to skip writing an article this week, but today’s sudden drop in price persuaded me to pen some thoughts. Ironically, the short term prospects for silver looked pretty good going into today. The market structure, as defined by the Commitment of Traders Report (COT), appeared OK, and persistent reports of tight physical supplies should have supported the market. So why the sudden swoon?

I try to avoid talking about silver on a short-term basis. That’s because it’s almost impossible for any one person to successfully surf the very short-term ups and downs. More importantly, it is clearly impossible for vast numbers of the investing public to do so. The only chance for real success for the average investor is on a long-term, non-leveraged basis. I continue to feel strongly that silver represents the best long term investment. That said, it’s hard not to contemplate the short term. And based upon those short-term indicators that I follow, I still feel a silver investor should be "all in."

The latest COT, for positions held as of 5/20, indicated a pronounced deterioration in COMEX gold futures and a much less pronounced deterioration in silver. (Deterioration being defined as tech fund buying and dealer selling). In gold, long speculators and tech funds bought almost 38,000 contracts against dealer (short speculators) selling of the same amount. There have been very few weeks of a deterioration of that magnitude. In silver, tech fund buying and dealer selling amounted to a moderate 3200 contracts.

Interestingly, while the bulk of the dealer selling was by the raptors (the 9+ smaller commercials), the four largest traders in gold sold aggressively as well. The big 4 set another new record of over 187,500 contracts net short, with the big 8 coming close to a record with almost 233,000 gold contracts held net short. At over 81% of the entire short position (ex all spreads), the big 8 hold a net concentration that would clearly be considered manipulative in any market.

Can you imagine the (legitimate) howls of protest from our politicians and regulators if there were a long concentration in crude oil that came close to the short concentration in gold or silver (77% this week). Unfortunately, for those looking to pin the blame on speculative buying for high oil prices, the true long concentrations in crude oil run about a third of the true short concentrations in silver and gold.

In silver, it was interesting to note that the big 4 did not increase their short position, although the 5 thru 8 largest shorts did, and the raptors sold long positions. In my opinion, today’s sharp sell-off to below the 50 day moving averages is explained by the dealers attempt to flush out the recent longs. If I’m correct, this sell-off in silver might not last very long. It still feels like silver wants to move sharply higher when this liquidation is complete.

While I did not expect this sharp sell-off, its explanation should be clear in hindsight. The dealers wanted to reduce their short exposure and rigged prices lower during a thin trading time to get the tech funds selling below the key 50 day moving averages in gold and silver. The commercials, early this morning, sold a few contracts to get the ball rolling downhill and then pulled their bids until the tech funds starting selling in earnest as the moving averages were broken. Then the commercials bought back all the contracts the tech funds were coughing up. This should be obvious to everyone (save the regulators, who are averting their eyes.).

Additionally, the current sharp sell-off needs to be put into perspective. We did, after all, move sharply higher in the week or so into this sell-off. In fact, the relatively more severe sell-off in silver, given how mild the deterioration in its market structure was compared to gold’s, is encouraging in that the dealers really seem to be serious about closing as many of their silver short positions as possible. That makes sense to me, because if any big short position could cause them real trouble, it has to be silver.

Finally, I want to thank everyone who took the time to write to the Inspector General of the CFTC. Although I did not ask anyone to send me copies of your correspondence, many of you did. While impressed with the quantity of the copies I received, I was overwhelmed with the quality of your sentiments. There was a near-universal eloquence in the copies I read. Whether it will do any good remains to be seen, but it certainly could, and that is what matters. For sure, the regulators will never be able to plead ignorance. Also, I just can’t keep up with my e-mail correspondence. I read everything sent to me and appreciate the contacts, but just can’t reply to all of them, especially those requiring complex answers.