WEEKLY COMMENTARY

June 1, 2004

All Systems Go

By Theodore Butler

Still spectacular. That's the only way to describe the current COMEX market structure, as evidenced by the Commitments of Traders Report (COT). Not only have the COTs for silver, gold and copper remained in strong "buy signal" territory, the latest COT indicated that silver and gold actually got better, with the dealers covering more of their short positions. Also notable was the concentrated short position of the 4 and 8 largest traders, in that it was smaller than anytime in the recent past. This tells us that these markets have big upside potential and small downside risk.

I think that the next rally that takes us through the key moving averages could be the big one. I say that because I feel the commercial dealers will not sell short aggressively on this next price rise, creating a selling vacuum or void, that will enable prices to explode. Since it is obvious that the recent sharp sell-off was designed to rid the dealers of as many short positions as possible, I'm guessing that the dealers will be reluctant to re-short big again on the next rally. I just don't think they will be putting their heads back into the lion's mouth by going naked short the 200 million ounces of silver they just covered.

Of course, I can't know the future, so I look for signs to either confirm or invalidate my opinion. Basically, that's what analysis is all about. I also confess that sometimes I try to do more than analyze. I try to influence. So convinced am I that the silver market is manipulated, I have tried to help end that manipulation. That was my intent in writing to New York Attorney General Eliot Spitzer about the manipulation and, specifically, concerning the powerful dealer, AIG. There are now signs emerging that my efforts might be having the intended impact.

First, as I've noted previously, AIG has disappeared from the COMEX silver delivery process, since I started writing about them. Remember, they had been the most active dealer in COMEX silver deliveries before that, so their withdrawal was noteworthy. But it is a story today from Reuters, that provides the surest sign that the dealer community is losing its appetite for wanting to be short big in silver. Here's the headline and excerpts from the story:

AIG no longer an LBMA market maker in gold, silver

Tuesday June 1, 8:04 am ET

LONDON, June 1 (Reuters) - AIG International Limited, part of American International Group Inc will no longer be a London Bullion Market Association (LBMA) market maker in gold and silver, the LBMA said on Tuesday.

LBMA Chief Executive Stewart Murray told Reuters AIG had been reclassified as a member and so would still trade, with effect from close of business on Friday May 28.

AIG was a first-tier market maker and dealer in over-the-counter spot, forward, option and swap markets in precious metals. Murray said the company requested to be reclassified.

AIG was not immediately available for comment.

This is an extraordinary development. The only development that could possibly be more extraordinary would be an announcement from China that they would no longer sell government silver. Supposedly, the LBMA is the largest physical precious metals marketplace in the world. While I have doubts about this, the CFTC stated this clearly in their recent 9 page denial of the silver manipulation. If the CFTC is correct, and the LBMA is the largest market for physical silver, what does it mean for it to lose perhaps its largest silver market maker.

Why is AIG abandoning the silver market making business? It's certainly not because there is less need to trade silver, as we produce and consume more than at any point in history. It's not because the silver market is dull and boring and offers little incentive for a market maker. On the contrary, volatility and volume have rarely been greater in silver, seemingly offering tremendous opportunities for any market maker. So why quit now, just when things are going well?

The answer is painfully obvious. AIG sees something that tells them to abruptly depart a business they dominated and controlled. Maybe it's an agreement with Spitzer, or the threat of becoming embroiled in the quagmire of a soon to detonate manipulation, or maybe they just see what many more see everyday - the inevitability of an exploding silver price. Who, in their right mind, would want to be short in a soaring price environment? If you're a market maker, you have to go short. The only way you can avoid going short is to stop being a market maker. I've said a lot of things about AIG, but I never said they were stupid. Abandoning the silver market is the smartest thing they've ever done.

Say what you will, but this move by AIG is a blow to the wolf pack. The pack may not be suddenly powerless, but they were definitely weakened, not strengthened, by AIG's retreat. Anything that weakens the wolf pack's dominance is good news for silver investors and the free market. AIG's departure is pure good news.

Lately, I've heard the question asked, "If silver is manipulated, why would anyone buy it? Can't it stay manipulated forever?" My answer is that the manipulation is a reason to buy silver, regardless of all other considerations. Fortunately, an even better is the silver deficit. The deficit guarantees the manipulation must end, as physical silver cannot be brought to market indefinitely at uneconomic prices. Probably it is the deficit that is responsible for AIG exiting the market. For the silver investor, the manipulation is your best friend. But you must buy silver to take advantage of it.