TED BUTLER COMMENTARY

September 5, 2006

Gold – GATA – and the COT

By: Ed Steer & Ted Butler

One of the most pleasant side effects of being involved in the ongoing process of exposing the gold and silver market price manipulation to the naked light of day is the quality of the people who I have met on this journey. This would, or course, include the entire GATA community…most of whom I have had the pleasure of meeting many times over the last six years.

But at the top of the list people of people that I have never met that would automatically fall into the august group mentioned above, is my now good friend Ted Butler. From the first time I read his work way back when, it was self evident that this man knew of what he spoke. I have a natural tendency to gravitate to people such as this, and Ted’s work was no exception.

Over the years on the Internet, I have learned that Mr. Butler has no peer when it comes to his understanding of the silver market or the Commitment of Traders report. And, whether it is admitted by other people or not, all roads of understanding in these two areas lead directly to Ted Butler.

During our many telephone conversations, most of our discussions were about the state of the silver market and the COT as it related to silver, copper and gold…all of which Butler follows religiously…but he only writes about silver.

During the last several months, as the silver concentration ratios on the short side started to get out of hand, he mentioned that gold was in an almost identical circumstance…that ‘four or less’ commercial traders were sitting on a huge portion of the gold short position.

A few days ago, I asked Ted if he would be kind enough to comment on the COT as it related to the current gold market. In an e-mail that arrived today, this is the reply I got. Without doubt, his commentary in this area is well worth sharing, and here it is….

"As you know, I am much more interested in silver than I am in gold. The fundamentals and the manipulation in silver are much more obvious and compelling. At anywhere near current prices, I would buy silver and sell gold until the cows came home. That said, if there were no such thing as silver, I would be a raving bull on gold right now, due to the COT structure.

I know many people believe in gold for a variety of reasons, mostly concerning gold’s role as the one real money. I respect those beliefs, although I don’t share them. Since I’m strictly a supply/demand guy, I’m not a gold believer in terms of the real money perspective. But I’m not a gold disbeliever either. I have no belief. I guess that makes me a gold agnostic, but certainly not a gold hater.

In fact, I think my non-belief makes me more objective than most on gold. I think it’s easier for me to analyze, at times, what really moves the gold price because I don’t have many preconceived gold notions. For instance, the hundreds of tons of gold purchased by the ETFs has been a powerful influence on the price. The recent run-up to over $700 was, in my opinion, mainly a result of Barrick Gold panicking and buying back millions of ounces of their short position. Those events have had, and may continue to have, a strong influence on the price.

I do follow gold pretty closely, mainly because it tracks and influences the price of silver and vice-versa. I think that silver will divorce itself from gold at some point, but up until now, they appear joined at the hip. I’ve also seen the dealers use gold to knock down silver at critical points in the past, so I’m always uneasy when the gold COTs are negative for the influence an engineered gold sell-off might have on silver.

But the current structure in COMEX gold futures is far from negative. It is downright great. What that means is that the gold market is not structured for a significant sell-off, but rather is structured for higher prices. How much higher is hard to tell, but the up move could be significant. It all depends on the how aggressively the dealers sell short on the next rally. The important thing is that gold should not go down big from here. Anytime you get low downside and potentially big upside that spells opportunity. For me, it also means that the dealers will not be rigging the silver price down because they are tanking the gold price.

Some may argue that the COTs in gold have been better in the past and maybe we are not at the ultra-low risk point yet. They look at the non-commercial long position and assume the tech funds are still heavily long and subject to further liquidation. That may turn out to be the case, but I don’t think so. I think the tech funds have been completely flushed out, as I indicated in my "Locked and Loaded" article in July. I don’t deny that the non-commercial long position has been much smaller (and safer) in the past. It’s just that I now think it’s not the tech funds that are heavily long. I think it is some other group.

I think that the new group that has replaced the tech funds on the long side currently are funds of a different sort – not tech funds, but index funds. The index funds are those institutional trusts that have been plowing into commodities to the tune of tens of billions of dollars. They are designed to replicate the performance of the popular commodity indices. Gold (and silver to a lesser extent) has garnered a chunk of this new money flow, due to its weighting in the various commodity indices.

Whereas the tech funds buy and sell depending on whether the price is rising or falling (leaving them suckers for dealer maneuverings), the index funds just buy and hold, basically. Therefore, the index funds are not the easy targets that the tech funds were. If I am correct that there is now a substantial involvement by index funds and that is represented in the higher than normal non-commercial long position (at previous bottoms), waiting for further liquidation could be a mistake. Gold looks good here.

The last point I’d like to make is something we’ve talked about often. I just don’t understand why those in the gold community don’t raise the same issue that I raise in silver, namely, the concentrated COMEX short position. I would have thought those who expect higher gold prices would be all over the concentrated shorts in gold, like I am in silver. Compared to any physical commodity, except silver, the concentrated short position in gold stands really stands out.

In fact, this week, one key measure of the concentration ratio of the 4 largest traders actually is more extreme in gold than it is in silver for the first time ever, to my knowledge. The concentrated net short position of the 4 largest commercial traders in COMEX gold hold 80% of the total dealer net short position, slightly exceeding the comparable measurement in silver. (This is not to suggest that silver is not off the charts compared to every other commodity, including gold, when it comes to all other metrics. Silver holds the record for the all-time obscene short position).

My point is that four traders in gold hold an inordinate percentage of the total net short position. Without this concentrated gold short position, the price would undoubtedly be higher. Nowhere near as high as the price of silver would be in absence of the concentrated short position, but higher nevertheless. Why the gold people don’t focus on this concentrated short position is beyond me. Rather than guess what may be going on behind the closed doors of governments and central bankers, here is documented evidence, which suggests manipulative activity in gold. And gold people are a heck of a lot more plentiful than silver investors, so their voice could be very loud on this issue.

It’s just not right that there are 4 big traders in gold and silver, short what thousands of other traders are long. It’s manipulation, clear and simple, as you can’t have a manipulation without a concentrated position. Shining the light on those behind this concentrated short position would end the manipulation, in my opinion.

Hope this helps,

Ted Butler

So, as the long weekend draws to a close, I hope that what Ted had to say was useful to you…because it certainly was for me.

I think we should all be prepared for a very interesting last quarter of 2006…and beyond.

With best wishes,