TED BUTLER COMMENTARY

September 18, 2007

DIFFERENT PATTERNS

(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.)

The most recent Commitment of Traders Report (COT) confirmed the continued deterioration in gold, with tech fund and speculative buying versus further dealer short selling. As expected, the latest COT report as of September 11, indicated more than 36,000 futures contracts were added to the commercial net short position, placing it mid-range in my guess of 30 to 40,000 last week. This puts the total commercial net short position at just over 160,000 contracts, up almost 70,000 from the lows four weeks ago.

Since the Tuesday COT cut-off, as many as 20,000 more gold contracts may have been added to the tech fund long/dealer short position. This places the COT gold market structure in clear bearish territory. That doesn’t mean gold can’t trade higher, or rule out the possibility that the dealers could get over run (oh happy day!), but history strongly suggests that the dealers will rig a sharp sell-off sooner or later. In fact, it is precisely the negative market structure in gold that concerns me most about silver, as there is nothing in the silver market structure itself that suggests high risk.

The latest COT in silver showed little deterioration, with the market structure remaining in its best position in years, in stark contrast to gold. I get the feeling that the dealers intend to use an old trick, an engineered gold sell-off, to trigger a sympathetic sell-off in silver at some point. In the past, this trick was used when the silver COT structure was also bearish, not bullish like it is now. This suggests one of two things; either silver will turn negative, COT-wise, with higher silver prices, or the gold sell-off may commence before there is a build up in the silver net commercial short position. In either event, this would represent a different pattern than witnessed in the past.

More importantly, a different pattern has also emerged in the latest COT report in the behavior of the big four concentrated shorts (the T. rex’s) and the raptors (the 9+ smaller commercial traders). For the first time I remember, there was significant T. rex buying (almost 3000 contracts) and raptor selling (almost 4000 contracts), in the most recent report. While the raptors still hold a near-record net long position of 24,000 contracts, this is the first time I have observed notable raptor selling and big 4 buying.

The buying by the big 4 in the latest reporting period caps a four week buying binge by the these big concentrated shorts in which a record near 13,000 short contracts have been bought back. This has reduced the concentrated net short position by almost 25% since the COT report of August 14, to the lowest level of the year. At just under 40,000 contracts, or the equivalent of 200 million ounces, the COMEX silver net short position still towers over the concentrated short position of any other commodity, in terms of real world production. Still, the reduction is remarkable in its suddenness and extent, especially when compared to the concurrent increase in the gold short position. Indeed, "different pattern" would appear to be an understatement.

I can’t help but view this hard COT data in the perspective of the recent attention I have placed on ScotiaMocatta. Clearly, there has been unusual short covering in the big 4 concentrated category. Something, obviously, has motivated this short covering at this time, particularly as it has been unique to silver, when compared to gold and the behavior of the big short(s) for almost a year. While I can’t state for sure that ScotiaMocatta has conducted the covering, that conclusion is certainly consistent with my private and public campaign concerning them.

Assuming that my speculation is correct and ScotiaMocatta was or is a (or the) big short and has decided to change its behavior, what does this mean for the future price of silver? For the long term, this would have to be considered bullish, because if the silver short side has lost a prime participant, the long-term silver manipulation will be undermined. In the short term, however, silver may face intentional volatility, as the big shorts look to buy back more contracts at prices that are advantageous to them, and decidedly disadvantageous to margin sellers under stress. This is manipulation in its purest form.

And let me be clear – either you view the silver market as manipulated or not, there’s no wishy-washy in between. It’s like being pregnant, you are or are not. How any objective observer does not reach the conclusion that silver is a manipulated market is beyond me.

Since I am convinced that that the silver market is manipulated, I am also convinced that the manipulation is a criminal undertaking. And while I write as an analyst as to being concerned about the dealers using an engineered sell-off in gold to bring about a final sell-off in silver, do not think for one moment that I do not view these engineered moves as anything less than criminal. I think I have a pretty good idea of who is doing it, but I know whoever is doing this engineering is a criminal.

PUTTING THINGS INTO PERSPECTIVE

(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.)

I am concerned that by explaining the silver manipulation in such detail, the real message to silver investors may not be getting through. Manipulation has created what I believe is the investment opportunity of a lifetime. If it were not for the fact that the price of silver has been manipulated, given the powerful supply/demand fundamentals, there is no way that it could, or would, be priced as cheaply as it is today, Simply put, the manipulation has caused the price of silver to be so low that it has created a rare gift.

Sure, the manipulation is an abomination to any free-market advocate, and we must continue to attempt to expose and terminate it. Like every manipulation in history, this silver manipulation must and will end. Artificial prices cannot be maintained indefinitely. But it would be a shame not to take full advantage of this by positioning oneself for the inevitable end of the silver manipulation.

The current investment opportunity in silver is rare precisely because the manipulation itself is a rarity. While there have been countless market manipulations throughout history, to my knowledge, they were all upside manipulations, where the price of something was artificially inflated. The current manipulation in silver is a rare downside manipulation.

Upside manipulations are more common because they are relatively simple to accomplish. All you have to do to create an upside manipulation is have the concentrated entity buy, and keep buying, enough of the item in question to drive the price sharply higher. Then they unload to new buyers who come in late. A short side manipulation is more complicated. It takes sophisticated short selling and uneconomic dumping of physical supplies.

In an upside manipulation, an ordinary investor can hope to participate by buying in the later stages of the price advance and then selling before the inevitable collapse in price. Or, if the outside investor is sophisticated and has deep pockets, he could go short and hope to profit from the price collapse. But both approaches to profiting from an upside manipulation are entirely dependent on luck and timing. Guess wrong on timing and you will lose big. This is rank speculation not tailored to securing your financial security.

But, the very rare downside price manipulation currently in force in silver offers outside investors the opportunity of a lifetime for a number of reasons. A downside manipulation creates a much lower price than would exist without the manipulation. Buying low means you can buy more at lower risk. Also, when a downside manipulation ends, it explodes upward. When manipulations end they end with a bang and a price movement opposite the direction of the manipulation.

But, there is a third aspect of the downside silver manipulation that creates a lifetime investment opportunity. Quite simply, it can be done easily by every type of investor. There is a simple and understandable way to participate, namely, buy real silver. There are no sophisticated strategies, critical timing decisions, high risk leverage or luck. It’s just common sense. Buy silver before the manipulation ends. Buy it now.