WEEKLY COMMENTARY

December 14, 2004

                                        Taking Care Of Business

I’m keeping this week’s comments intentionally brief. In last week’s article, even though I wrote that I had the feeling that we could have a real "thumper" to the downside, actually seeing it immediately occur was somewhat unnerving. That said, while timing is akin to luck, I hope readers understand that the reason for the dramatic price fall in gold, and especially silver, was solely due to the market structure on the COMEX, between the dealers and the tech funds. This is the key to understanding short term market moves.

Confirming this point, the most recently released COT Report indicated that on the day before the vicious sell-off commenced, the tech funds were more long in silver, on a gross and net basis, with dealers more short on a gross and net basis, than ever before. In gold, the tech funds were more gross long than ever before. That it was subsequent tech fund selling that cascaded on the downside that caused prices to collapse, would be merely stating the obvious. If serious market observers don’t see this, I can’t imagine what else they are looking at.

When the tech funds buy, it causes prices to climb. As a gold or silver investor, this feels good as it increases the worth of our investments. But these tech funds also sell, and that selling causes prices to fall, hurting out investments. That’s why it’s important to keep tech fund buying and selling in perspective. They aren’t trying to help or hurt us, but their mechanically buying and selling does move the markets.

It seems to me that the focus of what is moving the market is often blurred. For instance, there has been much recent controversy concerning the new GLD gold exchange traded fund (ETF), because of a one-day decline of 15 tons (500 thousand ounces) in their reported holdings. Many have said that this reduction in holdings was because the fund sold that amount of gold and that is what caused last week’s sell-off.

I disagree with this interpretation, and the most logical explanation that I heard for the reduction was that someone exchanged shares for the real gold, much like a futures contract delivery. In any event, we have seen tech fund liquidation, as evidenced by daily declines in gold open interest on the COMEX, of over seven times the amount of the ETF’s reduction. We know this represented real selling by the tech funds. I ask you, what do you think was the more likely cause of last week’s sell-off, the certain sale of 3.5 million ounces of COMEX gold contracts, or the possible sale of 500,000 ounces by the gold ETF?

Obviously, the dealers have been taking care of business and have been harvesting the tech funds in gold and silver. The dealers’ record of not covering to the upside appears intact. While the dealers are not making giant profits, they are closing out short positions. The key question, of course, is at what point is the tech fund liquidation complete, and we are presented with another outstanding "mother" buy point? Time will tell, but I sense we are drawing close. Leveraged players will try to bottom pick, as they must be more concerned with risk, but the buyers of real silver are starting to see bargain prices. Regardless of how much more tech fund liquidation (and lower prices) we may see, the buyers of real silver should be assured that prices will be higher than current levels in the near future.

It is interesting that in the sell-off so far, all of silver’s moving averages have been violated; while in gold, the big 50, 100, and 200 day moving averages have not been violated (yet). It is the violation of the moving averages that causes the tech funds to act. Therefore, it would appear that silver is more advanced in the liquidation process, at least in terms of contracts to be possibly liquidated, if not also in price. If gold does violate its big moving averages, heavy tech fund selling should be expected.