In Ted Butler's Archive


A very significant improvement in the market structure of gold and silver has occurred and we are now more bullishly structured for higher prices than at any time since early in the year. Yes, I know it hurts, psychologically and financially, when prices move lower; but I also know that the recent high level of managed-money selling and commercial buying which drives prices lower is the only thing that can improve market structure and lift the price.

We’re much closer to the end of the managed-money selling and commercial buying and the start of a new price cycle upward. I know it may not feel that way to most precious metals investors, but this time feels different for a number of reasons. The biggest reason is that JPMorgan, as a result of continued active accumulation of physical silver and the short covering of its massive COMEX paper short position, holds its biggest net long position ever in silver. This makes it the best positioned the bank has ever been for a silver rally. While it’s true that JPMorgan has been positioned favorably for the big silver rally in the past and that rally didn’t materialize, it’s also true it was never positioned as favorably as it is today. But it’s more than just JPMorgan.

Never have the managed-money traders (computer-driven hedge funds) taken the large positions they have taken this year, not just in COMEX gold and silver, but other markets as well. Previously, I’ve discussed how the managed-money traders have more money under management than any time in history. This is due to the overall lack of investment alternatives in a near zero interest rate environment. There is no question that the managed-money traders have taken record large positions, not just in gold and silver, but in any number of commodities, including crude oil, copper, sugar, and the grains. The commercials (big banks) have taken the opposing counterparty positions to whatever the managed-money traders have put on. And there is no way to dispute the price influence this positioning has had on all these commodities.

While we await the coming demise of the COMEX-controlled price discovery process in gold and silver, it’s much closer to the truth to say that COMEX positioning has never been stronger as a price influence. JPMorgan and the other commercials have been the masters of the managed-money traders up to this point.
Ironically, one of the reasons I feel the next move up in silver should be the big one is the new massive amounts of contracts the managed-money traders have taken. The commercials have come to appreciate the much larger positions the managed-money traders are now capable of putting on. I don’t think the commercials fully appreciated the large number of long contracts the managed-money traders put on in gold and silver early this year until it was too late and the commercials were staring down the gun barrel of a $4 billion open loss. But as they say – that was then and this is now.

Now that the commercials fully appreciate how many long contracts the managed-money traders can add in gold and silver, it is reasonable to assume the commercials will do what it takes to sell to the managed-money traders in a manner that won’t replicate their near-disastrous $4 billion experience this summer.

The next time prices penetrate the moving averages to the upside and the managed-money traders are given buy signals, it is reasonable to assume the commercials will demand much higher than usual prices to sell short to the technical funds. In other words, the commercials will make the managed-money traders pay up to buy contracts. This is a new twist on an old theme of mine. A coming void in commercial shorting in silver at some point would by itself create an explosion in price. The ability of the managed-money traders to buy more contracts than ever before adds to the likelihood that the commercials will demand much higher prices before shorting.

And should gold and silver prices turn upward soon and penetrate the moving averages, this will automatically add to the rally’s explosiveness, considering how far prices are below the moving averages. During much of the summer, gold and silver prices were very much above their key moving averages, which turned out to be magnets eventually pulling prices lower. Now, for the first time in nearly a year, gold and silver prices are substantially below their important moving averages and the price magnet effect should be to the upside.

Finally, in case you haven’t noticed, at the exact time gold and silver prices have come under downward pressure (since the U.S. presidential election), prices of base metals have soared, not just in copper, but also in zinc and lead, which are hitting multi-year highs. The actual supply/demand fundamentals of these metals hasn’t suddenly changed. Instead, the common denominator for the base metals price surge has been speculative buying.

This is yet to occur in silver and gold. But no market is more appealing to speculators than gold and silver and it is only a matter of time before the speculative fever descends like a swarm of locusts on these metals. It is said that there is no fever like gold fever, but that will change when the speculative fever comes to silver, considering how little of it exists.

In fact, I believe it is the surge in speculation in the base metals that sped up the commercials’ timetable for getting the managed-money traders to sell as many COMEX gold and silver contracts as possible over the past three weeks. The data will show that JPMorgan and the commercials have been buying the price decline, with the managed-money traders as the sellers. History has shown that it’s wise to buy when the commercials buy and wise to be cautious when JPMorgan and the other commercials are heavily short (like this summer).

In my opinion, now is the time to be fully positioned in silver. I can’t foresee any future price scenario that doesn’t feature silver being sharply higher than current levels. It’s important to remember that under my COMEX market structure approach, once the structure turns bullish (as it appears to be now), lower prices only strengthen and intensify the bullishness. I may be jumping the gun a bit and forgetting that the commercials always seem to have one final trick up their sleeves to the downside. Then again, it’s just as likely we may have seen the price bottom. But timing and pricing the exact bottom should prove much less important than the extent of the inevitable coming rally.

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