In Ted Butler's Archive


By Theodore Butler

What has been the most reliable of guides to short term moves in gold and silver, the market structure approach of the Commitment of Traders (COT), continues in its remarkable dependability. Maybe some day we will have to disregard the message of the COTs, but that day has not yet arrived.

The most recent COT report, as well as extrapolations from the cut-off date, indicates continued improvements in both gold and silver. Silver has now removed the complete 35,000 net contracts (175 million ounces) added in run up to the price peak amid the tech fund-buying orgy of a little more than a month ago. In fact, the dealers have engineered the hapless tech funds completely out of their big net long silver futures position and into a hefty net short position (please remember that the tech funds are not the only traders in the non-commercial category).

In gold, the three-week and almost $30 decline in price, has removed the majority, but perhaps not all of the 110,000 net contracts added in the rally to the $445 price peak of late June. So maybe we need a bit more liquidation in gold. But then again, maybe not, as COT extremes are a moving target. In any event, I am encouraged with the readings of the COTs in both gold and especially silver. The last report showed not only good net changes, but also good readings in every individual category. These included declines in fund longs, increases in fund shorts, as well as increases in the gross long and decreases in the gross short categories of the commercials.

Due to the remarkable consistency of the COTs in predicting future price movements, I am not surprised with the dramatic increase in commentary and interest in the study of the COTs. And a lot of the increased commentary is quite good. I guess it’s to be expected that when something works as well as the COTs have worked, people will notice and react. Additionally, there has been an increase in the graphical representations of the COTs, and just this morning I received an impressive new input from my personal favorite, the charts provided by my Aussie friend, Nick Laird. Here’s his new data series –

Bottom line, the current COTs are great, particularly in silver. The risk is low and the potential reward is high. Thanks to the dealer engineering of the brain dead tech funds, we are once again presented with an outstanding buying opportunity. The last few dollars down in gold and pennies in silver always hurt the most, but that’s just the way it feels emotionally. In reality, the last little bit of tech fund selling and dealer buying should be celebrated as a festive time for metal buyers. The only real question remaining in silver is how the dealers will behave on the coming certain rally. As always, if they don’t sell aggressively to cap the price, silver will explode.

We should be grateful that the dealers are so corrupt and the tech funds are so devoid of common sense as to replay the COT game on such a regular basis that it affords the investing bystander profitable entrance and exit points. And, to be sure, I am grateful. But I’d like to raise another aspect to what has been a very profitable endeavor by those of us who have correctly relied upon the consistency of the COTs. As profitable as the COTs have been, the underlying reason why they work so well is as illegal as the day is long.

To many, whether an activity that may prove profitable on a personal basis is legal or not, may be a moot point. Not to me, but not just because illegal is inherently wrong. Strictly from an analytical perspective, the question of illegal behavior is most important. Simply put, illegal behavior, were it to exist in any market, could come to be terminated at any moment. This could have a profound impact on any market. Please hear me out.

US Commodity law is quite explicit – the number one purpose of the law is to prevent price manipulation. Further, manipulation is defined as speculators setting the price of a commodity and not the legitimate producers and consumers of that commodity.

Now think what the market structure analysis of the COTs is all about. It is about anticipating when the tech funds (speculators) will get engineered into buying or selling by the commercials (other speculators). The COT is not at all about what the real producers and consumers are buying or selling.

The conclusion is that the paper speculators are moving the market around, not the real producers and consumers. And the speculators are moving it around in such regular fashion that it has become profitable to study their activities and trade accordingly. While we should be grateful for the opportunity to trade profitably on such a basis, it does not lessen the fact that the tech funds and dealers are operating in violation of clear commodity law. As such, it is reasonable to assume that such illegal activities can be terminated by any number of causes. Such causes could be regulatory intervention, tech fund recognition of their terribly track record in gold and silver, or the dealers sensing legal problems in the future, among a list of other possibilities.

If the paper speculators (the tech funds and dealers alike) do cease their stranglehold on the silver market, for any reason, what would be the price impact? In my opinion, the impact would be bullish beyond belief, because the dealers would lose their incentive to continue the long-term price manipulation of silver. Without the certainty of knowing they could liquidate tech fund long positions, the dealers would lose the incentive to sell short obscene and uneconomic quantities on silver rallies. There would be no reason for the dealers to cap the rallies.

It has been the regular skinning of the tech funds that has enabled the dealers to continue to frustrate the natural law of supply and demand in silver. So great has been the dealers’ futures and option profits over the years, that it would have been almost impossible for them to turn away from their silver manipulation and terminate the scam. But nothing lasts forever (especially manipulations), and if the profit motive were taken away from the dealers, there would be little reason to expect the manipulation to continue.

In fact, as more observers study and comment on the consistency and logic of the COTs, I am confident that these same observers will come to conclude that the very activity that comprises the COTs is clearly counter to commodity law. For those who ask why the dealers can’t continue the manipulation indefinitely, this is another reason for consideration. Someday, we may have to bid farewell to a great market tool in the COTs, but we will be welcoming a great addition in its place – a free market in silver.

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