In Ted Butler's Archive

Off The Hook?

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

As foretold by the structure of the market, as defined by the Commitment of Traders Report (COT), we have now witnessed meaningful rallies in several markets, including silver, gold and copper. Once again, the tech funds tripped over their own feet in selling down to the lows and then reversed to the buy side, causing prices to rise. Predictable.

Now the question is how far do the metals rally on the back of tech fund buying? No one can answer that. It’s one thing to identify low risk buy points, when the tech funds are loaded to the short side, but quite another when we move away from those low risk entry points. As we have just barely penetrated the key moving averages in gold to the upside, there could be more follow through, perhaps more than a little. But we have used up several tens of thousands of net tech fund gold buying power since the Tuesday cut-off, and that does increase the odds of a relapse to the downside.

Silver moved to the upside first and has been decisively above all its moving average tech fund buy signals. This has resulted in a noticeable deterioration in the silver COT structure. In addition to the almost 20,000 net contract increase in the dealer net short position in the latest COT report, there appears to be a further 10,000 contract deterioration from the cut-off date. This is not good news, as it increases the risk of a sharp sell-off, as alluded to last week.

This 30,000-contract increase in the dealer net short position in silver is equal to 150 million ounces. It increases the total dealer net short futures position to more than 350 million ounces. As always, I ask you to put these numbers in perspective. Just the two-week increase in the dealers’ net short position, alone, is greater than all the known silver bullion in the world, making this selling the most naked of short selling. These dealers have real silver backing these short sales like I’m the Easter Bunny.

And all this dealer selling took place on a 60-cent price increase. This is blatant price manipulation. It is not free market behavior. Legitimate sellers should strive to get the highest price possible. Selling short the equivalent of total known world inventories on a smaller than 10% rise in price in less than two weeks, is collusive price control. Period.

It’s relatively easy to identify low-risk entry points based upon COT analysis, as past writings hopefully make clear. And it is preferable for me to be able to write with the confidence that we are at low-risk buy points, with a couple of dimes, or so, of risk to the downside. The recent 60 cent and 30,000 contract rally in silver has brought us away from ultra-low risk levels. In fact, I can’t help but feel that the dealers let the tech funds off the hook much easier than they had to. I hope everyone realized that, instead of a 60- cent rally, the dealers could have demanded dollars per ounce. Some day, they will.

The real long-term fundamentals and recurring physical tightness still suggest many dollars to the upside in silver. It is important for long-term investors to focus on that and not the possible 10% declines that occur periodically. Those declines may not materialize, but if they do, they can be put to advantage.

I’d like to follow up on last week’s topic, the unusual copper delivery situation on the COMEX. One day after my article, the COMEX announced that it was reducing the position limit in the spot copper month by 50%, to 500 contracts. They didn’t elaborate on the reason for the change, but it is clear that this was a measure intended to relieve what I characterize as the worst thing that could happen to any exchange – a delivery default.

While I can’t say I’m surprised that the COMEX has taken some action (as the copper delivery situation is very serious), it is also no surprise that they have not employed the best solution available. Rather than rewrite what has already been written, please allow me to present the solution that I have long offered. While intended in silver, the connection to copper should be clear. The title of the article, aptly enough, is “The Solution” Here are some excerpts –


“I have a better solution. A much better solution. My solution, unlike the CFTC’s, is fair. My solution is constructive, in that it will head off and prevent a COMEX silver delivery default, not merely react in a panic, after a default. My solution is simple and cost-free to implement. My solution guarantees market integrity and will restore confidence in the CFTC and the COMEX.

My solution is to mandate that both long and short position holders in the current delivery month COMEX silver futures contracts guarantee their delivery responsibilities by first notice of delivery day. For longs, this means the full cash value of the contracts they hold must be deposited by first notice day. For shorts, this means receipts or warrants on COMEX-approved warehouse silver must also be deposited by first notice day. Any long or short not meeting these requirements must be liquidated by the clearing member responsible for the account, by first notice day.

If you think that solution sounds simple, you are correct. If you think that it sounds fair and balanced, you are also correct. You would be correct, again, if you thought that it would eliminate the possibility of a default in COMEX silver. Most importantly, market integrity would be preserved and confidence restored in both the COMEX and the CFTC.” End of excerpt.

This solution applies to copper to a “T”. It will be interesting to see how the ongoing copper delivery drama plays out. I hope it is clear that if we do have problems or emergencies in COMEX copper related to delivery, that they were completely avoidable. It is sad that a real solution to a problem can be intentionally ignored.

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