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Pounding The Table
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.)

The recent sell-off in silver has created an unusual buying opportunity. I believe we are approaching, or are already at, what may be the final lows, perhaps for a generation. Those, I admit, are strong words. Let’s see if I can back them up.

This has nothing to do with the real silver supply/demand fundamentals. Those fundamentals, quite frankly, can’t get any more bullish. That’s because you can’t have a more bullish situation for price than to have a commodity where you consume more than you produce – a deficit. That makes silver a long term buy/hold until the deficit is eliminated, and/or until the price goes so high that you can’t sleep or can’t stand it any longer. Even then, in all likelihood, we will sell too soon. No, I am not talking about the merits of buying silver long term, at current prices – that’s basic.

I am talking about buying silver into this price decline because of the market structure that has been created by the decline. I am talking about the Commitments of Traders Report (COT). I think the COT is telling us that silver is a buy right here and right now. First, I think a brief explanation and review of the silver COT is in order.

My interpretation of the COTs is centered upon the interplay between the commercial dealers and the mechanical technical hedge funds. The tech funds operate strictly on a price moving average basis, i.e., when the price goes up, and through certain price moving averages, the tech funds buy. Down, they sell. They are hoping to catch on to what may be a long term price trend. The commercial dealers, are the only natural counterparty to the tech funds buying and selling, and always take the opposite side of the tech funds’ buys and sells.

While the tech funds follow their mechanical strategy in many markets (like stocks and bonds and currencies), with varying degrees of success, it has been my observation, over many years, that they have been particularly unsuccessful in COMEX silver, and the other two principal COMEX-traded markets, gold and copper. In fact, I have never observed the tech funds ever make an overall profit in COMEX silver, gold or copper at anytime in the past 5 or 10 years. Because of this obvious pattern of consistent losses in COMEX trading, I have taken to calling the tech funds’ COMEX trading as brain-dead, moronic and stupid. I also have highlighted this manhandling of the tech funds, by the commercial dealers, as central to the silver (and gold) manipulation as it should be obvious to even the most casual observer that the short term price of these commodities is set on the COMEX. Speculators (both the tech funds and the speculating commercial dealers) are establishing the price of silver (and gold).This is against every principal of commodity law.

But my characterization of the tech funds as being stupid to even trade COMEX markets, as they are the obvious suckers, is not the only explanation that I have heard to explain why the supposedly intelligent investment managers of the tech funds would continue to throw away investors’ capital in such a decidedly unsuccessful COMEX venue. More than one person has approached me with a far darker explanation for the tech funds disregard for consistent COMEX losses. These people have suggested that the investment managers of the tech funds have been getting something to continue losing the commercial dealers. While I don’t know if this is true, it does bother me that, to my knowledge, the commercial dealers who continually clean the tech funds’ pockets also function as the clearing brokers for the funds, giving the those dealers a leg up in knowing how the tech funds will behave. Don’t expect the authorities from the CFTC or the COMEX to do anything about this.

But the motivations of why the tech funds behave as they do is very much secondary to the effect on the price of silver once the tech funds reach a full long or short position. It can be clearly demonstrated that once the funds put on a maximum long position, the market is structured to go down. Alternatively, when the funds are loaded up on the short side, a price rally is almost certain. The good news is that the tech funds have been lured onto the short side of silver, once again. In a recent article, I speculated that this was possible and the only real hope for what I believe was the cornered King Rat commercial short. The only question is at what level (both price and number of contracts) will the tech funds be done selling short silver?

The most recent COT, for positions held as of 3/18/03, shows the tech funds moved to the short side aggressively, allowing the total net commercial short to decline by almost 11,000 contracts (55 million ounces), to just under 33,000 contracts. The total net short commercial position is now down over 42,000 contracts (210 million ounces) from the recent peak. Interestingly, the 4 or less largest traders’ net short position, while it declined 6,000 contracts last week, is still greater than the total net short commercial position (meaning the king rat short crook may still be cornered and dangerous to the market). The action since the Tuesday cutoff of the most recent COT, indicates further tech fund selling, and my guess is that the commercials are now less than 25,000 contracts net short. Thus we are in, or close to, the range where market bottoms are made. Dimes (or pennies) to the downside.

How good is this “COT, buy when the tech funds are short big” signal? I ask you to decide for yourself. It occurred to me that I have written enough articles concerning the COT that some sort of track record for this signal should be evident. I think it is evident. Paraphrasing what I’ve said about this COT buy signal, when the tech funds are short big (like now), expect a rally. There’s no way of knowing whether the rally will be the big rally (where we move many dollars an ounce higher) or a mediocre rally, of half a dollar or so, which is snuffed out by commercial dealer new short manipulative selling.

The very first complete article I wrote for Investment Rarities on topic was titled “The Commitment of Traders Report”, on August 14, 2001. I pointed out the tech funds were excessively short and we did explode after 9/11 for more than 60 cents. The dealers sold short aggressively and back down we came. On 11/21/01 and 12/11/01, I wrote new articles stating that the tech finds were, once again, short big. Again, we rallied for more than 60 cents. For most of 2002, I wrote articles and perhaps a dozen letters to the CFTC and COMEX, complaining how the concentrated commercial dealer short position was so large as to be uneconomic and manipulative and warned how the price would be engineered downward, which it was (with the tech funds massively long. On 10/22/02 I wrote an article, “Here Go Again”, in which I stated the tech funds were short again and to expect a rally. Shortly thereafter, we got another 60 cent rally, stopped again by commercial dealer concentrated short selling. Well, here we go again, again. The funds are getting (or have gotten) short big again. Do some checking on my recollections. Go to the Investment Rarities archives and get a silver chart covering this time period and compare what I wrote and what happened to the price of silver.

My point is that the price of silver is controlled and dictated by the dealings between the commercial dealers and the tech funds. That is illegal, whether it is predicated on tech fund stupidity, or criminal activity, as some have suggested. In either event, there is no doubt that the commercial dealers are the masterminds. That is what I am trying to convey. How is it that I can write in advance what the price of silver will do based upon the tech funds and dealers behavior? Let me assure you, I am not that smart or prescient. Once you see that, the only conclusion a reasonable person can reach is that it is the funds and dealers behavior that controls silver prices, and not the real world of supply and demand.

Aside from proving the price manipulation, in large part, by the funds and dealers on the COMEX, it should be evident that when the tech funds are heavily short, that is a particularly good time to buy silver. Not just because they have been proven, time and again, to be the marks and suckers in the COMEX paper gain, but because the tech funds are all paper, and have no chance, whatsoever, of ever being able to deliver actual silver to close out their short silver contracts. They have to buy back their short positions, as they have no choice. It’s just a question of when and at what price they cover. The only question is, as always, will the crooked dealers short on the next rally, and limit the rally to half a dollar or so, or will the dealers leave the hot potato in the tech funds soon to be burnt hands? I confess to not knowing the answer to that question, as it is unknowable. But I do know one thing for sure. One day, when the tech funds are short silver (like they are now), the dealers will not be the normal and usual sellers that the funds have come to expect. There is nothing that requires the dealers to be the willing sellers they have always been on price rallies. When that day comes, as the deficit demands it must, it will be a day like no other in the history of silver. You want to be holding as much real silver as you possibly can, before that day.

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