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.)
There has been a dramatic change in the structure of the gold and silver markets over the past 3 weeks, as indicated by the COT report and the action since the Tuesday cut-off. In the space of a few short weeks, the tech funds have bought, and the dealers have sold short over 75,000 additional net COMEX gold contracts and 25,000 net silver contracts (futures only). In silver, that’s the equivalent of 125 million ounces sold short, in addition to the 250 million ounces originally sold short by the dealers. This is just the dealers’ net short futures position, not the gross COMEX silver short position of 900 million ounces, including options. We are clearly now in bearish territory in gold and silver, which is one of the most extreme COT readings.
As you may recall, the past few articles I had written described the favorable structure of the silver market because the tech funds had not yet entered on the long side, presaging a rally. We have all now witnessed that rally, which was caused by this tech fund buying/dealer short selling that was anticipated. It is hard to imagine anyone not understanding this market moving mechanism at this point. OK, now what?
Well, just because the COT market structure is now bearish, it doesn’t mean that it is impossible for gold and silver to move up strongly from here and for the dealers to be forced to throw in the towel and buy back their massive short positions at higher prices. But it is also true that that has never happened before. Instead, it is the purely mechanical technical funds that buy on the way up and sell on the way down, who have always capitulated in the past. Maybe it will be different this time, but you must calculate the odds for yourself.
What I can say for sure is that if we do sell off sharply in the near future, it will be because of technical fund selling amid the dealers collusively pulling their bids, and no other important reason. We go up in gold and silver because of paper trading on the COMEX, and we go down because of paper trading on the COMEX. This COMEX paper trading dictates the price of gold and silver. This will be true even (I should say especially) if the dealers are forced to cover their paper shorts and the price explodes. According to commodity law, it is illegal for paper trading to set the price. Where are the regulators?
But we cannot hold our breath waiting for the regulators to enforce the law. We must adapt to and insure ourselves against this manipulation. For those who are able, it has been possible to trade around the dealer/tech fund price movements. But everyone can immunize himself with the certainty of real silver, especially when bought in a timely manner. Someday, these COT manipulative games won’t matter, particularly to those owning real silver.
The main reason I write about the COTs, aside from identifying low-risk buy points (which is not now), is to offer an education on how the manipulation operates. In that regard, I am encouraged by the increase in the discussion and the number of articles this topic has generated. More importantly, I am encouraged by the actions being taken by those in the silver mining community.
Just this week, another silver miner, First Silver Reserve (FSR.V), stepped up to the plate by buying 5% of their annual production in real silver (100,000 ounces.) Thus, FSR joins the honor roll of those mining companies trying to right the wrongs of the manipulation. And they took advantage of the recent predicted sell-off, and bought at low prices. If the now bearish COTs result in yet another manipulative sell-off, hopefully more silver mining companies will do the right thing.
I can’t emphasize how important it is for the other miners to get with the program, specifically, PAAS, HL, CDE and SIL. It is these companies, and the industry at large, which should be leading the fight against the silver manipulation and the low prices it has created. That they haven’t lifted a finger against an increasingly obvious manipulation is shameful. There is nothing more important for them to focus on.
There is the strong chance that these miners will get another opportunity to mend their ways. If the current bearish COTs result in another sharp sell-off, these miners can redeem themselves. I’ve made it easy for them by suggesting they put a small percentage of their record cash positions into real silver. That way, they can let their actions do their speaking for them, by demonstrating to shareholders that they see the problem. That’s the easy and non-controversial way and should be done at a minimum, like other silver miners have done.
If the management of PAAS, HL, CDE, and SIL, had any guts, not only would they be buying real silver, they would also be speaking out against the manipulation. It is because they have chosen to look the other way and not to speak out, that the manipulation has continued in force. If it had been these miners complaining to the CFTC, the COMEX and to Eliot Spitzer, and not just you and me, the scam would have been terminated by now.
It is precisely because the producers have been so cowardly and so unconcerned for their shareholders that the dealers have operated with impunity. These mining companies can rectify their past inaction at any time, particularly if we get another sharp sell-off. While I’m not counting on them finally doing the right thing, I’m convinced there will be a day of reckoning if they don’t. For most people, certainly including myself, there can be no greater personal concern than one’s own reputation. If this silver manipulation unfolds the way I envision, good and bad reputations will be created by what one did, or did not do, before that unfolding. When the silver manipulation becomes obvious to all, those who could have and should have done something, but did not, will have to live with the consequences.
The most ironic aspect to this issue is that not only are CDE, HL, and SIL silent on the silver manipulation, but PAAS has actually lashed out at me for raising it. I say ironic because, due to my consistent advocacy for buying real silver, hundreds of millions of ounces have been bought over the years, mostly by the little guy. (Do you think any mining company director is responsible for getting anyone to buy even one ounce of real silver?) It is this buying of real silver that has tightened the market sufficiently to allow the price to rise somewhat. Without the cumulative effect of the public buying silver, it is my opinion we’d still be in the $4 range, where the manipulators would prefer it to be. If we stayed in $4 range, what would these companies look like financially? Would they have been able to raise hundreds of millions of dollars in financing? Would they have been able to avoid bankruptcy? They should be thanking me, not attacking me.
In the meantime, the rigging of the silver (and gold) market continues. In three weeks, more paper silver was sold short that any country could produce in a year. More than the entire known world inventory. Three times as much as the US produces annually. Maybe the dealers get overrun on their naked shorts, especially now that the former kingpin, AIG, is gone. Maybe the dealers snooker the tech funds again. All I know for sure is that this is not right and too many people who should know better are looking the other way.
Amazingly, this paper-selling orgy by the dealers has taken place against a backdrop of a tight physical market. Not only are COMEX silver warehouse stocks at a yearly low, other signs point to tightness. While I hear that the Central Fund of Canada finally received that final shipment of the silver it bought earlier in the year, the other Canadian institutional investor has not, according to good sources. The COMEX dealer crooks can sell hundreds of millions of paper silver short with no problem, but can’t scrape up a couple of million of real ounces. Unbelievable.