In Ted Butler's Archive

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.)

Or extra innings. Or sudden-death overtime. Or any term used to describe a decisive moment in which the outcome of a contest will be determined. That’s where I think we are in silver (and gold). More specifically, I’m referring to the struggle between the tech funds and dealers on the COMEX.

As I have been writing about lately, it appears that the dealers have “engineered” the tech funds to liquidate large numbers of long contracts on the recent slide in prices. Something like 40,000 net futures contracts in silver and 50,000 net futures contracts in gold. This large liquidation may have cleared the decks and set us up for a strong run to the upside. After all, because the silver COMEX contract covers 5,000 ounces, we have just witnessed a 200 million ounce reduction in the dealers’ net short position in a few weeks. That is enormous. To those who still doubt that the COMEX sets the price, let me remind you that this amount of silver was much more than the size of the Hunt Brothers or Warren Buffett’s silver position.

The break point in silver is the 50 day moving average, currently at 5.075, basis the December contract. (In gold, the key number is the 20 day moving average, currently at $378, also basis Dec.) The price drop below these moving averages caused the funds to sell, and now when the price rallies through the moving averages, those same funds will turn buyers. I think this is really a stupid way to invest money, particularly in a market as manipulated as silver, but this is just the way it is. Of course, there is no way of determining, in advance, when the moving averages will be penetrated, or what level the moving averages will be at when that occurs. It could come immediately, or later.

The real question is what happens when the moving averages are violated to the upside? Will the same dealer-manipulators sell short aggressively, to the tune of tens of thousands of paper contracts (equivalent to hundreds of millions of ounces of silver), as they always have in the past? Make no mistake – this is the key to the silver (and gold) market. One of these days, and maybe even today, the dealers will sell short no more. When that comes, it will be obvious to all. It will be obvious in the price action. One thing I’ve always told people close to me, when I’m asked about whether whatever the latest rally that may be unfolding, is if it’s the start of the “big one”, is that, when the big one comes, we won’t have to ask each other if this is it. We’ll all know, without a doubt, based upon the dramatic price action. Or stated another way, if you have to ask if this is it, chances are it’s not the big one.

So, will the dealers sell aggressively when the moving averages are violated this time? While I’m only speculating, I think this next time could be different, as I indicated last week in my mother of all buying opportunities piece. For one thing, we have written acknowledgment that the chief financial crime fighter of our age, Eliot Spitzer, is aware of COMEX silver. If you are a silver manipulator, that can’t be good news. This guy seems to throw a financial crook in jail every week. I have even heard the rumor that the five most frightening words on Wall Street are “Eliot Spitzer on line one.” If the silver market has been manipulated, as I allege, Mr. Spitzer’s presence could change that.

Another thing that might portend a change in the dealers’ capping of the market by extreme short selling, is the announcement that Neal Wolkoff is leaving the COMEX. In a press release dated, October 1, the NYMEX stated that, “by mutual agreement”, Mr. Wolkoff’s contract won’t be renewed at the end of the year. It always seemed to me that Mr. Wolkoff, in his communications with me, always defended the shorts. Maybe that suggests a change from the standard COMEX line in the future. Also, please keep in mind that we are at a much higher price in silver, vis-a-vis the current good COT readings, than we have been at in my memory. I’m always on the lookout for changes in the normal manipulative pattern.

Last, there has been an eerie silence from the COMEX and the CFTC, to my solution to a delivery default in the silver contract. I think that is because they can find no fault with my suggestion. Even more importantly, as evidenced by the more than 1400 people who signed the silver petition, the idea that the silver market is manipulated is widespread. This is genuinely shocking. Please think about this. Of the people who have taken the time to study the silver market, I think the vast majority believe the market to be manipulated, as I contend. Further, try as I might to find one, I am aware of no legitimate free market explanation for the price pattern in silver for the past 15 years, considering the deficit and dramatic decline in inventories. I don’t think one could be put forward. Please let me hear from you if you have such a free market explanation.

While it’s really not important if we break out in silver now or later, it is very important that you take action before the breakout. That’s because the risk/reward ratio will deteriorate as we move higher in price. The ultra-low risk nature of silver as an investment will disappear as we launch upwards from five dollars. The timing of that launch is very much secondary to the launch itself. What creates the low risk, the most important consideration in any legitimate investment, is the low price. Period. If you want low risk, you must buy low.

This very point was just brought home in an article in this Sunday’s NY Times, about George Gilder, and the high-tech bust of 2000. Mr. Gilder was a very widely followed investment newsletter guru and lecturer, who exerted tremendous influence in the shares of cutting edge Internet and high-tech companies. In the boom, when he mentioned a company its shares would vault upward on that mention alone. Hundreds of thousands of people rushed into and held the stocks he recommended, pushing the prices of those shares to incredible heights. Then came the bust. As it turned out, too many people came in at the peak, and lost, not just 50% or 80%, but as much as 98% of their investment. In hindsight, Mr. Gilder acknowledged his mistake was not paying attention to timing or price.

I think timing is tantamount to luck, but I think price is everything. At $5, silver can’t lose 98% of its value. At this point, I have trouble visualizing how it can lose more than 10% of its value. This is the most important thing I can say about real silver. It can’t hurt you financially. It can reward you spectacularly. I’ll be honest, it would ruin my life, or at least ruin my own impression of myself forever, if I ever caused anyone to lose 98% of their capital on what I represented was a good, solid investment. That’s not going to happen with paid-for, real silver. Maybe if you buy it at $200 per ounce, but not at $5.

When silver launches from five dollars, it will become a hold, not a buy, until it becomes a sale. As a fundamental, value-oriented analyst, I will not be urging you to buy it all the way up. I will be urging you (most likely) to hold that which you were fortunate enough to buy when price and risk were low. And agonizing over when to sell. But first things, first. You can’t hold, for what may be a very long time, and agonize over not selling too soon, unless you have first bought wisely. The time for buying wisely is now. 

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