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Still Unresolved

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.)

Here’s a quick update. I was hesitant to write yet another article in which I confessed to being still unsure how the Commitment of Trader (COT) market structure in COMEX silver would play out, but the fact is I still don’t know. I had thought, if the normal manipulative pattern played out, we would see a sell-off prior to first notice day, Aug. 29. While my timing was off, we did experience a sell-off today, Sept. 2, that took silver below the 20 day moving average, around 5.02 basis December, in which good technical fund selling (and dealer buying) was apparent.

This may be the start of the cleansing process, in which the market structure is made healthy, and the tech funds are tricked off of the long side and onto the short side, and the Silver Managers can cover their excessive short positions. The key number is the 50 day moving average, which now stands around $4.90 (up from $4.76 a few weeks ago). If past is prologue, a violation of the 50 day average will cause big tech fund selling, setting the stage for a bottom, or bottoming process, in the silver price. A large volume of trade below $4.90 (or whatever the 50 day moving average is at the time) will allow the Silver Managers to cover a good portion of their short sales. It could signal “all clear” for the price of silver.

Please remember, this discussion of the COTs is an attempt at superfine price tuning, and should not be construed as meaningful in a long term sense. Certainly, no one should confuse it with the long term fundamentals which is the only reason to buy and hold silver. I discuss it, only because it has been such a reliable indicator, and because it explains why prices move, more often than not.

I would be remiss if I did not mention the current state of the gold COTs, something that I do not usually do, due to the current extreme historical structure of the COMEX gold market. Very briefly, the gold COTs are off the charts, meaning the tech funds are more long, and the commercials (the same dealers as in silver) are more short, than ever before, and by a very wide margin. This has caused many commentators to declare that the COTs are a poor indicator, or that it proves that the heavily-short dealers will be over run, causing the price of gold to explode. I don’t know about that.

I confess to not knowing how the gold COTs will be resolved, but I don’t think anyone else knows either. Maybe the tech funds will overpower the dealers, or maybe the tech funds will just run, once the moving averages are hit on the downside. (The 20 and 50 day moving averages in gold, basis December, are around $364 and $356, respectively.) While it is possible that the dealers will be overpowered to the upside, it is important to remember that the next time the dealers are overpowered in gold or silver, will be the first time. Additionally, it would appear that if the dealers are ever overpowered, it is more likely to occur in silver, than in gold, due to the real possibility of a silver physical shortage. In fact, the first couple of days of the September delivery in silver, might be signaling something unusual. More on that next week.

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