In Ted Butler's Archive

China Confirms The Obvious

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.)

Once again, the COTs correctly depicted the market structure and foretold the price direction in silver. Following the tech fund long liquidation and sharp sell-off, the silver market rallied smartly once the tech funds were cleaned out, as suggested in last week’s article, “The Set-Up?” While it remains to be seen if this move turns into the “big one”, where the dealers don’t sell short and we hit a selling vacuum to the upside, we will know soon enough.

It is encouraging that the 10 percent rally from the lows, so far, does not seem to be attracting big tech fund buying and, therefore, dealer short selling. Of course, that can change in a heartbeat, but daily volume and open interest changes suggest no worrisome buildup of tech fund longs and dealer shorts to date. This will remain good news as long as it continues. While this has nothing to do with real developments in the world of silver production and consumption, it is what moves prices. It is manipulation, but it is also reality.

Somewhat unusual in the encouraging lack of tech fund buying and dealer selling in silver, is that the tech funds have been buying in gold, with commensurate dealer selling. Therefore, the risk of a sell-off is growing in gold but not, yet, in silver. Perhaps, just perhaps, this might be signaling the certain coming divorce in the price action between gold and silver. Please be sure that this COT structure can change quickly and must be monitored daily.

Not surprisingly, it appears that the silver mining companies, specifically PAAS, CDE, HL and SIL, have missed a wonderful second chance to step up to the plate and buy some real silver on the telegraphed recent sell-off. At the very least, they could have used the occasion to speak out against the increasingly obvious silver manipulation. I’m afraid the managements of these companies just don’t get it. The feedback I get is that the vast majority of their shareholders are disappointed that management does nothing and pretends that all is well with how the price of silver is set on the COMEX.

While the shares of these companies should move in the same direction of silver itself, especially considering how few choices are offered to investors interested in silver mining equities, managements’ blind eye to the shenanigans in silver can have long term negative results. One of the key concerns for equity investors is confidence in management. It may prove hard for confidence in management not to be undermined given their current refusal to openly address the issue. Nothing is more important to the profitability of a resource company than the price of the resource. Shareholders know this simple fact, but it appears management has other thoughts.

While silver mine managements continue to under-appreciate the true value of their resource, they appear to be increasingly isolated. Others are coming to recognize just how valuable industrial resources will be in the future. Just this week, the state-owned mining company of China, Minmetals, announced it was interested in buying all of Canada’s largest mining company, Noranda, for roughly $7.5 billion (including existing debt). Make no mistake; this is a very significant acquisition. Noranda is a large world producer of base metals, including copper, zinc and silver. China is, or soon will be, the largest consumer of these and other commodities. China has also been on a shopping spree for Canadian energy supplies and other world producers of natural resources.

I would like to make a couple of observations and I would ask you to use your common sense to judge if my thoughts are on the mark. First, it should be clear that China sees that it will need increasing amounts of raw materials for as far as the eye can see. While we fret (in the US) about the current economic status and micro-analyze the latest statistics, China is putting vast amounts of cash on the table, betting in the strongest possible terms on continued world economic growth and long term demand for all industrial commodities.

Second, China is now buying resource producers or resources in the ground, because they have reached the limit for buying the resources themselves. They know they will need industrial commodities of all types, and while they certainly have the money to buy these commodities, they know they have a problem. There are not enough available raw materials compared to the Chinese buying power. China could not buy $7.5 billion of any commodity, because that dollar amount of any commodity simply does not exist. Furthermore, even though China buys very large amounts of all commodities, to aggressively purchase more would drive prices even higher, definitely counterproductive from China’s viewpoint. Buying producers and resources in the ground would appear to be their only alternative.

I find it interesting that China is attempting such a large acquisition of a Canadian producer. I think this has to do with the strong rule of law in Canada, compared to other areas in the world. I think China is taking a very long-term view and has thought-out the issue of nationalization or confiscation, in what may be a future world free-for-all for vital natural resources. I think China is smart to choose Canada, rather than Peru or Bolivia, for example.

Sometimes, messages are delivered in a plain, blunt manner. I think this acquisition of Noranda by China is such a blunt message. There will be a struggle over scarce and vital industrial resources from now on. No resource is more scarce or vital than silver. No resource is more “buy-able” than silver. No resource is cheaper. China has too much money, as do very many world entities, to buy a significant chunk of real silver without sending the price skyward. Unless you have hundreds of millions, or billions, of dollars to invest, you won’t get a clearer message for what to buy – real silver.

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