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Time to Act

By: Theodore Butler

-- Posted 26 August, 2004 | | Source:

Like a fast-moving hurricane, the market structure landscape appears to have been altered by the dealers and funds over the past few days. In fact, Iím writing this article a bit early in consideration of that altered landscape. While there was nothing extraordinarily negative in the just-released COTs, the action since the Tuesday cut-off, particularly on Friday the 20th, suggests an orgy of tech fund buying and dealer selling in gold. It is this tech fund buying that has propelled the price higher, same as ever. No other influences, the dollar, oil, interest rates, nor the stock market came close to being the principle price driver. It was solely the funds and dealers.

For the past few weeks I have been anticipating a gold rally because the tech funds had not yet come on to the long side with aggression, so the rally we just had has not been surprising. But this tech fund buying comes with a cost; at some point these same tech funds will be selling, causing prices to decline. Thatís the problem. Itís also at the heart of the manipulation of our markets, as it is clear that paper trading is setting prices. This is against commodity law and is just plain wrong. It is not right that big money (funds and speculating banks) set the price of commodities. Unfortunately, it is also reality, which is why I focus on it.

In silver, we have now moved to the negative side, from neutral, on COT analysis. Ditto with gold. Does this mean we sell-off soon? Maybe. Iím not a prophet and I donít think the vast majority of investors should try to trade the market short term. The key to long-term investment success is buying and holding undervalued assets. I try to use the COTs to identify extremely low risk points in the market, when the risk is a few dimes to the downside. While there are many, many dollars of upside to silver, the COTs suggest a little more than a few dimes to the downside currently.

There is no way of knowing when the tech funds are done buying and the dealers are done selling. We could go much higher short term if the funds buy more and the dealers let them, before selling off. Itís always possible that the dealers could finally get overrun to the upside, for the first time. If any market could ever nail the dealers, it would be silver, with its spectacular supply/demand fundamentals. The profit potential is always great in silver at anywhere near current prices. But there are times when the risk is extremely small as well, as defined by the COTs.

What does this mean to the average silver investor? Basically nothing, save one thing. No one should even contemplate disturbing long-term core silver positions. There is too much risk and cost in messing with long-term holdings. Besides, I could be dead wrong (in fact, I hope I am) in my assessment of the COTs. There have been times, such as in the first quarter, when the COTs stayed negative through a two-dollar rally. I am much more certain of the long-term explosive move up, than the short term move down. The only concession I would make is to save some dry powder to take advantage of a possible sell-off and low risk buy point.

But there is an unusual opportunity that has been created for the silver miners, specifically Pan American Silver, Hecla, Coeur dí Alene and Apex Silver, to be more proactive in regards to the silver market. I understand that no one likes to be told to do anything, especially by an outsider. Iím sure thatís how the CEOs of these companies look at suggestions that they buy silver with excess shareholder cash. However, the recent rise in the price of silver (and gold) due to tech fund buying sets up an interesting opportunity for these miners (and other miners).

If we surge higher in the silver price from here, and the dealers are overrun by the realities of supply and demand, I will be the first to acknowledge that the time has come and gone for the miners to buy silver and this suggestion is no longer necessary. Those miners, like Silver Standard, who did buy silver, will reap the rewards for their foresight with profits and goodwill, but surging prices will relieve the ones who didnít previously buy real silver of responsibility of fighting for a fair price for their shareholdersí resource.

I want to be very clear about something here. My intent is not to fight with the miners. My intent is to help them. I have offered a constructive solution to what is an obvious problem; the price of their product is manipulated and that has hurt them. I have offered this solution publicly with no expectations of private gain. I admit that perhaps my tone could have been more solicitous in the past. I apologize if I offended or insulted any CEO, particularly Ross Beatty, now chairman of Pan American.

My proposal is easy to put into place. I have seen complaints that it will disrupt the minersí business operations and even comments that Iím telling the miners to cease production. That is not close to being correct. All the miners have to do, in the event of another sharp sell-off in the price of silver, is to deploy a small percentage of their cash, some 10 to 20%, into real silver. If they are unsure of how and when to do it, they can call me for advice, free of charge. Letís face it; these miners are almost universal in their declaration that they wonít hedge the price of silver to the upside. They know that shareholders want this blue sky potential. Buying silver with a small percentage of free cash is philosophically aligned with a no hedging pledge.

As I have written previously, the four companies mentioned have more than $800 million in shareholder cash. These companies have no plans of spending or using all this cash anytime soon. It is a cushion. It is, admittedly, the first cash cushion in their history, and I can understand their reluctance to part with any of it. But I am not suggesting they part with any of their shareholdersí cash cushion. The 10 to 20% that I am suggesting they deploy into silver on a sell-off will not affect their operations in the least. The money will not disappear; it will just be invested in real silver, and not in short-term interest bearing securities at 1 or 2%.

Without exception, every shareholder in a silver company wants exposure to the price of silver. Thatís why they have invested in these companies in the first place. I feel I can speak for the vast majority of silver company shareholders and state that a company holding 10 to 20% of its cash in silver, bought at a reasonable price, instead of money market securities, will be well-received by them. It will probably even enhance share performance, as seems to have been the case with Silver Standard.

If the COTs play out in the usual manner where the technical funds are tricked into dumping the paper silver they just bought, and the price of silver swoons, that will prove once again that paper speculators are setting the price of silver.

This will be a time to put everything else aside, for the sake of shareholders and the silver market. CEOs are intelligent and will gravitate to an idea designed to benefit their shareholders. I hope the silver mining CEOs will seize the opportunity and buy some real silver. It will be a wonderful chance to do the right thing. That way, shareholders and silver investors will turn out winners.

-- Posted 26 August, 2004 | |

This article is brought to you in part by Investment Rarities Inc.

Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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