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The Set-Up?

By: Theodore Butler

-- Posted 21 September, 2004 | | Source:

The market structure, as defined by the Commitments of Traders Report (COT) for futures positions on the COMEX, improved dramatically for silver over the past two reporting weeks. It is rare to get a bullish surprise in this report, but the amount of technical fund selling and dealer buying was outstanding. In fact, the current readings show that we are just about at the low levels of net dealer short positions seen at the prior two "mother" buy points. While it is always possible for further improvement (along with lower prices), the bulk of the tech fund selling/dealer buying is behind us, in my opinion.

In the past two weeks, the tech funds have sold, and the dealers have purchased, 20,000 net silver futures contracts on the COMEX. Thatís the equivalent of 100 million ounces of silver. Although I have written about this extensively in the past, I ask you to consider it once again. The only reason the price of silver fell over 80 cents an ounce (over 10%) in the reporting period was due to the paper sale of 100 million ounces of silver by the technical funds on the COMEX. Most of the decline came over a three-day period.

I ask you to think about that 100 million ounces of silver contracts sold by the tech funds and bought by the dealers. First, it is truly a very large quantity of silver. It is more than 16% of total world annual mine production, and double what the US mines annually. It is greater than what Mexico, the worldís largest producing country, mines in a year. It is almost as large as the entire inventory in the COMEX-approved warehouses, the largest known inventory in the world, by far.

This 100 million ounce amount that just changed hands on the COMEX is roughly equal to the famous purchase by Warren Buffett 7 years ago. The difference is that Buffett took more than six months to buy his real silver, the most celebrated silver transaction in decades, while the equivalent amount was transacted in a matter of days on the COMEX. Common sense should tell you that the COMEX transaction, even though it was paper, exerted a large influence on price, given its large size. In fact, it was the only logical explanation as to why silver sold off so sharply.

My point here is clear; paper trading on the COMEX sets the near term price of silver, and not supply and demand in the real world. Period. This is the purest example of manipulation that you will ever see. To those who would argue that there is a buyer for every technical fund contract sold, I would agree. The problem is that it always is the dealers who collude and conspire among themselves, and collectively pull their bids as the tech funds sell. This is why prices always suddenly collapse when the tech funds get long. It is always just a matter of time. The question is, why are the tech funds so stupid to continue playing this rigged game?

The other question is, why are the silver miners not objecting to this obvious rigging of the price of silver? A couple of weeks ago I predicted that if the price of silver sold off, it would be because the dealers hoodwinked the tech funds again. That is exactly what happened, as verified by the government issued COT report. I donít know how it could be clearer that paper speculators on the COMEX are setting the price of silver. This is expressly against the main premise of commodity law. If the miners, principally but not limited to, PAAS, CDE, SIL and HL, havenít taken advantage of the well telegraphed sell-off to buy silver, they have squandered another wonderful opportunity. If all they are doing is thinking about it, it is probably too late. At the very least, they should be speaking out against the documented shenanigans on the COMEX.

The good news, of course, is that the tech funds have already sold. Most, if not all, of the risk has been removed from the silver market. Now all that remains to be seen is if the dealers sell short again on the next rally, as the tech funds come in to buy. If they do sell, it may not be the big one. If they donít sell short heavily, it will be the big one. Either way, we wonít know until the rally develops, but we should get that rally nonetheless. Therefore, this is not the time to hesitate to buy, based upon the tech fund clean out in the COTs.

-- Posted 21 September, 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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