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The Flush Out

By: Theodore Butler

-- Posted 6 July, 2005 | | Source:

Sometimes, itís downright eerie how reliable the Commitment of Traders Report (COT) can be in forecasting significant moves in the gold and silver market. Weíve just experienced one of those times. The buildup in tech fund long positions and dealer short positions in gold and silver created a clear and present high-risk situation, which resulted in a sharp price break.

Make no mistake; this recent swoon in price was caused by the tech funds dumping as the dealers engineered the price through the critical moving averages. This is not a complaint, just an explanation for what just occurred. In fact, if this recent sell-off caught you off guard, that could only be because you did not consider the COTs. I am not encouraging anyone to approach the markets on a short-term basis. But if you do decide on such an approach, and you disregard the message of the COTs, you will greatly handicap yourself.

Therefore, it is not surprising to me to read more written about the COTs and greater acceptance of this market structure approach as an analytical metric. What is surprising (and amusing) is how anyone can attempt to explain the recent round trip in gold and silver prices without reference to the COTs. Of constant surprise is how the silver miners can ignore the price being set by speculators on the COMEX.

So, what is the current message of the COTs? First, letís look at where weíve been. In gold, the tech funds plowed onto long side, with a reckless abandon over a four-week period, to the tune of 110,000 net contracts. Now we are in the midst of the unwinding, which commenced on Friday, July 1. It will take aggressive and high volume selling to clean out the tech fundsí gold buying orgy, such as weíre currently witnessing.

In silver, the flush out appears complete, or largely so. I base this on daily price and volume statistics. By my calculations, much of the 30,000 total net contracts bought by the funds and sold short by the dealers on the previous rally, have been reversed on the price decline in the past week. As such, the recent high risk in the silver market is no longer present, in my opinion. Itís safe to go back into the water.

This is important in silver, because the fundamentals are so powerful and the price is so far below real value, that you need a good reason not to be over-invested at all times.. The only good reason I have ever found not to be over-invested in silver is when the COTs are indicating that the funds are very long and the dealers very short. This was the case until this recent price decline remedied that circumstance. Therefore, I see no compelling reason not to be over-invested in silver. Especially below $7.

Once again, we are set up with a win-win situation in silver. We know there will be a rally once the tech fund selling is exhausted. What we donít know is how the dealers will behave on that coming rally. Will they sell, as they always have, or will they stand aside, allowing the price to truly explode? It is a resolution best awaited from a fully-committed posture.

-- Posted 6 July, 2005 | |

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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