TED BUTLER'S ARCHIVES
TED BUTLER COMMENTARY
May 5, 2008
Another Sick New Record
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The engineered sell-off of gold and silver by the big commercial shorts continued over the past week. However, there were decidedly mixed results in the dealers’ attempt to force speculative long liquidation in each market, even though gold declined almost $50 and silver $1.20 in the latest reporting week (ended Tuesday). For positions held as of April 29, the Commitment of Traders Report (COT) indicated a further commercial net short reduction of 14,000 contracts in COMEX gold futures, but no liquidation at all in silver.
Over the past two COT reporting weeks, there has been a commercial net short liquidation of almost 20,000 contracts (2 million ounces) in gold on the almost $90 decline in price. But in silver, on a $2 price sell-off, there has been no reduction in the commercial net short position. In fact, the total net commercial silver short position increased by 2,000 contracts (10 million ounces). I don’t recall ever seeing such a large price decline in silver with no dealer short liquidation. What does this mean?
It means one of two things. Either the dealers will continue to press the price to the downside to hunt out speculative silver long liquidation, or that no further liquidation is possible and we will move up in price, perhaps sharply. It’s just my opinion, but I sense a big move up shortly.
Further, this gold liquidation cycle with no silver liquidation is reinforced in the behavior of the big ETFs in gold (GLD) and silver (SLV), as discussed in last week’s article. Since that article was written, there was further liquidation of the physical gold holdings in GLD of 350,000 ounces and an increase (as I wrote that I sensed coming) of 5 million ounces in the SLV. And yes, I still think the explanation lies in an outbreak of common sense, as more recognize the superior relative value of silver compared to gold.
I hope no one interprets my words of the liquidation in gold, both on the COMEX and in GLD, as me being bearish on gold because of that liquidation. That is definitely not the case. Liquidation shakes out weak hands, tech funds and other momentum traders. That strengthens, not weakens, the bullish case for gold. It’s not a case of gold being bearish, it’s just a case of silver being much more bullish than gold’s developing bullish structure.
The latest COT did establish one strong similarity between gold and silver that is not present in any other major market, namely, the outrageous level of the concentrated net short percentage of the largest traders. Even though, as predicted last week, the unusually large number of phony silver spreads that were liquidated would have the effect of boosting the reported concentrated percentages in silver dramatically, that doesn’t come close to telling the whole story. Yes, the silver spread liquidation did result in the largest one-week jump in the stated percentages of the largest short traders (big 4 from 38% to 44.2%, big 8 from 46% to 56.6%) to among the largest reported concentration percentages in history. But the real story is still the true concentrated percentages, once the remaining spreads are subtracted from total open interest.
In fact, the 8 largest traders in COMEX silver set a new sick record of concentration of 83% once the spreads are removed, up from 82% last week. In other words, the near-record reported net short percentage of 56.6% is understated by almost half again. Forget that no other market has, or has had, such a extreme concentration (save gold), no other market even comes close.
In terms of commodity law and common sense, there are no words that come to me that can fully describe just how extreme is the percent of short concentration in silver (and gold). Those that speak with me know I have trouble trying to describe its dimensions. I sit amazed every day that this is allowed to exist. I honestly don’t understand why the regulators and informed market observers are not making a big deal about it. Let me be clear - there is nothing more important in silver or gold.
So large is the concentrated short position in silver that I feel we have just witnessed the high-water mark, that won’t ever be exceeded. I say this for two reasons. One, the arrival of first notice day should reduce the number of shorts held by the big traders in the next COT report due to deliveries, as well should liquidation after the latest COT’s cut-off date. But the most important reason why I don’t think we will ever exceed the 83% mark of the latest report is that it is already so far above even the most extreme levels I could have ever imagined. Surely the regulators can’t be that negligent or incompetent to allow this to occur ever again.
AI
