WEEKLY COMMENTARY

None So Blind

By Theodore Butler


The latest Commitment of Traders Report (COT) showed a very sharp increase in the net dealer short position in gold, of more than 38,000 futures contracts. That brought the total dealer net short position to over 147,000 contracts, an increase of almost 110,000 contracts from the lows, some 5 weeks ago. This increase in the commercial gold net short position ranks among the largest in history. Silver's dealer net short position was basically unchanged for the week, still up 20,000 contracts from the lows.

The rise in the gold commercial short position is reminiscent of the 100,000-contract rise exactly a year ago. At that time, I speculated that the rise in the gold net short position was intended to fuel a gold decline for the purpose of precipitating and augmenting a silver price decline, which was over $8 then. That is exactly what transpired.

I'm speculating again, and I think the same thing is happening now. The dealers are using gold to smack the silver again. What's different is that the price and net short position in silver is nowhere near as extreme as it was a year ago. I interpret that to mean the silver cash market is much tighter now and the dealers didn't want as big a silver net short exposure as they had a year ago.

It should come as no surprise to anyone paying attention that the root of the sharp price decline in gold and silver on Monday was as a result of the bloated dealer net short gold position. The dealers collusively pulled their bids as the tech funds came into sell. The gold open interest declined almost 20,000 contracts for Monday's trading, confirming tech fund long and dealer short liquidation. It is almost amusing to hear alternative explanations for Monday's decline.

As I wrote last week, there are any number of legitimate reasons why silver may explode in price, but only one reason for why it would fall – because the dealers so desired to trick the tech funds. That has come to fruition. Now we await the completion of the tech fund liquidation and the next low-risk buy point.

I can't help but think of the silver miners and the phrase, "there is none so blind, as he who refuses to see." I don't know how much clearer the tech fund/dealer manipulation of the gold and silver price could be. There were absolutely no real world consumption or production developments impacting the silver price on Monday. It was all paper COMEX trading.

Yet the miners pretend not to notice as the price of their product is toyed with. They make statements about how strong silver demand is, and how low their cash costs have become, yet are still not able to earn a real operating profit, even though silver is more than 50% higher than the lows of recent years. They even go so far as publicly denying that a manipulation exists, in spite of the clear wishes of thousands of their shareholders. That's crazy.

When this tech fund liquidation and artificial sell-off runs its course and the price of silver rallies once again, the concern over the lack of action by the miners in the silver manipulation will recede. But it shouldn't. I can't imagine a situation in any other commodity with such clear evidence of price manipulation where all the producers would stand there and take it.


March 22, 2005