Ted Butler: Taking care of business
By Ted Butler
December 14, 2004
www.InvestmentRarities.com
I'm keeping this week's comments brief. In last week's
article, even though I wrote that I had the feeling that
we could have a real "thumper" to the downside,
actually seeing it immediately occur was somewhat
unnerving. That said, while timing is akin to luck, I hope
readers understand that the reason for the dramatic
price fall in gold, and especially silver, was solely due
to the market structure on the COMEX, between the
dealers and the tech funds. This is the key to
understanding short term market moves.
Confirming this point, the most recently released COT
report indicated that on the day before the vicious
selloff commenced, the tech funds were more long in
silver, on a gross and net basis, with dealers more
short on a gross and net basis than ever before. In
gold, the tech funds were more gross long than ever
before. That it was subsequent tech fund selling
that cascaded on the downside that caused prices
to collapse would be merely stating the obvious. If
serious market observers don't see this, I can't
imagine what else they are looking at.
When the tech funds buy, it causes prices to climb.
As a gold or silver investor, this feels good as it
increases the worth of our investments. But these
tech funds also sell, and that selling causes prices
to fall, hurting out investments. That's why it's
important to keep tech fund buying and selling in
perspective. They aren't trying to help or hurt us,
but their mechanically buying and selling do move
the markets.
It seems to me that the focus of what is moving the
market is often blurred. For instance, there has
been much recent controversy concerning the new
exchange traded fund (ETF) in gold because of a
one-day decline of 15 tons (500,000 ounces) in their
reported holdings. Many have said that this reduction
in holdings was because the fund sold that amount
of gold and that is what caused last week's selloff.
I disagree with this interpretation, and the most logical
explanation that I heard for the reduction was that
someone exchanged shares for the real gold, much
like a futures contract delivery. In any event, we have
seen tech fund liquidation, as evidenced by daily
declines in gold open interest on the COMEX, of more
than seven times the amount of the ETF's reduction.
We know this represented real selling by the tech
funds.
What do you think was the more likely cause of last
week's selloff, the certain sale of 3.5 million ounces
of COMEX gold contracts, or the possible sale of
500,000 ounces by the gold ETF?
Obviously, the dealers have been taking care of
business and have been harvesting the tech funds
in gold and silver. The dealers' record of not covering
to the upside appears intact. While the dealers are
not making giant profits, they are closing out short
positions. The key question, of course, is: At what
point is the tech fund liquidation complete and we
are presented with another outstanding buy point?
Time will tell, but I sense we are drawing close.
Leveraged players will try to bottom-pick, as they
must be more concerned with risk, but the buyers
of real silver are starting to see bargain prices.
Regardless of how much more tech fund liquidation
(and lower prices) we may see, the buyers of real
silver should be assured that prices will be higher
than current levels in the near future.
It is interesting that in the selloff so far, all of silver's
moving averages have been violated; while in gold, the
big 50-, 100-, and 200-day moving averages have not
been violated (yet). It is the violation of the moving
averages that causes the tech funds to act. So it
would appear that silver is more advanced in the
liquidation process, at least in terms of contracts
to be possibly liquidated, if not also in price. If
gold does violate its big moving averages, heavy
tech fund selling should be expected.
Just a quick update on the copper delivery situation
I mentioned last week. With two full weeks of
deliveries now complete, there is still a larger open
interest (and, therefore, short position) in the spot
December delivery month than all the real copper
in the COMEX-approved warehouses. This is
unprecedented and it will be interesting to see how
this situation is resolved. |
