Posted by: basserdan
*** Ted Butler on Gold and Silver ***
Another good read, imo.......
The Beat Goes On - Gold & Silver
By: Theodore Butler
September 25, 2003
As the hurricane-delayed Commitments of Traders Report (COT), for positions held, as of 9/16 indicated, the extreme lopsided condition of the gold and silver markets continued. While the gold COTs recorded a decline in the net short commercial position for the week (and the past two weeks), a closer reading of the report showed that the big 4 and 8 short traders actually increased their position in both time periods. Price action and open interest increases in gold since the cutoff of the recent report indicate they are still adding to their concentrated gold short position, which continues to grow to levels never seen in over 20 years. In silver, the net short position (futures only) still hovers around 400 million ounces, with the big 8 holding close to 315 million ounces net short. I doubt the concentrated shorts in gold have the 15 million ounces they are short. I know they don't have the 315 million ounces of silver they are net short.
Say what you will, the big concentrated short traders are not running yet from the short side. If they were, we would see it in much more explosive price action to the upside than we have seen to date. Sure, the 8 concentrated big shorts are sitting with sizable open losses in gold COMEX futures, at $388. And they do stand to lose an additional $15 million for every dollar up from here, not considering that they may be hedged in other vehicles (options, stocks, etc.) Of course, they may get over run. Or, they may not. I have repeatedly affirmed that I don't know how this COT drama will play out.
The important point is that these are open positions, with open profits for the tech funds and open losses for the dealers. It is premature to officially proclaim the race over. We will only know the final outcome when most of these positions are closed out. It will not make me sad to see the dealers turn tail and cover their short positions at sharply higher prices, for the first time ever. If that occurred in silver, it would mark the end, for sure, of the silver manipulation. It has just been my experience that these Silver Managers are harder to kill than Count Dracula. So, let's see how it plays out.
In the long run, for silver, the COTs won't matter at some point. For this reason, long term silver investors must filter out most of the message from the COTs, and not cause them to permit the abandonment of real silver positions. But that is not to say that, in the interim, the COTs are not a good market tool and should not be considered at all.
Backwardation.
A recent phenomenon has developed in the silver market, a slight backwardation on the COMEX. I say slight, because the configuration to date does not meet the real definition of a true backwardation. First, let me explain backwardation in general, then the nuances of the current backwardation in COMEX silver.
Backwardation, or inversion, is the condition in any futures market where the nearby contract months trade at a higher price than longer-dated months. It is the opposite condition of a normal, or contango, market, where the longer dated months trade at a higher price than the nearbys, reflecting the costs of carrying or holding a commodity over time. Generally, backwardations occur in non-metal and base metal commodities when there is tightness or shortage in the near term availability of a commodity. Because the shortage will be eventually eliminated (through the law of supply and demand), the longer dated months are not as expensive as the nearby months.
In gold and silver, backwardation has been rare and very temporary. While it occurred on a small number of occasions in silver, I don't recall it ever happening in gold (I could be wrong here.) The general thinking, in gold and silver, is that because there are such large accumulated inventories, there can never be a real shortage in either (I'll discuss this in regards to silver, in a moment). In gold, the reasoning appears logical. While many people have various and very high price targets for gold, I know of no one who is actually predicting a gold shortage, in the true sense of unavailability at any price. For a price, albeit and perhaps a much higher price than presently, you should always be able to buy just about any quantity of gold you desire. That's because so many people and institutions hold gold, and because the overall quantity of gold always increases, due to continuing mine production and the very small percentage consumed industrially. To many, gold is the true money. As such, it is continuously accumulated. If a situation developed where gold for good current delivery cost measurably more than good deferred gold delivery, there would be practically an unlimited number of gold holders who would take advantage of such an opportunity. Sell for a guaranteed higher price than replacement. It would be, literally, money for nothing.
Silver is different. But first, about the "slight" backwardation on the COMEX. Slight, because it only involved the December 2003 contract compared to deferred months, not the current September contract. A true backwardation would have the very nearest month as the most expensive. Besides, how can you have a shortage that doesn't involve the spot month? What was even more strange about the COMEX slight backwardation was that the September contract should have been selling at a premium, due to the current tight delivery circumstances. As I have written recently, we have been experiencing progressive tightness in COMEX silver deliveries. As of today, September 22, there are still over 600 contracts (3 million ounces) open in the September contract, with only 4 trading days remaining. This is the largest number of contracts open at such a late date in the delivery process in my memory.
We see over 925 million ounces gross total short on the COMEX (futures and call options), 400 million ounces net short by the commercials (futures only) and 315 million ounces net short in futures by the 8 or less largest traders, and yet there is an apparent struggle to come up with 3 million in actual ounces for delivery. That should bother you.
While I assume that the September contract will be settled without incident, and the slight backwardation we see currently may not necessarily lead to an immediate true backwardation, please weigh that against what I know will happen at some point - silver will go into a pronounced true backwardation. It has to. Let me be very clear about this. I don't see gold going into a pronounced backwardation for the reasons I've given, namely, there should be no true gold shortage, regardless of price. But silver has shortage written all over it. Structural and long term deficit. Disappearing inventories. Vital industrial consumption for just about all things modern and new. Difficult contract deliveries. Delayed shipments. That spells shortage. Shortage equals backwardation, like one plus one equals two.
What does this certain coming backwardation mean to the silver investor? It means one thing and one thing only - buy and hold real silver. Backwardation is just another way of saying that the real item will command the highest price at some point. Or just another way of saying that real silver will be more valuable than any paper contract on silver. We may not know when silver will hit its ultimate high price, or what that price may be, but we know human nature. We know that in the coming industrial crunch for silver, users will pay whatever price is necessary to keep their businesses open. They may hem and haw about committing to long term contracts at historically high prices, but no price will be high enough to shut down their operation. That's what backwardation is all about. Put it to your advantage - buy real silver.
Last week's letter to Eliot Spitzer touched off more than a normal amount of comment and interest. In fact, one Internet friend of mine, with absolutely no input or suggestion from me, even went so far as to set up a petition site to encourage Mr. Spitzer to look into the issue. The comments written by many on this petition site are articulate and well-balanced. I suggest you take the time to read them and perhaps sign and add your own comments, if you are so inclined. I don't see how it could possibly hurt (except maybe the shorts). That address -
www.petitiononline.com/comex/petition.html
-- Posted Thursday, September 25 2003
goldseek.com |
