Doug Casey: Silver is Rodney Dangerfield now but probably a mania soon


By Ted Butler
Wednesday, June 30, 2004

I delayed this article for a day in order to review
the statistics concerning the first delivery day on
the COMEX July silver contract and to see if the
CFTC would correct the material error they made in
the latest Commitments of Traders Report (COT) for
COMEX gold, silver and copper. As it turns out,
the CFTC did respond quickly to my notification
to them of the error, and that is to their credit.

On the other hand, it is telling that they made the
error in the first place and I doubt they would have
caught it if I did not inform them. It is also notable
that so few analysts and commentators even
caught the error, which involved many thousands
of contracts.

Simply put, the CFTC's error involved the
misclassification of a large trader into the small
traders' category in silver, gold and copper. This
was a glaring mistake. I don't know if market
positions were taken as a result, but I certainly
read plenty of commentary by analysts that
missed the error completely. I think the main
lesson to be learned here is that the CFTC is not
infallible when it comes to commodity matters.
No one is. This is something to keep in mind in
light of the CFTC's nine-page denial of a silver
manipulation. The bottom line is that, the CFTC's
mistake aside, the COT market structure
remains bullish and intact in gold, silver, and

The other reason for my delay of this letter was
to analyze the statistics for the first delivery day
of the COMEX July silver contract today, June
30. Basically, I was looking for two numbers --
one, the remaining number of open contracts in
the July contract month, and two, how many
contracts were issued on the first day, which is
traditionally the heaviest delivery day of all
commodities. I wanted to see if there was any
chance of a mismatch, or potential for a delivery
short squeeze.

I believe a short squeeze is inevitable because we
have a structural deficit and it must come to the
COMEX sooner or later, given the COMEX's
prominence as the world's largest silver exchange
and largest silver depository. And while this coming
short squeeze, or inability of short sellers to deliver
called-for physical quantities, can come at any time,
it is reasonable to assume it would likely occur
during one of the COMEX's five major delivery
months, of which July is one. Of course, no one
can know the timing of even the most inevitable
events. So we look for clues.

The main clue would be a large number of open
contracts on the first delivery day, coupled with a
small number of first day's deliveries, leaving a
large number of unresolved contracts. Even if this
occurred, it would be no guarantee of a delivery
squeeze, but it should make you sit up and pay
attention. A week ago, or so, it didn't look like
anything unusual was developing. The July open
interest was not particularly large by historical
standards, even though total warehouse stocks
were the lowest in more than six months, and 4
million ounces less than the last major delivery
month, May.

During the past week, however, the open interest
in the July contract didn't decline as much as it
historically does, and that's what has caused me
to wait for the first day's statistics. The first day's
deliveries were 1387 contracts (almost 7 million
ounces). Of that amount, Deutsche Bank delivered
almost 80 percent, with two other Silver Managers,
HSBC and Bank of Nova Scotia, accounting for 80
percent of the taking of the total issued. The former
Kingpin Silver Manger, AIG, was conspicuous in
its absence, once again. (There is no question in
my mind that AIG senior management took my
advice and has abandoned the silver market.)

This is a very small amount of silver for the first
day's notices. Not the lowest in history, but among
the lowest in first day's deliveries. It suggests
tightness, not abundance of silver for delivery. When
combined with the remaining open interest in the
July contract going into the first notice day, it gets
even more interesting. The number of contracts still
open on the first day was 10,462. This is a very
large number, just as first day deliveries were very
small. What this means is that there is a very large
amount of July contracts that will be still open, after
the first days deliveries are netted out, along with
last-minute liquidation. My guess is that roughly
8,000 contracts will remain at the end of the first
delivery day, or the equivalent of 40 million ounces.
If I'm correct in my guess, that will represent the
largest remaining open interest after first delivery
day on the COMEX in many years. I am a bit
surprised that there has been very little talk of this
potential delivery mismatch.

These two numbers, taken together, should make
market observers sit up and take notice. It doesn't
mean, of course, that there will be a delivery
problem during the July delivery month, but it doesn't
rule it out either. The larger the remaining open
interest in the delivery month, the greater the chance
of a delivery problem. As I've written before, there has
been a progressive tightening in the COMEX silver
delivery process for over a year and a half. That
certainly appears to be continuing. While no one
can say for certain when a delivery problem will
occur, I can state something else with certainty,
namely, that every COMEX delivery month process
weakens the shorts and strengthens the real silver
investor. At the end of every delivery month, the
shorts have less silver at their disposal and are
weaker and real silver investors are in better shape.
That's the beauty of the structural deficit for silver
investors. Time is on their side.

And it's not just the COMEX that offers strong clues
as to delivery tightness for wholesale quantities of
silver. I've heard recently from very reliable sources
that one of the big Canadian institutions waiting on
a silver delivery has still not been completely
received, after several months. Furthermore, I hear
that some of the silver that has been delivered has
come from Russia. That's a long way to go for a
commodity that many say is very abundant.
Certainly, the price doesn't suggest such physical
tightness. As you know, I say that's because the
price is manipulated.

It has now been two months since I wrote that the
silver market was at a uniquely low-risk buy point.
I still feel that way. Not much has happened
price-wise, since then. That's great, in my opinion.
In any investment, not losing is the most important
factor. My view was motivated by the low risk nature
of the market structure. After plummeting more than
$2.50 from the top, we've stopped going down in the
past two months. We haven't gone up yet, but we
will. Not because I say so, but because of the law
of supply and demand.

We now appear to have the best of all worlds.

Favorable COT market structure, powerful fundamentals,
and clear signs of multi-market delivery tightness. If
there could be a significant improvement in this total
package, I'm not aware of what it could be. This
market is still structured for a big upside and small
downside. The only validation still missing is the
price. What's not missing is the great opportunity
that still exists in silver.


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