Kosares: Just get gold and you''ll win; Sinclair: Higher gold helps U.S. economy


By Theodore Butler
July 6, 2004

It didn't take long to see how the unusually large remaining
open interest in the July COMEX silver contract would be
resolved. First there was a big transfer of 21 million ounces
from the eligible to registered category in the Brink's and
Delaware warehouses, followed by the second notice day
delivery of 5,200 contracts (26 million ounces). I'll review
more facts, and then some speculation on these
developments in a moment.

The market structure, as depicted in the latest COTs,
remains intact and bullish. There was some deterioration
in silver and copper, but none in gold last week. I think
the silver deterioration was corrected in the fairly high-
volume selloff the day after the report's cutoff. However,
the important issue in the COTs is where we sit in a
longer-term perspective. The answer is decidedly bullish.
It is still unresolved whether the dealers will short heavily
on the next real rally, and I'm still guessing they won't.
Time will tell.

One thing that gives me hope that the next rally could
be it is the mounting evidence that AIG is abandoning
or has abandoned the silver market. I continue to raise
this issue because I feel it is the most profound event
in the silver market in decades. Aside from the
announcement that AIG had terminated its market-
making role on the LBMA, I am astounded that they
have literally disappeared from their historical dominant
role in COMEX silver deliveries.

I have not seen AIG involved in COMEX silver deliveries
in months, since I started writing about them. To watch
them go from supreme commander of silver deliveries
to AWOL is mind-boggling. I am still numb from this

I approached the AIG matter by trying to put myself in
their shoes and to get them to change their silver ways
without getting my head taken off. What I wrote was
the truth and non-malicious in nature.

I think we're already witnessing one effect of AIG's
reduced role in the silver market. Many have noticed
the dramatic increase in price volatility over the past
two months. Even though silver has been in a fairly
contained trading range, we have seen sharp price
increases and decreases on almost a daily basis.
Up 20-30 cents one day, and down the next. I think
these rapid ups and downs are due, in large measure,
to AIG's retreat from the silver market. The controlling
force in the market has departed and left a vacuum. I
liken it to what happens when traffic lights go out and
there's no policeman to direct traffic. I think the silver
market has lost its chief traffic cop and disorderliness
has developed.

This may mark an important milestone in the road to
a free silver market. But that road will not be smooth.
There are always tradeoffs. Manipulated markets are
usually orderly markets, except when the manipulators
intentionally create volatility. For 20 years the silver
market has been contained and regulated by the
dealer wolf pack, with periodic episodes of dramatic
volatility (such as we witnessed in April). Free markets
can be very disorderly, especially when emerging from
a long period of manipulation. When silver finally goes
completely free, the volatility will knock your socks off.
Get prepared for it. How? You should already know by
now -- fully paid-for positions, patience, and a long-term

Now let's look at those extraordinary COMEX
warehouse transfers and deliveries.

On the first notice of delivery day, and not before as is
usually the case, 21 million ounces of silver were
transferred into the registered category from eligible.
This involved the issuing of more than 4,200 warehouse
receipts, no small logistical paperwork undertaking.
The next day 5,200 contracts were delivered. Of these
deliveries almost 5,100 contracts (98 percent of the
total) were issued by one firm, Calyon, which is the
new name for the brokerage firm Carr Futures. The
parent firm, Calyon Financial, is the result of a recent
merger between two large French banks, Credit
Agricole and Credit Lyonnais.

You may recall that Credit Lyonnais over the past
year had taken delivery of several thousand COMEX
silver warehouse receipts, so it's not terribly surprising
that they made a delivery of this size. In addition, the
bulk of the silver involved in the large transfer and
subsequent delivery on the second notice day involved
the silver brought in (from China, in my opinion) and
delivered by AIG back in December, which I wrote
about previously.

It should be remembered that when I, or anyone, says
that this or that firm took or made delivery of any
commodity contracts, there is no way of knowing if
such contracts were for the clearing member's own
account or for a customer of that clearing member. All
deliveries must be made through a clearing member
and that is the only name published.

What is surprising is that the unusually large transfers
and subsequent deliveries took place after the first
notice day's deliveries. In fact, I have never seen such
large last-minute transfers and second-day deliveries
before. Usually, such large amounts of transfers and
deliveries are arranged days and weeks in advance of
first notice day. That's because of the large amount
of preparation and paperwork involved. You can be sure
that this was a last-minute development and that the
midnight oil was burned in getting this transfer and
delivery completed.

Two old-time Silver Managers, HSBC and Bank of Nova
Scotia, accounted for 80 percent of the stopped -- or
received -- silver for the first three days of deliveries.
Again, there is no way of determining if it was for their
own account or on behalf of customers. We do know,
however, that this is a big boys' game and not for small
retail accounts.

Those are the facts.

Now, I'd like to speculate on what I think these unusually
large transfers and deliveries were all about.

I think that Calyon (Credit Lyonnais) was snookered out
of their silver by HSBC (the old Republic Bank of New
York) and Bank of Nova Scotia (Mocatta). I say that
because what I think went down was something I had
long anticipated would occur. I'm just surprised it took
so long.

What I think just occurred was the last great transfer
of paper silver into real, physical silver with no dramatic
impact on price. And, if I'm correct in my speculation, it
was a very slick move that was flawlessly executed.

This may seem complicated, so I'll try to make it as
simple as possible.

In the days and weeks before the first notice of delivery
day for every traditional COMEX silver delivery month,
those holding positions in the soon-to-expire futures
contract must roll over to a more deferred futures
contract if the don't want to make or take actual
delivery of silver. This involves most positions, as
fewer than 5 percent of futures contracts result in
actual delivery, and more than 95 percent of all futures
contracts are rolled over. Virtually all these rollover
transactions involve the simultaneous purchase and
sale of the expiring futures contact and the more
deferred contract. If you originally bought, or are
"long" a futures contract, then you do a switch or
spread whereby your broker simultaneously sells your
expiring futures contract and buys a more distant future.
Someone short buys back his original contract and
simultaneously resells or shorts a more distant
contract. This is true in all commodities.

The net effect of all this rolling over is a tremendous
spike in volume in the days and weeks preceding the
first notice day, as virtually all contracts in the nearby
futures month, which always comprises the majority
of total contracts outstanding, must be traded. Every
contract must be moved or must make or take delivery.
No exceptions.

To help you envision this trading phenomenon, I would
ask you to try to picture the seasonal migrations of
great herds of caribou or wildebeests. Everyone has
to move.

It is in the swirl and confusion of the movement of all
these contracts being rolled over, prior to the first
delivery day, that I have long thought that someone
big could easily step into the contract migration
undetected and convert a large number of paper
contracts into real silver warehouse receipts. In fact,
I don't think you could do it any other way if you
didn't want to impact the price of silver.

I don't think that any individual or any institution in
the world could pick up the phone and buy 25 million
ounces of real silver (5,000 COMEX warehouse
receipts) without dramatically affecting the price.
Not because that would be a lot of money ($150
million) but because that would be a lot of metal,
seeing how so little silver remains in world
inventories. I further think that if anyone gave
sufficient notice to the COMEX that he intended
to take delivery of 25 million ounces of real silver,
there would be all kinds of persuasions and
jawboning to talk them out of it.

I think that if someone waited until the approach of
first delivery day, and as tens of thousands of
contracts were being traded and migrated to other
months, he could buy 5,000 contracts of the nearby
month undetected on a switch basis (simultaneously
selling a more deferred month). The deferred month
sold could have been purchased previously, over
time, or bought back later, but is in any event a
paper transaction. Then, at literally the last minute,
the spot month buyer would inform the COMEX that
he wanted delivery. There would be no advance
persuasion or jawboning and if the COMEX or the
entity (short) responsible for making delivery didn't
deliver immediately, many would notice (like me)
and it would turn into a big deal, in my opinion.

The last thing the regulators want, at this point, is
any kind of silver delivery big deal stink.

I think that is just what occurred in this July delivery
trading. Thus, I think that Calyon got snookered out
of its 25 million ounces of real silver. It was just
taken from them.

Sure, they were short, but they intended to roll over
and keep the paper short and hold onto their real
silver. It is likely that they shorted many times what
they held in real silver at points in the past, and
when anyone complained about the silver shorts
they could tell the CFTC they had (some) real
silver. And Calyon intended to continue this practice
of selling more paper contracts against their real
silver. But someone stepped ahead of them in the
rollover migration confusion, and took their real silver.

I say this because everything happened so quickly
-- the last-minute giant transfers, the giant deliveries
on the second day, and the clear fact that hardly any
new silver was brought into the warehouses. Old stuff
was used to make delivery, unlike this past December.

Remember that this is my speculation, and I am clearly
labeling it as such. I think it is a very bullish
development. I don't see how it could be bearish and, at
least, the short-term market reaction was that of higher
prices on this news.

Lately, while cruising the TV via remote control, I have
noticed a proliferation of shows on gambling and poker
card games. The game of choice seems to be Texas
Hold 'Em. I usually linger and watch for a while, maybe
because I find the experience of knowing every player's
cards a unique experience. In any event, I'm always
taken aback by the size of the bets and the extent of
the posturing and bluffing. It's a different kind of card
game than I've ever participated in. It's almost not real.
It got me to thinking that it is just like the silver market,
especially the COMEX.

Watching TV poker is the same as watching the price
ticks emanating from the COMEX, the world's largest
precious metals exchange. Both are shows. Neither
reflects complete reality.

Don't misunderstand me. I'm not saying the poker
players on TV aren't real and they're not playing with
real money. I'm saying the poker shows on TV have
no semblance of reality for any card game that any
typical viewer had ever played in, or will ever play in.
It's pure fantasy. I suppose that makes for legitimate
TV entertainment.

But what about the silver fantasy on the COMEX?
Is that also just legitimate entertainment?

Consider what I have written in the body of this
article, and in countless other articles, about AIG
and the other Silver Managers and dealer wolf pack.
About the trading games and bluffing they all engage
in to make a quick buck. About the brain-dead tech
funds getting tricked constantly amid the dealer
collusion. About the weak arguments that the
regulators invent, pretending that is how it should
be, but never giving straight answers. Even though
thousands have signed a petition beseeching the
New York attorney general to intercede, and many
hundreds have written to the Commodity Futures
Trading Commission, the games and the bluffing
and weak excuses continue.

I guess all this would be acceptable if TV poker and
COMEX silver trading were exactly the very same
thing -- namely, merely big boys playing games with
outsized sums of money for the purpose of providing
legitimate entertainment for the masses. But we all
know that is not the case. What separates the two
is that the COMEX is supposed to be a legitimate
and licensed commodity exchange. The difference
is that one is solely a fantasy game on TV and one
is a fantasy that also happens to involve a legitimate
commodity that affects the lives of billions of people
around the world. That's why manipulation is the
No.1 market crime -- because it involves everyone.

What makes the COMEX a fantasy operation is that
their phony trading games have resulted in a fantasy
price for real silver. We are taught that the price of
any commodity can't stay so low as to create a
deficit for very long. Yet the COMEX fantasy
operation overrules what we are taught.

We know, intuitively, that inventories of any
commodity can't effectively approach zero without
the price sharply escalating. Yet the COMEX
fantasy operation overrules our intuitive knowledge.
We have never seen a commodity short position that
compares to the short position in COMEX silver and
our heads hurt trying to imagine the legitimate
economics of such a large short position at such a
low price. Yet the COMEX fantasy operation overrules
what we see with our own eyes and think with our
own minds.

The only things that matter are what matter to the
Silver Managers. It's all about what suits the dealer
wolf pack in their private game.

But that appears to be changing. What with AIG
apparently gone from silver, with the increased
volatility, and with evidence that the Silver Managers
may be turning against one another to get hold of real
silver, the COMEX price fantasy operation may be
breaking down.

Make no mistake -- the fantasy will end in a fight for
physical silver, and in no other way. All the tricks and
double-crosses and stabs in the back among the
dealer wolf pack will be about grabbing physical silver.
As this becomes more apparent, there will be a rush
for real silver and the nearby COMEX month for
delivery. It will feed on itself and draw in many varied
participants, especially the industrial users. Only
those who have the real silver will prevail.

And that's the message for the rest of us. And perhaps
the greatest difference between TV poker and COMEX
silver. When the TV fantasy is over, we're neither richer
nor poorer. When the COMEX silver fantasy operation
is over, those holding real silver will get decidedly
richer. All the bluffing and posturing and phony
big-money trading games won't matter at that point.
What will matter is ownership of real metal.

Try to tune out the increased daily volatility and focus
on the long term. All that is required is patience.
There's never been a more simple formula for profit --
buy and hold silver and wait for the COMEX silver
bluff to be called.


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