China''s Minmetals cinches bid for Noranda, Brazilian paper says


By Ted Butler
Monday, July 19, 2004

The market structure, as depicted by the Commitments
of Traders Report (COT), deteriorated more sharply than
I expected in gold, copper, and silver. The latest COTs,
as of the close of business July 13, indicated a notable
increase in the dealers' net short position. Extrapolating
from the report's cutoff date, there was further tech fund
buying and dealer short selling since then. My guess is
that the dealer net short position has increased, from
the recent bottoms, by 20,000 contracts (100 million
ounces) in silver, into the low to mid-60,000 contract
mark. In gold, I'd peg the up-to-date dealers' net short
position at around 125,000 contracts.

Clearly, the current COT positions are now neutral and
no longer screamingly bullish as they were recently.
Just as clearly, my hopes for an immediate price
explosion, or market event to the upside, based upon
the previous COT readings in silver, have been dashed.

While the recent buy signal did identify a significant
bottom area, as did the signal back in October, we did
not get (yet) the price explosion I hoped for, as the short
sale of 20,000 contracts by the dealers blunted the rise.
Still, we did get a dollar-plus rally from the lows in just
the past two weeks, and precisely as predicted, no one
has gotten hurt who followed the buy signals at the
former exceptionally low risk levels.

The COTs are a mathematical compilation, and, as such,
lend themselves to objective analysis. Numbers are
numbers. Of course, the interpretation of those numbers
is inherently subjective. Additionally, I think the COTs
should be employed only to aid in short-term
determinations. Certainly, long-term core holdings of
silver should never be disturbed based upon the COTs.

Back in January, the COTs in silver were exceptionally
bearish, and stayed bearish as the market rose more
than $2 an ounce, before collapsing. That said, where
do we now stand in the COTs and where do we go in
the near term?

The short answer is that I don't know. The longer answer
is that I see a number of possibilities.

For one, this move to the upside could evolve just like
past moves, in that the tech funds plow in on the long
side, propelling prices higher until they have finished
buying and then we collapse as they sell. In other
words, the dealers sell short unlimited quantities of
paper silver and then engineer a selloff and the
manipulation continues. Then we wait for the dealers
to get done covering their shorts and the next low-risk
buying opportunity. Same old, same old.

But there are some recent developments that suggest
that it may be premature to eliminate the silver price
explosion thesis.

In the COT report itself, it is notable that despite the
buildup in the dealer net short position, there has not
been (yet) a proportional buildup in the concentrated
short position of the big four and eight traders. The vast
majority of the dealer net short increase has come
from the secondary dealers and not the real big boys.

Now it may turn out that the big dealers will eventually
sell short heavily on this move later, at higher prices.
They've done this in the past. But it's also very possible
that they won't sell heavily this time, especially
considering the strong evidence that the former biggest
dealer, AIG, is no longer playing the silver game.

In that case, as I indicated last week, it is not implausible
to imagine the market exploding in a wave of short
covering by these secondary dealers when they realize
that their "patron" will not back them up and bail them
out. It must be remembered always that these dealers
who are net short more than 300 million ounces of silver
couldn't actually deliver that silver in a thousand years
if their lives depended upon it. Not to equivocate, but it
is also possible for the secondary dealers, even absent
their former leadership, to engineer a selloff by
themselves. The tech funds aren't that difficult to trick.
Still, it is hard not to notice that the big boys haven't
come in on the short side yet.

There are, however, developments apart from the COT
report that could spell a different outcome this time
around. Aside from the apparent departure of AIG,
there is the matter of the unusual COMEX silver
warehouse transfers and second notice day deliveries
of 26 million ounces. It still looks to me that someone
was snookered out of his silver. Now there may be
further evidence developing that supports this theory,
based upon recent out movements of silver from the
COMEX warehouses, as well as further transfers
between the registered and eligible categories.

I've written extensively about the COMEX silver
warehouse stocks in the past, and I suggest you
review those articles to get a fuller explanation.
I'll try to be brief here and concentrate mainly on
recent developments.

The COMEX silver stocks are the largest and most
visible of the world's known bullion inventory. They
are the only visible inventory that can be verified
daily. As such, they are closely watched and analyzed.
There is a natural tendency to regard increases in
these inventories as being bearish and outflows as
bullish. These COMEX stocks are not, however, the
only silver inventories in the world, and one must be
careful to not interpret them as such.

For the past seven years or so the COMEX silver
stocks have been somewhat stable, ranging roughly
20 million ounces above and below the 100-million-ounce
mark. But they are 70 percent lower than the adjusted
high levels of 330 million ounces, 12 years ago, a
clear confirmation of the structural deficit. Since the
COMEX silver stocks have been relatively stable for
the past few years, we can state factually that it has
not been these stocks that have been satisfying the
structural deficit. The silver that has been satisfying
the deficit has come from elsewhere, principally the
central bank of China.

There is something else we can state that is factual
about the COMEX silver stocks -- that is, that in the face
of expected continued deficits, it is only a matter of time
before the silver at the COMEX will be needed to satisfy
the deficit as the other inventories dry up. We can't know
when that will be, just that it will be. This is a situation
unique to silver and, unlike gold, there is less
above-ground silver in existence in the world every day
and the COMEX is the largest known stockpile remaining
in the world. When they come for the COMEX silver to
satisfy the deficit, that will be a very big price deal, as
that is the very last stop for the silver inventory train.

Therefore, market observers are sensitive to changes in
the level of COMEX warehouse levels, particularly
outflows, as that may signal that the other inventories
are finally tapped out. Of course, since the other
inventories are in the unknown category, there is no
way of knowing when they are largely depleted until
well after the fact. At that point, it can be expected
that the price of silver will already reflect that situation
and will no longer be a bargain. So it is natural to look
for clues before the fact, on the hopes of catching a
bargain, even though there can be many false starts
before we really have to tap into the COMEX.

Currently, COMEX silver inventories have fallen to just
under 115 million ounces, as of July 19, down more
than 3.5 million ounces over the past week or so. Now
we have seen declines of this magnitude many times
in the past, and at this point, it does not look terribly
noteworthy on the surface. After all, we are still around
10 million ounces greater than a year ago, although we
are down about 10 million ounces from the recent highs
over the past six months.

So why am I even discussing the COMEX warehouse
stocks now? In a very recent article, "Texas Hold 'Em,"
I wrote about the unusual delivery quantities and
patterns and how I thought I saw some large dealers
use the rollover contract migration to sneak in and
grab a large quantity of silver warehouse receipts. I
had long theorized that someone would do just what
I thought I witnessed, and I was admittedly sensitive
(maybe oversensitive) to the transaction. Now I think
I see another long expected transaction involving the
very recent out-movement of COMEX silver stocks.

Since we know that someday, somebody will move
on the COMEX silver stocks to satisfy the deficit, I've
always asked myself how would that likely occur.

Well, the first part would likely occur just as described
in "Texas Hold 'Em." The second part would involve the
quick physical movement of silver out of the warehouse.
It is clear that the silver that has been transferred out
of the COMEX over the past week or so is part of the
same silver that was delivered against futures contracts
on the second notice day. I have been waiting a long
time to see if this would happen.

For someone to take delivery, via futures contracts, and
quickly order out physical silver suggests bona-fide
commercial demand. It is also suggestive that the silver
may not have been available elsewhere, as this is a
high-profile and noticeable transaction. It raises the
legitimate question: Are we at the last silver inventory
train stop? It is not something a speculator is likely to
do, as it would likely invite the attention and scrutiny
of the authorities. It is not even important to see the
out movement continue in the short run, as there has
been enough quantity moved recently to qualify as

What is important is to see if this out movement of
silver can be replenished by different in movements.
This can certainly be the case, as it has happened
before (see "The COMEX Silver Shuffle"). But if this
out movement is occurring for the reasons I've
suggested -- namely, it could not be secured
elsewhere -- and no in movements are forthcoming,
then take the COTs, the charts, the Commodity
Futures Trading Commission, the silly bearish stories,
and everything else you can think of and throw them
out the window.

Nothing else will matter if we have arrived at the last
inventory stop, the COMEX.

Let me be crystal clear. I don't know if that's the case,
as that is unknowable. What I do know is that we must
scrutinize the clues and hope to see something like this
before the fact.


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