If you read The Gartman Letter, here''s something else you may have missed

Section:

By Ted Butler
November 9, 2004
www.InvestmentRarities.com

A close reading of the current Commitments of Traders
Report (COT), including an extrapolation since the
Tuesday cutoff, indicates that we are still at a bearish
extreme in gold and silver. Yes, there was technical
fund liquidation and dealer short covering in the latest
report, but that activity clearly took place on the big
down day on November 2. Subsequently, it appears
that the tech funds came rushing back onto the long
side (with the dealers going short) at higher prices.
The tech funds are still buying high and selling low,
the dealers are doing the opposite.

Basically, there are only two ways for this big tech
fund long/dealer short position to play out. One party
will have to be the aggressor. Either the tech funds
liquidate at lower prices, or the dealers cover at higher
prices. No one knows which it will be. We do know
that, in gold and silver, the dealers have never panicked
and covered shorts at higher prices. Certainly, there is
little or no visible evidence that the dealers are about
to panic here. But, they could, particularly in silver,
and my sense is we would get little warning.

The reason I analyze the COTs is to identify low or
high-risk points in the market. I hope I have been
clear that this type of analysis is short-term in
nature, and to a long-term silver investor the COTs
matter little. And long-term is the right way to go.
Still, trying to divine the basic rhythms of the
markets is a compelling intellectual attraction.
Because I've seen the COTs play out in a certain
repetitive way for many years (with variations, of
course), it's hard for me to ignore them.

Over the past year there have been several ultra-low
and ultra-high-risk points in silver and gold as defined
by the COTs. The most recent low-risk point was
back in mid-September. (See my commentary "The
Setup?"). Since that point silver has rallied more
than 20 percent in price ($1.25+ per oz). But it has
been tech fund net buying of almost 35,000 Comex
futures contracts, or 175 million ounces, that caused
the rally. In gold, almost 80,000 net contracts were
bought by the funds since the September lows. It is
the addition of these contracts that caused the price
to rise and greatly increase the risk of a tech fund
flush-out to the downside.

This doesn't mean, of course, that the funds WILL get
flushed out. As I said, no one knows how it will play out.
But we are at an extreme juncture. It doesn't hurt, even
for a long-term silver investor, to recognize that, at least
for mental preparation in volatile markets. It's always
dollars to the upside in silver but not always a couple of
dimes to the downside. Can silver explode in price from
here? Of course. Can silver get smacked down with
tech fund liquidation? Also of course.

The current situation is more extreme than usual, in my
opinion. It's almost as if the dealers are in a "do or
die" situation. We have a confluence of forces that are
superimposed upon the extreme COT position.

For one, we have a very heavy Comex option expiration in
gold and silver on November 23. This is the one month when
gold and silver have a concurrent option expiration. Normally
the major option months are staggered. The amount of call
options that is and could get "into the money" at current or
higher gold and silver prices is massive. I don't recall an
option expiration cycle with such heavy numbers of call
options in both gold and silver threatening to go live if
prices remain steady or move moderately higher. If this
were to occur, tremendous additional pressure could be
placed upon the dealers.

Likewise, December is the largest futures delivery month
and the only concurrent major futures month shared by
gold and silver. The delivery process begins on November
30, one week after the options settlement. Considering the
current one-year lows in the level of COMEX silver
inventories, it is not hard to imagine a "tight" December
delivery process. That tightness would only be
exacerbated if the short position going into the first delivery
day was swollen with a full tech fund long position and
unusual in-the-money option exercises. Additionally, the
recent purchase of 5 million ounces by the Central Fund
of Canada (not 6 million, as I reported originally) creates
a tighter overall physical market.

In short, the stakes are much higher for the dealers than
is usually the case at extreme COT points -- especially
considering that the leader of the silver wolf pack, AIG,
has apparently departed. If the dealers were to ever get
overrun, these unusual additional factors would seem to
add to that likelihood.

Amazingly, the total gross short position in Comex silver
(futures plus call options as of November 8) is the highest
in recent memory, at 198,000 contracts. That's the
equivalent of 990 million ounces. This is a billion-ounce
paper short position that is much larger than the 600 million
ounces in world production and maybe 150 million ounces in
known bullion inventories combined. Try to find another
commodity with that configuration. You won't.

Because the stakes are unusually high for the dealers, they
will be working overtime to engineer a sharp selloff. If such
a selloff does materialize, it should set up a tremendous
low-risk buying opportunity.

If I knew which way this bloated COT position was going to
be resolved, I would tell you. The simple truth is that no
one can know. All we can do is observe and prepare. So
instead of worrying about how the market may behave in
the short term, prepare, emotionally and financially, for any
outcome. And concentrate on what we do know -- namely,
in a commodity deficit prices must eventually rise to
eliminate that deficit.

Fortunately, there is one simple and best solution that
overrules all short-term uncertainty and allows us to capture
the certainty of the long term. That simple and best solution
is unencumbered physical silver. There are no contingencies
or "what-ifs" with real silver. There are no worries about what
could go wrong. No concerns over short-term price
fluctuations. When the law of supply and demand triumphs in
silver, there will be no unexpected surprises for those holding
real silver.

In has been my observation, almost universal among those
who own real silver, that they tend to disregard the impact
of short-term price movements upon their real silver holdings.
This is the way it should be.

In fact, it's kind of funny. I talk to people with big physical
silver holdings who are very concerned with short-term price
movements, but only for the possible impact on short-term
speculative holdings. Their physical silver holdings are
thought of very differently. It's as if we are talking about
different commodities. We are. One is paper and one is
real. One is uncertain in the short term, the other is certain
for the long term.

I hope and wish for everyone to look at silver this way.

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