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Ferdinand Lips to Gold Rush 21: We need three revolutions
By Theodore Butler
InvestmentRarities.com
Tuesday, August 9, 2005
There was quite a bit of price volatility and changes in the market
structure for the metals recently, particularly in silver. According
to the most recent commitment of traders report, there was
deterioration, as expected, in both gold and silver, as prices
rallied during the reporting period. The big news, however, was what
transpired since the Tuesday cutoff date. There was a marked
divergence between the gold and silver price action and the market
structure since the cutoff.
In gold, the tech funds added to their net long position and, in my
opinion, the dealers added to their net short position by some
30,000 contracts since the cutoff. This is why prices rallied during
the COT reporting period. That would put the dealer net short
position around 130,000 contracts, not at screaming negative
readings but up almost 50,000 net contracts from recent lows, on the
$20 rally. As such, more two-way price movement should be expected.
My sense is still that we have not seen the top in gold (or bottom
in the dollar) yet.
In silver, we had the opposite experience than in gold from the
cutoff date. Whereas the tech funds plowed onto the long side of
gold, they were the big sellers in silver over the past week,
causing prices to plunge. Yes, the brain-dead tech funds were
tricked once again by the dealers. The bad news is that silver ran
up from under $7 to over $7.30 to back under $7 again. The good news
is that the tech funds are now just about maximum short again in
silver, creating another ultra-low risk buy point. I know it is
contrary to human nature to celebrate selloffs, but this new buying
opportunity being presented in silver is good news.
That gold's price has been much stronger than silver recently
provides a special opportunity for those thinking of switching gold
into silver. Since there is much more gold in the world than silver,
the recent price action provides an especially attractive short-term
pricing opportunity To my knowledge, no one has been able to refute
my assertion that there is more above ground gold in the world than
silver.
Recently, I have received a large volume of e-mail concerning the
increase in Comex silver warehouse stocks by some 10 million ounces
to a bit over 111 million ounces. Although I have written about the
Comex warehouse stocks in the past, based upon the common theme of
the messages to me, I think it appropriate to revisit the issue
here. Basically, people want to know where this silver is coming
from and whether it disproves the deficit story in silver. Also,
many are upset with recurring clerical errors in the Internet
reporting of the Comex inventories. (These appear to me to be just
that - clerical errors and not anything conspiratorial.)
It is easy to understand why observers would reach the conclusion
that increases in Comex silver warehouse inventories would undermine
the deficit or shortage story in silver, because deficits and
shortages are all about decreasing inventories, not increasing
inventories. In the case of increasing Comex silver inventories, the
easy and obvious conclusion -- namely, there is now a surplus -- is
wrong, in my opinion.
First, I think people pay way too much attention to the daily
changes in the Comex inventories. This is clearly a case of "do as I
say, not as I do," since I've followed the changes in Comex
silver inventories on a daily basis for more than 20 years. Having
paid such close attention to them myself, why would I tell others
not to?
Because most people approach the warehouse stocks with the wrong
perspective. They are looking for a quick and simple deficit
confirmation signal to invest in silver. They think Comex stocks are
the same as world inventories. They think that when the Comex stocks
decline in earnest, that will be the all-clear signal for a price
move in silver.
Perhaps that will be how things work out, but I don't think so. It
won't break my heart if the Comex silver stocks decline consistently
from here, and everyone gets plenty of notification to load the boat
with silver, but I wouldn't count on it. I think it much more likely
that the silver price explodes long before we get the big decline in
Comex stocks. I think it's possible that the Comex silver stocks
will never decline materially from current levels, and that those
waiting for this signal may be left high and dry.
I can make that statement because I think I know what the Comex
silver stocks really are and are not. They are not the only silver
inventories in the world; they are the only inventories that are
transparent. There are no other silver inventories left in the world
we can see (save the inventories of the Central Fund of Canada,
which are clearly unavailable and are not subject to daily physical
movement). But there are other, non-transparent inventories. Because
of their transparency, the Comex inventories attract attention from
all interested in silver.
In my opinion, Comex silver inventories represent the only
legitimate public place to buy and store investment quantities of
silver in thousand-ounce bars, the industrial standard form. I'm
aware that others will be quick to argue that London and Zurich are
other places where similar silver could be bought and stored, but I
would never advise anyone to buy and store thousand-ounce bars other
than at Comex-approved warehouses. There is no transparent and
audited accounting of silver held anywhere in the world other than
at the Comex. Even Warren Buffett originally had to get his silver
from the Comex to ship to London. If there was, or is, so much
audited and legitimate silver in London, as many insist, why not
just buy it there instead of shipping it there?
Whether you take delivery or buy from a bank or dealer (like
Investment Rarities), you are buying and storing real thousand-ounce
bars that will be held in a COMEX warehouse. If you are buying Swiss
bank silver certificates on an unallocated basis or in a leveraged
scheme, your bars will not be stored in the Comex warehouses because
your silver does not exist. Only real silver is held in the Comex
warehouses, not make-believe silver.
Because all the privately held legitimate and real silver in
thousand-ounce bars in the world that are professionally stored are,
basically, held in Comex-licensed warehouses, you must consider this
when observing daily changes in the inventory levels. If there is
investment demand for silver that is professionally stored and
safeguarded, that investment demand must find its way to the Comex
warehouses. There is no other place for this investment demand to
go. So increased investment demand for professionally stored silver
must result in increases in Comex warehouse levels. Period.
This is the mistake, in my opinion, made by those observers who fret
over increases in Comex inventories. The Comex stocks are not
increasing because there has been a sudden end to the 60-year
structural deficit and there is magically a surplus, as many
conclude every time we witness an increase. There is not one iota of
substantiating evidence of that. No, the Comex inventories are
increasing because more people become aware every day just what an
investment bargain silver is and put their money there.
The real question is not the level of Comex stocks and whether they
are rising or falling. The real question is how much of the total
Comex stocks is available for sale at current prices. Of course
there is no daily public report for this. This is one you have to
figure out for yourself. You have to ask yourself if people are more
likely to buy and hold silver at current prices because those prices
are low, or are they more likely to sell silver because prices are
too high. Here I'd like to pass along a personal observation. I've
yet to run across the real silver investor (and I've run across
quite a few) who has voluntarily decreased his total silver
investment position. Every person I know who invests in silver holds
or has increased his total position.
The point here is two-fold. First, it provides a compellingly
logical explanation for why Comex silver inventories would increase,
and, second, it should illustrate how the silver held at the Comex
is increasingly falling into stronger and stronger hands and is
therefore less available at current prices. The more you see (at the
Comex), the less is available.
What's kind of funny is that even though there may be more silver in
total, there is less available for sale. Even funnier is that this
silver is even considered "inventory," in that that term is used
generally to describe a commodity waiting to be consumed. From the
people I know who own big chunks of this Comex silver inventory,
it's going to be a long time before they decide to part with their
silver.
Those waiting for a significant Comex warehouse decline may be
waiting a long time. If I had to guess, I would say those warehouse
declines will come only after silver prices are much higher than
now, if at all. In the meantime, be glad that the market is
misinterpreting the real meaning of the Comex silver warehouse
stocks.
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RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.usagold.com/amk/usagoldmarketupdate.html
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
http://www.goldpennystocks.com/
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
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