Back from Gold Rush 21, Embry again tells Canada about gold price manipulation


By Ted Butler
Tuesday, August 23, 2005

The most recent commitment of traders report confirmed expectations
of a continued deterioration in the market structure in COMEX
gold,and a further improvement in the market structure in COMEX
silver. As mentioned here last week, we have the unprecedented
condition of gold holding at historic negative extremes while silver
sits close to its best readings of the past year and a half. Since
this condition has never before has existed, it is impossible to
offer examples of prior resolutions. It's new to us all.

The $25 gold rally over the past few weeks was propelled by a
110,000 net futures contract tech fund purchase/dealer short sale,
the equivalent of 11 million gold ounces. Please make no mistake;
this rally was caused by tech fund buying, nothing else. Moreover,
the very largest tech funds had a disproportionate share of the
contracts purchased and, therefore, most of the impact on price. A
study of the changes in the concentration ratios of the four largest
long-side and short-side traders indicates the largest tech fund
longs bought many more contracts than the largest dealer shorts
sold, further confirming the large tech fund impact on price. Now

Will the tech funds add more long contracts, driving prices higher
still? Maybe, but the last few times they added 100,000 contracts or
so, temporary tops were created. Will the tech funds start
liquidating soon, as the key moving averages are violated? Maybe,
and perhaps that is more probable, as those moving averages are
relatively close to current prices. While no one knows how it will
play out, unless the tech funds radically alter their past behavior,
what they do is what will determine near-term pricing.

I am continually impressed by the amount of attention the COTs have
garnered recently. Most of the articles and analysis is quite good.
But sometimes feelings can run somewhat astray. It is important to
remember just what is the COT. Quite simply, it's a market tool
that one can factor into one's expectation of price movement, or
just ignore. It's not something to get worked up about.

In my opinion, it's a great report and great market tool. In fact, I
can't believe how fortunate we are to have such a report. It's a
gift. After all, it doesn't cost anything, it's relatively error-
free, and it's timely. I know some complain about its being three
days "late" (the Tuesday cutoff for the Friday release), but to a
guy who remembers using the COT when it was issued only monthly,
having a weekly report is like comparing a Gulfstream jet to a Piper

What makes the COT report so valuable is that it goes a long way
toward answering one of the biggest questions in any market: Who is
buying and selling? It tells you who is accumulating and
distributing. Aside from the core fundamentals of supply and demand,
everyone can decide for himself what is important as a market tool,
whether it is charts or wave patterns or cycles or astrology. For
me, the COT report is the most important.

Of course the COT report is completely objective, as it is just
numbers and positions, while the opinion of what it all may mean is
necessarily subjective. So it is important if you are going to rely
on anyone's opinion of what the COT may mean that you understand
what that opinion is based upon and how that opinion has fared in
the past. If it is difficult to grasp the rationale behind an
analyst's opinion, if that analyst has not warned of danger at prior
tops or opportunities at prior bottoms, you probably should look for
other analysts' opinions.

It's important to put the COTs into proper perspective. They should
be a tool for short-term market movements, not a substitute for long-
term analysis. If one is interested only in short-term trading, the
COTs are more important. It is possible and logical for there to be
times for one to be very bullish on an item long term and cautious
near term due to extreme COT readings.

As for me, I see the danger of a selloff in the gold market based
upon the current COT market structure. Not the end of the world for
gold, just a selloff. How big a selloff is unknown, maybe only $10-
$20 from here, maybe more. I'm not going to focus on the price but
on the tech fund liquidation. It's impossible to know the timing or
the day-to-day price roadmap. Of course it is always possible for
the dealers to get overrun and to have them rush to cover their
shorts at much higher prices, but, as always, the next time that
happens will also be the first time that has ever happened in gold
or silver.

As for silver, the COTs remain fine amid the very lackluster price
performance. I'm thinking more and more about something I wrote last
week -- my long-time feeling that there would be a shakeout to end
all shakeouts before the price explosion. Aside from the rotten
price performance recently and the possibility that a sharp selloff
in gold now would put additional selling pressure on silver,
there's something else that is making me think this may be the last
shakeout in silver.

I've been intrigued with a closer reading of the COT in respect to
the commercial position. Not only is the net commercial short
position approaching recent extreme low readings, but an analysis of
the two categories from which we derive the net position -- the
gross long and short categories -- indicate something that has
piqued my interest. It seems that the gross long category has grown
much larger than in the recent past, by some 15,000+ contracts to
around 35,000 contracts over the past few months.

This may be important because, of the three gross long categories in
the COT report, the commercial category is more likely to ask for
physical delivery than the non-commercial or small-trader
categories, in quantities that could affect the market. Perhaps this
unusually large gross commercial long position may indicate coming
unusual delivery demands. If so, that could be another incentive to
give the silver market one last hard shake to the downside, to
separate as many long hangers-on as possible.


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