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Gold Fields to take control of Iamgold, derailing Golden Star''s bid
By Ted Butler
Tuesday, August 10, 2004
Once again the structure of the market, as depicted
by the COTs, foretold the path of least resistance in
gold and currencies. While not intended as a timing
mechanism, the sharp jump in gold and decline in
the U.S. dollar on Friday, August 6, were in
conformity with recent tech hedge fund activity.
The actual trigger was the monthly employment
report, but it was the scrambling to rearrange
positions by technical traders, as key moving
averages were violated, that explained the guts
of the big moves. And it appears that the tech
fund buying in gold and selling in the dollar
have a way to go. Then, when the tech funds
have their full position on, they will be
engineered out of those positions. This is how
the markets work. It just seems that the tech
funds keep finding themselves on the wrong
side of the markets.
This has been a rough year for the tech funds
-- in fact, one of their worst on record. As you
know, I have long criticized them in the metals,
where the dealers seem to trick them constantly.
Until recently the tech funds could brush off
unprofitable trading activity in the COMEX metals
because of offsetting profits from other markets,
principally the currencies. But now the dealers
appear to be cleaning the tech funds' clock in
the currencies as well.
It might be instructive to examine the trading
results and performance discussion of what is
perhaps the leading tech fund, John W. Henry
(www.jwh.com). It would appear that the trading
results for this year have been disastrous, with
net losses of more than 25 percent, wiping out
the gains of the past two years. Since the
combined assets in this fund run over $2 billion,
we're talking $500 million in losses. And profits
for the dealers.
In last week's article, "Silver Is For Serious
Money," I opined that silver would have been a
better investment than most others. We can now
add one more -- investors in these tech hedge
funds would have been measurably better off if
they skipped the trading and extra costs and
just bought real silver and went fishing.
I believe that will be true in the future as well.
Of course, to be fair, there is no way that even
this one fund, to say nothing of the thousands
of other funds, could possibly buy anything
close to that much silver, as it is simply not
available. But it does make me scratch my
head and wonder why they don't even try,
instead of frittering away their investors' funds
to the dealers.
While the COTs are still neutral in silver, neutral
means just that -- we could go up or down. There
are enough tech fund longs in silver that an
engineered selloff could take place. This has been
the essence of the ongoing manipulation.
Remember, I'm not talking about the fundamentals
in silver or the long term, as those are spectacularly
bullish. I'm talking about what the manipulative
paper traders on the COMEX are up to. In fact,
it's kind of perverse. I think the fundamentals have
gotten so tight in the silver wholesale market that
the manipulative dealer wolf pack may have no
choice but to engineer one last vicious selloff,
whereby they wipe out as many leveraged traders
as possible, and then we explode in price. The
clues here include the delays in delivering decent
size quantities of silver and the movement of the
COMEX warehouse stocks. Amazingly, the Central
Fund of Canada appears to have received only 60
percent of the silver it purchased in late March.
I know it's redundant, but delays mean shortage.
For anyone paying attention to the daily trading
patterns in silver, it has been easy to see that the
commercial dealer shorts have been literally
working overtime to engineer a selloff in order to
liquidate the tech funds. You can see that in the
after-hours trading in the COMEX Access
session and in the opening segment of regular
trading. Invariably, we are lower in the overnight
market and lower on the COMEX opening. Then
we struggle back during the day. The lower prices
at night and on the opening are very intentional
and designed to trip off tech fund liquidation.
That hasn't occurred yet, but the manipulative
dealers show no signs of giving up. In fact,
there's an obviousness or heavy-handedness
to this dealer attempt at precipitating tech fund
liquidation that I haven't seen before. I think this
is due to a new composition of the dealer wolf
pack. I also think it is part of a new era in silver
that is the subject of this article.
As you know, I have studied the silver market for
many years. In addition to this study, I have
actively attempted to terminate what I feel has
been a long-term manipulation of the silver price.
Many of you have joined in this attempt and for
that I am grateful beyond words. Now it appears
that due to our efforts and developments in the
real world of silver we have entered into a new
I'm hesitant to assign a simple label to this new
silver era, such as the non-manipulated era,
because market rigs and games are not going
to disappear overnight. But this new era will
come to stand in stark contrast to the rigidly
manipulated era of the past 20 years. Like the
death of all old and birth of new eras, the silver
variety will be a combination of evolution and
revolution. Evolution in the workings of the
market, revolution in the price.
For 20 years the silver market was dominated
and controlled by a few powerful New York
dealers, led by AIG and their predecessors.
This group managed every daily aspect of both
the paper and physical silver market, including
leasing and central bank transactions, mine
finance and hedging, and all paper trading,
including government regulation of such trading.
To say they controlled the price would be an
AIG and their cohorts WERE the silver market.
Their control was so complete that, in simple
terms, AIG and the others were the only
explanation as to how you could have a structural
deficit without rising prices. They took care of
everything -- from securing and transporting
physical supply to managing the price. And that
certainly included tricking and cheating the tech
funds and leveraged speculators out of billions of
So absolute was their control that it was possible
to identify AIG and the others by name by studying
information derived from the public record. When
confronted directly with that information, AIG
apparently chose to withdraw from the silver
market rather than continue its control. This is the
most profound factor in terminating the old and
bringing in the new era in silver.
For some simple proofs of this claim, look at the new
small size of the concentrated net short position on
the COMEX and the explosion in daily price volatility
in the new era of silver. The traffic cop is gone. And
it is no coincidence that prices are meaningfully
higher than the average of the past decade.
The other major factor for the birth of the new silver
era is the sudden realization that the world is now
straining production capacity, with strong
consumption of a whole host of basic commodities.
A new shortage seems to crop up every day. In fact,
it's easier to identify those commodities NOT in
shortagel. Nowhere are the strains more prevalent
than in minerals, from energy to metals. The story is
the same across the board. It's not unexpected
declines in production; it's always surging demand,
principally from China and the rest of developing
As I've written previously, silver is a demographic
commodity. Population and GDP drive its
consumption. Silver is used in so many industrial
applications that it is impossible not to use more
as the world's economy grows. If the world is
consuming more oil, copper, steel, etc., then it is
consuming more silver.
Ironically, even in the one area that may be
stagnant or contracting slightly, photographic film
consumption, there is a wickedly bullish twist too.
This happens to be the chief source of recycling
recovery for silver. The exploding new uses for
silver have virtually zero recycling possibilities.
How much silver can you recover from a used
bandage? The one use that may be falling will
restrict recycling, while the new uses don't. So
you could say that not only is silver consumption
growing, recycling will shrink due to the changes
in the consumption mix.
This worldwide demand for resources is
particularly significant for silver, in that it has
been in a structural deficit long before the new
demand kicked in. This is like throwing gasoline
on a raging fire. And this new demand seems
more than capable of consuming any additional
byproduct silver production that may come on
stream. In fact, this new worldwide demand for
everything just about guarantees that the silver
deficit will not end quickly.
As more people realize that we have reached
the practical limits of production of many
commodities, it is reasonable to assume that
they will gravitate to holding a portion of their
wealth in such commodities. Of all the
industrial commodities growing scarcer, silver
will be the hands-down choice, due to practicality.
The average person just can't buy and hold
physical forms of oil, copper, steelm or cement
for resale. The average person CAN hold silver,
just as he has done for thousands of years.
This growing awareness of the limits of the
world's resources ushers in the new era for silver.
This puts incredible pressure on the silver
manipulators to quit the manipulation.
These big dealers aren't stupid. They see the
growing demand and shrinking silver inventories.
They know that it's only a matter of time before
all hell breaks loose price-wise. That's at the
core of why AIG exited this market.
In a very limited (and somewhat sick) way, I kind
of miss AIG's control of silver. At least they were
subtle and professional in their leadership of the
wolf pack. They smoothed things out. The
secondary dealers who have stepped in to fill the
void are crude by comparison. There is nothing
smooth about them. They are like a group of
unruly teenagers experiencing no parental
control for the first time. They seem to try to jam
the tech funds daily (hence the overnight selloffs)
and don't seem capable of long-term strategic
trading to position and bleed the tech funds.
I don't think this leaderless wolf pack of secondary
dealers is the model for the new silver era but rather
a bridge between old and new. For one thing, they
don't appear to have the roots and well-rounded
control of all aspects of the silver trade. They
seem to be primarily paper traders, out to make
a quick buck off the hapless tech funds by imitating
past behavior of the wolf pack. To be sure, they
also don't appear to have the very deep pockets
of the former Silver Managers, and will not be able
to fade the funds to the extent the pack could. Most
importantly, this new pack on the block can be
overrun, in my opinion, where the former pack never
What does being in a new silver era mean to the
average silver investor?
Mostly very good things -- the end of the long-term
manipulation and the payday of sharply higher
prices. Sure, there will be a lot more volatility as
the new wolf pack tries to liquidate the funds and
then get out of harm's way. But that's just a mental
adjustment for the average investor. What would
you rather have -- dull flat prices or volatile but
One definite negative to the new silver era will be
the disappearance of giveaway prices and
ultra-low risk. The compensation will be that we
won't have to wait years for the price explosion.
Remarkably, there is one thing that has not
changed for the average investor in the transition
to the new silver era -- namely, how he should
position himself for it. Here the answer is clear
and simple own fully paid-for, real silver.
Not only has that approach worked in the dying
years of the old era, it looks like the sure thing
at the dawn of the new era, marked by a dying
manipulation and strong demand for all industrial
commodities. Unbelievably, the best and,
arguably, the only practical industrial commodity
to own is real silver.
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