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More attention from The Globe and Mail for Sprott report on price suppression
By Theodore Butler
Wednesday, August 25, 2004
Like a fast-moving hurricane, the market
structure landscape appears to have been
altered by the dealers and funds over the
past few days. In fact, I'm writing this
article a bit early in consideration of
that altered landscape.
While there was nothing extraordinarily
negative in the just-released COTs,
the action since the Tuesday cutoff,
particularly on Friday, Aug. 20,
suggests an orgy of tech fund buying
and dealer selling in gold. It is
this tech fund buying that has
propelled the price higher, same as
ever. No other influences, the dollar,
oil, interest rates, nor the stock
market came close to being the
principal price driver. It was solely
the funds and dealers.
For the past few weeks I have been
anticipating a gold rally because
the tech funds had not yet come on
to the long side with aggression,
so the rally we just had has not
been surprising. But this tech fund
buying comes with a cost; at some
point these same tech funds will
be selling, causing prices to
That's the problem. It's also at
the heart of the manipulation of
our markets, as it is clear that
paper trading is setting prices.
This is against commodity law and
is just plain wrong. It is not
right that big money (funds and
speculating banks) set the price
of commodities. Unfortunately,
it is also reality, which is why
I focus on it.
In silver, we have now moved to the
negative side, from neutral, on COT
analysis. Ditto with gold. Does this
mean we selloff soon? Maybe.
I'm not a prophet and I don't think
the vast majority of investors should
try to trade the market in the short
term. The key to long-term investment
success is buying and holding
undervalued assets. I try to use the
COTs to identify extremely low risk
points in the market, when the risk
is a few dimes to the downside.
While there are many, many dollars
of upside to silver, the COTs suggest
a little more than a few dimes to
the downside currently.
There is no way of knowing when the
tech funds are done buying and the
dealers are done selling. We could
go much higher short term if the
funds buy more and the dealers let
them before selling off.
It's always possible that the dealers
could finally get overrun to the
upside, for the first time. If any
market could ever nail the dealers,
it would be silver, with its
fundamentals. The profit potential
is always great in silver at
anywhere near current prices.
But there are times when the risk
is extremely small as well, as
defined by the COTs.
What does this mean to the average
Basically nothing, save one thing.
No one should even contemplate
disturbing long-term core silver
positions. There is too much risk
and cost in messing with
long-term holdings. Besides, I
could be dead wrong (in fact, I
hope I am) in my assessment of the
COTs. There have been times, such
as in the first quarter, when the
COTs stayed negative through a $2
I am much more certain of the
long-term explosive move up than
of the short-term move down. The
only concession I would make is to
save some dry powder to take
advantage of a possible selloff
and low-risk buy point.
But there is an unusual opportunity
that has been created for the silver
miners, specifically Pan American
Silver, Hecla, Coeur d'Alene, and
Apex Silver, to be more active in
regard to the silver market.
I understand that no one likes to
be told to do anything, especially
by an outsider. I'm sure that's how
the CEOs of these companies look at
suggestions that they buy silver
with excess shareholder cash.
However, the recent rise in the
price of silver (and gold) due to
tech fund buying sets up an
interesting opportunity for these
miners (and other miners).
If we surge higher in the silver
price from here and the dealers are
overrun by the realities of supply
and demand, I will be the first to
acknowledge that the time has come
and gone for the miners to buy
silver and this suggestion is no
longer necessary. Those miners,
like Silver Standard, who did buy
silver will reap the rewards for
their foresight with profits and
good will, but surging prices will
relieve the ones who didn't previously
buy real silver of responsibility of
fighting for a fair price for their
I want to be very clear about something
here. My intent is not to fight with
the miners. My intent is to help them.
I have offered a constructive solution
to what is an obvious problem; the
price of their product is manipulated
and that has hurt them. I have offered
this solution publicly with no
expectations of private gain. I admit
that perhaps my tone could have been
more solicitous in the past. I
apologize if I offended or insulted
any CEO, particularly Ross Beatty,
now chairman of Pan American.
My proposal is easy to put into place.
I have seen complaints that it will
disrupt the miners' business
operations and even comments that I'm
telling the miners to cease production.
That is not close to being correct.
All the miners have to do, in the event
of another sharp selloff in the price
of silver, is to deploy a small
percentage of their cash, some 10 to 20
percent, into real silver. If they are
unsure of how and when to do it, they
can call me for advice, free of charge.
Let's face it; these miners are almost
universal in their declaration that
they won't hedge the price of silver
to the upside. They know that
shareholders want this blue-sky
potential. Buying silver with a small
percentage of free cash is
philosophically aligned with a
As I have written previously, the
four companies mentioned have more
than $800 million in shareholder cash.
These companies have no plans of
spending or using all this cash any
time soon. It is a cushion. It is,
admittedly, the first cash cushion
in their history, and I can
understand their reluctance to part
with any of it.
But I am not suggesting they part
with any of their shareholders' cash
cushion. The 10 to 20 percent that I
am suggesting they deploy into silver
on a selloff will not affect their
operations in the least. The money
will not disappear; it will just be
invested in real silver, and not in
short-term interest bearing
securities at 1 or 2 percent.
Without exception, every shareholder
in a silver company wants exposure
to the price of silver. That's why
they have invested in these companies
in the first place.
I feel I can speak for the vast
majority of silver company
shareholders and state that a company
holding 10 to 20 percent of its cash
in silver, bought at a reasonable
price, instead of money market
securities, will be well-received by
them. It will probably even enhance
share performance, as seems to have
been the case with Silver Standard.
If the COTs play out in the usual
manner where the technical funds
are tricked into dumping the paper
silver they just bought, and the
price of silver swoons, that will
prove once again that paper
speculators are setting the price
This will be a time to put
everything else aside, for the
sake of shareholders and the silver
market. CEOs are intelligent and will
gravitate to an idea designed to
benefit their shareholders.
I hope the silver mining CEOs will
seize the opportunity and buy some
real silver. It will be a wonderful
chance to do the right thing. That
way shareholders and silver investors
will turn out winners.
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