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Financial Times notes uncertainty over new central bank gold sales agreement

Section: Daily Dispatches

The Setup?

By Ted Butler
Monday, September 20, 2004

The market structure, as defined by the Commitment
of Traders Report (COT) for futures positions on the
COMEX, improved dramatically for silver over the past
two reporting weeks. It is rare to get a bullish surprise
in this report, but the amount of technical fund selling
and dealer buying was outstanding. In fact, the current
readings show that we are just about at the low levels
of net dealer short positions seen at the prior two
"mother" buy points. While it is always possible for
further improvement (along with lower prices), the bulk
of the tech fund selling/dealer buying is behind us, in
my opinion.

In the past two weeks the tech funds have sold and the
dealers have purchased, 20,000 net silver futures
contracts on the COMEX. That's the equivalent of 100
million ounces of silver. Although I have written about
this extensively in the past, I ask you to consider it
again. The only reason the price of silver fell more
than 80 cents an ounce (more than 10 percent) in the
reporting period was due to the paper sale of 100
million ounces of silver by the technical funds on the
COMEX. Most of the decline came over a three-day

I ask you to think about that 100 million ounces of
silver contracts sold by the tech funds and bought
by the dealers. First, it is truly a very large quantity
of silver. It is more than 16 percent of total world
annual mine production, and double what the
United States mines annually. It is greater than what
Mexico, the world's largest silver-producing country,
mines in a year. It is almost as large as the entire
inventory in the COMEX-approved warehouses, the
largest known inventory in the world, by far.

This 100-million ounce amount that just changed
hands on the COMEX is roughly equal to the famous
purchase by Warren Buffett seven years ago. The
difference is that Buffett took more than six months
to buy his real silver, the most celebrated silver
transaction in decades, while the equivalent amount
was transacted in a matter of days on the COMEX.

Common sense should tell you that the COMEX
transaction, even though it was paper, exerted a
large influence on price, given its large size. In fact,
it was the only logical explanation as to why silver
sold off so sharply.

My point here is clear; paper trading on the COMEX
sets the near-term price of silver, and not supply and
demand in the real world. Period. This is the purest
example of manipulation that you will ever see. To
those who would argue that there is a buyer for every
technical fund contract sold, I would agree. The
problem is that it always is the dealers who collude
and conspire among themselves, and collectively
pull their bids as the tech funds sell. This is why
prices always suddenly collapse when the tech funds
get long. It is always just a matter of time. The
question is: Why are the tech funds so stupid to
continue playing this rigged game?

The other question is: Why are the silver miners not
objecting to this obvious rigging of the price of silver?

A couple of weeks ago I predicted that if the price of
silver sold off, it would be because the dealers
hoodwinked the tech funds again. That is exactly what
happened, as verified by the government-issued COT
report. I don't know how it could be clearer that paper
speculators on the COMEX are setting the price of
silver. This is expressly against the remise of
commodity law.

If the miners, principally but not limited to Pan
American Coeur d'Alene, Apex, and Hecla, haven't
taken advantage of the well-telegraphed selloff to
buy silver, they have squandered another wonderful
opportunity. If all they are doing is thinking about it,
it is probably too late. At the very least they should
be speaking out against the documented shenanigans
on the COMEX.

The good news, of course, is that the tech funds have
already sold. Most if not all of the risk has been
removed from the silver market. Now all that remains
to be seen is if the dealers sell short again on the next
rally, as the tech funds come in to buy. If they do sell,
it may not be the big one. If they don't sell short
heavily, it WILL be the big one.

Either way, we won't know until the rally develops, but
we should get that rally nonetheless. So this is not the
time to hesitate to buy, based upon the tech fund
cleanout in the COTs.


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