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Expecting free lunch forever, U.S. dollar may be supplanted by Chinese yuan
By Ted Butler
Monday, October 11, 2004
There has been a dramatic change in the structure of the gold and
silver markets over the past 3 weeks, as indicated by the COT report
and the action since the Tuesday cutoff. In the space of a few short
weeks, the tech funds have bought, and the dealers have sold short
over 75,000 additional net COMEX gold contracts and 25,000 net silver
contracts (futures only). In silver, that's the equivalent of 125
million ounces sold short, in addition to the 250 million ounces
originally sold short by the dealers. This is just the dealers'
net short futures position, not the gross COMEX silver short position
of 900 million ounces, including options. We are clearly now in
bearish territory in gold and silver, which is one of the most
extreme COT readings.
As you may recall, the past few articles I had written described the
favorable structure of the silver market because the tech funds had
not yet entered on the long side, presaging a rally. We have all now
witnessed that rally, which was caused by this tech fund
buying/dealer short selling that was anticipated. It is hard to
imagine anyone not understanding this market moving mechanism at this
point. OK, now what?
Well, just because the COT market structure is now bearish, it
doesn't mean that it is impossible for gold and silver to move up
strongly from here and for the dealers to be forced to throw in the
towel and buy back their massive short positions at higher prices.
But it is also true that that has never happened before. Instead, it
is the purely mechanical technical funds that buy on the way up and
sell on the way down, who have always capitulated in the past. Maybe
it will be different this time, but you must calculate the odds for
What I can say for sure is that if we do sell off sharply in the near
future, it will be because of technical fund selling amid the dealers
collusively pulling their bids, and no other important reason. We go
up in gold and silver because of paper trading on the COMEX, and we
go down because of paper trading on the COMEX. This COMEX paper
trading dictates the price of gold and silver. This will be true even
(I should say especially) if the dealers are forced to cover their
paper shorts and the price explodes. According to commodity law, it
is illegal for paper trading to set the price. Where are the
But we cannot hold our breath waiting for the regulators to enforce
the law. We must adapt to and insure ourselves against this
manipulation. For those who are able, it has been possible to trade
around the dealer/tech fund price movements. But everyone can
immunize himself with the certainty of real silver, especially when
bought in a timely manner. Someday, these COT manipulative games
won't matter, particularly to those owning real silver.
The main reason I write about the COTs, aside from identifying low-
risk buy points (which is not now), is to offer an education on how
the manipulation operates. In that regard, I am encouraged by the
increase in the discussion and the number of articles this topic has
generated. More importantly, I am encouraged by the actions being
taken by those in the silver mining community.
Just this week, another silver miner, First Silver Reserve (FSR.V),
stepped up to the plate by buying 5% of their annual production in
real silver (100,000 ounces.) Thus, FSR joins the honor roll of those
mining companies trying to right the wrongs of the manipulation. And
they took advantage of the recent predicted sell-off, and bought at
low prices. If the now bearish COTs result in yet another
manipulative sell-off, hopefully more silver mining companies will do
the right thing.
I can't emphasize how important it is for the other miners to get
with the program, specifically, PAAS, HL, CDE and SIL. It is these
companies, and the industry at large, which should be leading the
fight against the silver manipulation and the low prices it has
created. That they haven't lifted a finger against an
increasingly obvious manipulation is shameful. There is nothing more
important for them to focus on.
There is the strong chance that these miners will get another
opportunity to mend their ways. If the current bearish COTs result in
another sharp sell-off, these miners can redeem themselves. I've
made it easy for them by suggesting they put a small percentage of
their record cash positions into real silver. That way, they can let
their actions do their speaking for them, by demonstrating to
shareholders that they see the problem. That's the easy and non-
controversial way and should be done at a minimum, like other silver
miners have done.
If the management of PAAS, HL, CDE, and SIL, had any guts, not only
would they be buying real silver, they would also be speaking out
against the manipulation. It is because they have chosen to look the
other way and not to speak out, that the manipulation has continued
in force. If it had been these miners complaining to the CFTC, the
COMEX and to Eliot Spitzer, and not just you and me, the scam would
have been terminated by now.
It is precisely because the producers have been so cowardly and so
unconcerned for their shareholders that the dealers have operated
with impunity. These mining companies can rectify their past inaction
at any time, particularly if we get another sharp sell-off. While
I'm not counting on them finally doing the right thing, I'm
there will be a day of reckoning if they don't. For most people,
certainly including myself, there can be no greater personal concern
than one's own reputation. If this silver manipulation unfolds
the way I envision, good and bad reputations will be created by what
one did, or did not do, before that unfolding. When the silver
manipulation becomes obvious to all, those who could have and should
have done something, but did not, will have to live with the
The most ironic aspect to this issue is that not only are CDE, HL,
and SIL silent on the silver manipulation, but PAAS has actually
lashed out at me for raising it. I say ironic because, due to my
consistent advocacy for buying real silver, hundreds of millions of
ounces have been bought over the years, mostly by the little guy. (Do
you think any mining company director is responsible for getting
anyone to buy even one ounce of real silver?) It is this buying of
real silver that has tightened the market sufficiently to allow the
price to rise somewhat. Without the cumulative effect of the public
buying silver, it is my opinion we'd still be in the $4 range,
where the manipulators would prefer it to be. If we stayed in $4
range, what would these companies look like financially? Would they
have been able to raise hundreds of millions of dollars in financing?
Would they have been able to avoid bankruptcy? They should be
thanking me, not attacking me.
In the meantime, the rigging of the silver (and gold) market
continues. In three weeks, more paper silver was sold short that any
country could produce in a year. More than the entire known world
inventory. Three times as much as the US produces annually. Maybe the
dealers get overrun on their naked shorts, especially now that the
former kingpin, AIG, is gone. Maybe the dealers snooker the tech
funds again. All I know for sure is that this is not right and too
many people who should know better are looking the other way.
Amazingly, this paper-selling orgy by the dealers has taken place
against a backdrop of a tight physical market. Not only are COMEX
silver warehouse stocks at a yearly low, other signs point to
tightness. While I hear that the Central Fund of Canada finally
received that final shipment of the silver it bought earlier in the
year, the other Canadian institutional investor has not, according to
good sources. The COMEX dealer crooks can sell hundreds of millions
of paper silver short with no problem, but can't scrape up a
couple of million of real ounces. Unbelievable.
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