|
That gold/silver are in direct competition with central bank backed currencies is reason enough to believe that a conspiracy to suppress precious metal prices exists. It is also reason enough to reduce your precious metals position when the COT statistics suggest the commercials are getting desperate.
Earlier this year I received a lot of flack for an article entitled ‘Silver a Sell, Unless The Jig is Up”. Drawing from the numerous gold/silver bulls that took the time to write - including long-timer silver manipulation theorist Ted Butler – the overwhelming consensus was that my conclusions contradicted the body of evidence displayed. In other words, since it was so obvious that the price of silver was being artificially manipulated the mere thought of selling the metal before an even more dramatic rally in price was absurd.
Just over 1-month after ‘Silver a Sell’ was published the price of silver was trading lower by more than 30%. Suddenly - what with the commercials becoming content with the profits they helped create - silver was again a buy:
“The US dollar has strengthened and precious metals have weakened. This trend could last months, but probably not years. Owning/accumulating more gold/silver at current prices is one of the safest ways to hedge against the volatile US dollar.” May 12, 2004: Silver A Buy…The Jig Goes On
Price Manipulation is Not the Reason to Own Silver
When a crop like wheat crashes by 30+% it is usually because of exceptionally poor weather/harvest results. When the price of oil crashes (as it is threatening to do so today) it is usually because of a change in the supply/demand fundamentals. Because investor’s can interpreted the (future) fundamentals differently the reasons why wheat, oil, and other commodities crash is not always precisely known. However, there is usually a logical explanation behind price movements.
The price of silver crashed by 30+% early this year because the commercials swamped the market will sell orders and the speculators scrambled to sell. To be sure, there was no other reason beyond the COT fundamentals to explain the price crash. As for blaming the crash on the April/May dollar rebound, don’t buy it: when silver surpassed $8 an ounce earlier this year the U.S. dollar index was above 90. Today silver is at $8 an ounce again and the dollar index is threatening to break below 80.
Suffice to say, and as the multi-year supply deficit in silver will attest to, the price of silver is not always controlled by the same variety of ‘fundamentals’ that control other markets (i.e. from time to time paper silver is created out of thin air and sold into the market in obscene quantities).
Is this ‘conspiracy’ against silver a reason to buy silver? No. The conspiracy itself is a not to own silver.
The Current Silver Rally
Last week’s gold COT data was extremely difficult to interpret. The data on silver was no different.
 |
That an extreme drop-off in open interest did not coincide with a drop in the price of silver is strange. The speculation I previously made about CBOT waiving fees (the day before COT) could explain some of the shortfall in open interest. This is the only speculation to draw on at the moment, as GLD is a gold backed ETF (the silver ETF is currently being worked on).
Unlike what happened last week in gold – the gold commercials covered some contracts for losses - net commercial short interest in silver actually increased during the latest COT. However, the 89,857 net short commercial position in silver is still 7,645 contracts off of the record (March 23, 2004), and net small spec long interest is not yet at extreme levels. What this tells us is that the market was not, for lack of a better phrase, ‘fully braced’ for a price turnaround. The COT internals may have changed dramatically with this week’s price run-up, although we won’t know for sure until next week.
 |
A popular trader belief is that double tops/bottoms hold while triple tops/bottoms fail. I have never purchased any investment based solely upon technical analysis. However, it is most certainly the case that market participants pay attention to these types of speculations. Silver, unlike the dollar triple bottom, is nearing a double top.
Ready To Sell Some Silver
The comparisons between April 2004 and December 2004 could soon become similar. Quite frankly, the future COT numbers may suggest that the increasingly desperate commercials are prepared to use any relief rally in the US dollar to flood the market will sell orders. That being said, whether or not the dollar will rally anytime soon is unknown given how variables there are to consider.
I would be a seller of some physical silver if, and more likely when, the price of silver reaches/surpasses its 2004 highs. However, I would not sell my entire silver stake simply because U.S. dollar weakness will probably not be exhausted for some time. The COT data is the only ‘fundamental’ worth speculating on until, and unless the ‘conspiracy’ is destroyed. And although I believe that the commercials will one day be forced to cover and silver will explode higher in price, I would never base my investment on this speculation alone.
As for what to do with the money acquired from silver sales, Todd and I will be offering our equity research suggestions in the upcoming 2005 Wish List. As always, your equity research/suggestions are both welcomed and appreciated. Although we do not cover all member suggestions in the Wish List, we do our best to research and reply to any and all submissions.
|
