In this excerpt, precious metals market analyst Ted Butler describes an important evolution going on in the gold market. It has the potential to become a game changer. Although a continuation of this trend is required, it is an encouraging sign for precious metals bulls. This article was published in Ted Butler’s latest newsletter to its premium subscribers.
There is one thing about much of the recent commentary that leaves me puzzled. As factual and graphic are the descriptions of the extreme changes in COT positions in COMEX gold and silver, particularly this year, I am a bit taken back by the lack of discussion as to what may be the reason for the extreme changes. It is one thing to accurately portray the changes in positions and even to label the current set up as being strongly bullish for the price in the future; but, apparently, quite another to explain why the changes are occurring. But it is the “why” that completes the picture.
For instance, there’s no disagreement that the commercials (particularly banks) have been the big buyers this year and over the past month on price declines and that the technical funds have been the big sellers. The statistics are accurately portrayed and proper emphasis is given the record extremes in different categories. What’s missing is how these extreme positions came to be or in stating the case in a common sense perspective.
Missing most is the question of how the heck did the commercials (mostly JPM except in gold this past month) manage to buy more gold and silver contracts than ever before on the biggest price decline in history? One bank, JPMorgan, bought 150,000 COMEX gold contracts flipping a short market corner of 75,000 contracts a year ago into a long market corner of similar size today and 25,000 silver contracts on the most severe price decline in decades. Unless JPMorgan is the greatest trader in history (a proclamation destroyed by the London Whale experience), logic dictates that the bank cheated in some way. Yet the question of how could this be is never asked, even when the manipulation is described in detail.
The good news is that the question of how JPMorgan came to dominate gold and silver will be asked more frequently in the future because it has to be asked by anyone with the slightest concern for cause and effect. Then it will be a very short distance to understanding that there is no legitimate answer. There’s an answer all right, just not a legitimate answer. This is why I believe that JPMorgan has remained mute in the face of growing allegations of wrongdoing. That’s also why I am sensitive to JPM not buying more gold over the past month because it suggests we may be near the end game where the bank, not able to justify its positions, instead looks to end its death grip on the market. Then again, maybe that rattlesnake will still bite me.
The important point is that this is a spectacular set up for higher prices to come. The price decline has lasted so long that the market seems conditioned for further sell-offs. More are concerned about the next dollar or so to the downside in silver instead of the next ten or twenty dollars to the upside. The fact is that we are structured to go up big and not go down big based upon what JPMorgan and the commercials have achieved this year and month; to say nothing about being below the realistic cost of production for many silver miners.
The technical funds which are heavily short have amassed their record gold and silver short positions at average prices not far above current prices. The 62,000 gold short contracts and 20,000 silver short contracts sold since Oct 29 have an average price maybe $40 or $50 in gold and a dollar or so in silver above where we closed on Friday. That’s not a large price margin for turning a profitable open position for the tech funds into a loss, based upon recent price volatility. Almost certainly, a price move back to where we were on Oct 29 ($1340 in gold and $22.50 in silver) would result in all the new tech fund shorts added since then to be bought back or attempted to be bought back (based upon past tech fund behavior). I’m not talking any big deal; just a move to where we were 5 weeks ago.
That’s why I am more concerned with how JPMorgan will behave on the next rally. Having not added any gold on the move down from $1340, JPM wouldn’t seem to be in position to begin to sell until those prices are achieved. And in silver, it has always been the case that the next (as in every previous) silver rally will be determined by what JPM adds in new COMEX silver shorts. Now, more than ever, that is the only question that matters. We still may go lower temporarily, but rather than focus on that, it makes more sense to me to try to comprehend just how powerful the next rally could be.
This is an excerpt from Ted Butler’s premium service. Readers are highly recommended to subscribe to the service on www.butlerresearch.com as it contains the highest quality of gold and silver market analysis. Ted Butler is specialized in precious metals markets analysis for 4 decades.