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May 12, 2004

Silver A Buy...The Jig Goes On
by Brady Willett

A little over a month ago (April 9) I speculated that silver was a sell unless the jig was up. Well, the jig wasn't up. Instead, the price of silver has been decimated.

"... the commercials are capable of crushing silver prices lower the second speculators flinch...with wild, unpredictable swings in the price of silver likely going forward, selling some of your silver holdings now seems prudent. After all, investing in unpredictability is not wise..."

Following the sell off in silver (and gold), the conclusion from Bulter and Sinclair is that the evil commercial shorts are artificially suppressing prices again. This argument - although probably true - is of little use to the investor. To be sure, what BS and many others fail to specifically mention is that a bet against the commercials is really a bet against central banks. While hardly omnipotent, it is nonetheless difficult to conjure up a predictable set of circumstance wherein central bankers become powerless and watch the US dollar - the reserve currency of the world - blow up. As for the knowledge that all paper money eventually fails...this is an effective investment strategy if you are psychic. Not being a follower of witchcraft, I elect to play by the rules the commercials dictate.

The Commercials Win Again...

As suspected, the commercials have reduced their short positions as the price of silver has fallen. The commercials may be 'evil', but it is clear that they are not stupid.

As for gold, as similar phenomenon is seen.

Notice that in both charts that total commercial short interest is sitting at multi-month lows. This could, potentially, be good news for precious metal owners as it suggests the worst is over.

But They Had To Work For It

That gold and silver have fallen for four days in a row and the COT statistics are current only as of May 4 is a cruel joke. To be sure, with silver currently trading around $5.60 an ounce the chart below would be significantly more useful if the commercial position was better known (bullish internals would be if commercial short interest has been reduced to say less than 3 times commercial long interest).

Regardless, notice how the commercials nearly always make the right decisions - even during a bull market in silver! In other words, notice how the commercials are making huge bets against silver when prices are high, and smaller bets against silver when prices are low.

Needless to say, an ominous trend is seen inside of the green guidelines. As any silver investor is aware, the commercials have had to work a little bit harder to slam silver in 2004.

Buy & Hold

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.

Even so, what should worry the silver holder is the fact that the speculators have not dumped. Rather, despite a noticeable pull back in speculative interest the long-term trend is still in bull mode. This could be cause for concern if the US dollar does not resume its descent soon and/or the commercials try to flex their muscles leading into June's FOMC meeting.

Brady Willett
FallStreet.com

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