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Old-time country music
fans will recognize the title as one of the late Tammy Wynette’s
greatest hits http://www.youtube.com/watch?v=S9J7XE-ctMU Men and women are
alike in uncountable ways, yet are also remarkably different. In every
species, the female is from Venus, the male from Mars. Sometimes, even
relationships that have endured for the longest time end in divorce.
Today, I write of the
pending divorce I see in a relationship that the world has grown comfortable
in observing for hundreds of years. As such, when it becomes obvious that the
two will part ways, most will be shocked and in disbelief. Yet there will be
no reconciliation and the split should prove permanent. The divorce I speak
of is in the price relationship between gold and silver.
Gold will still be gold,
of course, and will remain as it has been since the dawn of civilization,
valued by the world’s inhabitants for its beauty and rarity. As will
silver. Each will exist forever, as they have existed through the ages. Each
will rise and fall in price based upon supply and demand and investment flows
and the presence (or absence) of manipulation. Nothing can change that. What
will change is the price relationship they have shared in everyone’s
living memory. They are about to begin separate journeys.
In the coming price
relationship dissolution, silver will be the cause of the break up.
That’s because it is the price of silver, relative to gold, that is out
of line. Just like a spouse long-abused in a one-sided relationship, silver
will be the one to blossom once the marriage is terminated. Certainly, I am
not suggesting that gold has abused silver, as inert
materials can’t possible abuse anything. The abuse of the silver price
has come from the long-running manipulation. It is the coming end of the
silver manipulation that will set silver free to begin its own new price
life.
One of the irreconcilable
differences in the gold-silver price relationship is something quite visible.
Yes, both have been manipulated in price by the concentrated short selling of
the big bullion banks on the COMEX. But the amount of short selling in gold
never exceeded the amount of real gold existing in the world that could conceivably
cover the short position. For example, the current total commercial net short
position in COMEX gold futures sits at 20.4 million ounces (as of July 21).
The net short position of the 4 largest traders is 16.1 million ounces.
That’s a lot in terms of dollars, almost $20 billion and $16 billion
respectively, but not so much in terms of the amount of gold bullion in the
world (2 billion ounces). The total net short position in COMEX gold futures
represents just 1% of the gold bullion in existence.
Half of the gold bullion
in the world is owned by government entities (remember, I speak of gold
bullion only, not the total 5 billion ounces of gold said to exist in all
forms). The US government, alone, is reported to own 260 million ounces of
gold. If the big 4 gold shorts really got into trouble, just 6% of the US
Government’s gold stash could conceivably be used to bail them out
completely and make delivery, if necessary. Let me be very clear here -
I’m not saying this will happen. I am saying it could happen. If the
US, or any number of other world governments decided that a gold short
covering price fire must be extinguished, they could put it out with physical
material if they chose. Not would, necessarily, but could.
This is not the case in
silver. The 4 largest traders are net short 235 million ounces on COMEX
futures. While that’s not very large in dollars, at just over $3
billion, it is enormous in terms of the amount of silver bullion in
existence. The big 4 in silver are short more than 23 times what the big 4
are short in gold, relative to above ground bullion inventories. But
here’s the kicker - there is no possible way for any government entity
to extinguish a silver short covering price fire by actual delivery of
government owned silver. That potential price smothering material simply does
not exist in government hands. The US Government, the world’s largest
owner of gold reserves, and formerly the largest owner of silver reserves,
now owns no silver. For those that are convinced
that there is government involvement in the gold and silver price
manipulations, this is a difference worth considering.
This is not the only
difference that will lead to a gold/silver price break up. The reason we have
such a mismatch in the relative size of the short positions compared to world
inventories, lies in the very nature of what silver has evolved into over the
past century. Silver became a vital industrial material and its formerly
large inventories have been consumed to the point where there is less silver
bullion in existence than there is gold bullion. That one in a million of the
world’s citizens know this fact, promises to make the gold/silver price
divorce, when it occurs, as sensational as the most notorious celebrity
split. Only instead of reading of racy details in a trashy tabloid, the
specifics will be carried in the financial press and in price reporting. The
growing awareness of the particulars of the divorce will drive many to want
to buy silver.
I have long anticipated
this divorce, but now its timing seems at hand. This has been the recent
theme of my articles, where I have evoked images of this could be the last
time and game changers. As an analyst studying supply and demand
fundamentals, timing is not normally the focus of my attention. If I am to be
wrong, it will likely come on the timing side. That said,
there are two features in the current environment that may bear on the timing
of the coming gold/silver split. Whether this is the time should be revealed
in these two factors.
One, the current relative
structure in the gold and silver futures markets, as defined by the
Commitment of Traders Report (COT), suggest the
divorce may be near. In gold, the commercials are shorting heavily again,
showing no fear in selling into the recent price rally. So far, the big
shorts have not yet shown a similar willingness to short additional silver
contracts. This holds the promise that they may not short on further price
gains. Simply put, if the big silver shorts don’t sell additional
contracts, the silver price will fly and the divorce papers will be filed. If
they do sell, the price marriage will be held together temporarily.
The second factor
involved is the course of the CFTC in dealing with the issue of position
limits in silver. This is directly related to whether the big shorts sell
additional silver contracts. If the Commission does the right thing (as I
hope), and levels the playing field in silver, then the big shorts
can’t sell more COMEX silver short. If that occurs, as it should, the gold/silver
divorce will be final. If not, the bad marriage will linger.
Just like a marriage that
never should have occurred, given the real facts, silver has no business
being less than 2% of the price of gold. Whether it deserves to be equal to
gold in price is debatable, but it certainly doesn’t make sense for
gold to be 70, or 50, or even 20 times more than the price of silver. On any
reasonable and objective measurement, from annual production to existing
inventories, the gold/silver price relationship is lopsided. You may think my
divorce analogy is a bit extreme, but the coming price out-performance of
silver compared to gold will reward those who back the real winner. The
current price relationship is on the rocks. Those that can switch gold
holdings to silver should do so without delay.
Here’s a new interview with King World News - Click Herel
Theodore Butler
Investmentrarities.com
Also
by Theodore Butler
To Speak with a Gold and Silver Expert Call
1-800-328-1860
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