Contrarian Profits reports that bullion banks increased their net short position by a staggering 21,939 contracts.
(emphasis mine) [my comment]
Gold o.i. was exactly as expected...with the bullion banks going short against every long...effectively stopping the gold rally in its tracks. The bullion banks increased their net short position by a staggering [but not surprising] 21,939 contracts. The bullion banks are now net short 204,226 contracts...20.4 million ounces. The full-color COT graph for gold is linked here.
We are now sitting with a COT structure that is bullish to very bullish for silver...and very bearish for gold [perhaps, but I believe that gold might become even more overvalued in regards to silver in the short run]. This situation has only existed a few times during the last ten years. Ted suggested [and not for the first time] that maybe 'da boyz' are trying to permanently separate silver and gold prices so that silver will rise independently of gold [Not sure I buy this argument]. That's possible...but we'll have to wait and see if it pans out that way.
SLV (silver ETF)
GLD (gold ETF)
From comparing the 3 year charts of GLD and SLV, it appears that silver prices have been much more successfully suppressed then gold prices.
Since gold and silver hit their highs in March 2008, gold has mounted three convincing attempts break higher, while silver on the other hand hit a new three year low. Historically silver has traded at around one fifteenth the price of gold, which would make silver very undervalued today. On the other hand, if silver is so undervalued, why is it struggling so much compared to gold? Or, perhaps a better question, why has the suppression of silver been so much more successful than the suppression of gold?
Maybe commercial demand for silver has been hit harder than it was for gold. In any case, I own both gold and silver, and I expect all precious metals to do very well over the next year. Silver will probably catch up to gold at some point, but it might not happen in the very short term.
A final conclusion that can be drawn from these charts is that gold, not silver, is more likely to ultimately break the COMEX. My bet is that buying by Swiss ETFs, Goldmoney, Bullionvault, etc is creating more stress for gold than silver, probably because the average investors is buying mostly gold.
Warning: the gold/silver ratio could rise higher in the short term
A lot of precious metal investors, including many readers of this blog, believe that silver is undervalued compared to gold and are buying silver. While I agree 100% that silver will rise against gold in the long run, I think it might be a different story in the short run. Consider the following:
1) Most investors are not familiar with gold/silver ratio, and don't realize that silver is undervalued.
2) Gold is regarded as less risky than silver market because:
A) Market for gold is larger and more liquid than silver market
B) Gold prices are less volatile than silver
C) Gold is better known than silver
3) Average investors will expect gold to do better than silver. In popular culture, gold is the undisputed king of precious metals ("gold standard", gold reserves, gold medals, etc...). For example, think about movies that deal with precious metals. How often is gold used vs silver? (Goldfinger, Die Hard 3, Three Kings, Pirates of the Caribbean, etc...)
4) Gold is seen as the traditional inflation hedge.
Because of these four reasons, when the dollar starts collapsing, the gold/silver ratio will probably head even higher as money floods into the gold market. Panicking investors, who have never owned precious, are likely to buy the familiar "safer" gold rather than the unfamiliar silver. It will probably look something like the panic into treasuries which happened in September/October of 2008, when investors poured into the "safest" US debt while ignoring other AAA-rated bonds. As a result, I expect the gold/silver ratio to continue moving higher until panic over the dollar reaches a peak.
After this initial panic-driven spike in the gold/silver ratio, silver will rise against gold over the next two years as the average investor becomes more familiar with precious metal markets and realizes how undervalued silver is.
Conclusion: When the dollar collapses, gold will be the new "safest" investment. The gold/silver ratio is likely to head higher (maybe around 100) and then slowly fall over next two years as the dollar panic subsides (to under 50). Of course, this isn't guaranteed, as silver IS undervalued in relation to gold.
I would recommend owning both gold and silver right now. However, if the gold/silver ratio does head higher like I expect, that will be the true opportunity to switch from gold to silver.