Wednesday, November 10, 2010

SLV Dip Buying – Who is Selling Silver?

We will get to an important look at the silver futures traders in a moment, but first, just below is our graph for iShares Silver Trust (NYSE:SLV) metal holdings.  As the trading yesterday, Tuesday, for SLV resembled a wild roller coaster immediately following the CME’s announcement of higher margin requirements for silver futures, authorized market participants for the popular silver trust were in the process of issuing new shares and adding another 112.53 tonnes of new allocated silver bars to its inventory held by a custodian in London.

Source iShares Silver Trust.

SLV added about 3,617 or so new good delivery bars and now holds about 333.3 million ounces of silver, 10,366.03 tonnes which is a new record.

Under the current custodian agreement JP Morgan Chase London has committed to provide up to 400 million ounces or about 12,440 tonnes of silver as needed by SLV.  Therefore if there continues to be more buying pressure than selling pressure for the SLV shares, there is still up to 67 million ounces or 2,074 tonnes of availability before the trust and the custodian would need to amend the current custodian agreement or in the alternative SLV would need to find a different silver holding custodian or sub custodian. 

Jim Rickards on the CME Margin Mayhem of November 9

Eric King posted a timely piece late yesterday afternoon on his King World News blog which we wish to highlight and to endorse.  It’s a short piece by Jim Rickards of Omnis, and it speaks bluntly and clearly to those who may be angry about the CME’s decision to raise margin requirements yesterday.


“Invariably the parties disadvantaged by these moves complain that the exchange is "changing the rules in the middle of the game".  That's a naive and pointless perspective.  The fact is that the ability to change the rule is itself a rule.  The exchange is not changing the rules, they are just utilizing an alternate set of rules that are already in place.  Traders should stop complaining and read the rule book.  It's all there,” writes Rickards.

To read the entire comment, including Rickard’s supposition as to the CME’s motives, click on this link, or copy and paste the following in your browser.,_Silver_Margin_Change.html 

According to the CME the December ’10 silver contract saw extremely heavy volume of 179,000 contracts on Tuesday.  That was on a contract that had an open interest of about 80,000 contracts - heavy volume.

Eric also interviewed founder James Turk in a blog entry just below the Rickards entry which inspired us to look closely at the disaggregated COT data from last Friday.   Turk wondered in the KWN piece if the Big Commercials are not the ones doing the selling (shorting) of silver futures, then who is?  The idea is that the bullion banks could theoretically be backstopped by the U.S. government, but other sellers could be caught with their pants down in a short squeeze in such a tight market for physical silver.

Well, first of all we have to note that as the price of silver has gone higher, the open interest for COMEX silver futures really has not gone as high as we might expect in silver market up so strongly.  For example, in the August 24 COT report, as silver was threatening to break out of the wide triangular consolidation and trading at $18.35 the ounce, the open interest on the COMEX was 124,185 contracts.  By November 2 silver had then advanced more than $6.50 to $24.91 and the open interest had increased by only 34,448 contracts to 158,633 contracts open.

Here’s the COMEX silver open interest chart.


Source for all COT charts CFTC for disaggregated COT, Cash Market for silver.

We say the open interest “only” increased by 34,000 contracts as if that is not a lot.  It does represent about 172 million ounces of silver in additional paper sales, but in comparison to other strong advances in the past, this increase in open interest is strangely small so far.   For example, also visible in that chart is the 2007-2008 advance from roughly $12 to $20.  Let’s call that advance about $8.  Bear with us on this (no pun intended), we think this could be important, but it is a bit tedious.

On September 4 of 2007, with silver then trading at 12.09 the COMEX open interest was 107,814 contracts.  By January 15 of 2008 (four months later) silver had advanced about $4 to $16.24.  With that $4 increase the open interest on the COMEX had risen by 69,730 contracts (349 million ounces worth) to 177,544 open.

Between January 15 and February 19 (five reporting weeks) the price of silver clawed upward to $17.25 or roughly $1 higher, but the open interest increased another 11,607 contracts to 189,151 open.

Interestingly, the February 19 open interest would be the peak open interest for that surge higher in silver, but the price of silver continued higher for another four reporting weeks with silver touching $21.44 in March, about $9 higher than where the run began and more than $4 above where the open interest peaked.

The point is that during the other surge higher in that chart above, as the price of silver advanced the first roughly $5 of a total of $9 higher,  the open interest increased about 81,337 contracts which means that the Big Sellers were confident enough that silver would fall to sell about 407 million ounces of paper silver into the market. 

In the current breakout advance, as silver had advanced from about $18.35 to $24.91 on November 2 or roughly $6.50, the open interest has only increased 34,448 contracts or about 172 million ounces worth to 158,633 contracts open. 

Now consider that silver has gone as high as $29 and change in the week since then or about $5 higher still, and according to the CME the COMEX open interest is still only about 157,000 contracts open!  Silver is higher, a lot higher, but the COMEX open interest is actually less. 

Turk:  Who is doing the selling? 

We began this exercise looking for who was doing the additional selling on the COMEX, inspired to do so by Mr. Turk’s comment to Eric King.  What we have found instead is that apparently no group of traders has been willing to sell strongly into this latest price run up for silver metal.  That indirectly confirms our contention that it is exploding demand in the physical market that is driving this rush into silver.

Indeed, looking quickly at the major groups of futures traders, here is what we have found over the last five COT trading weeks from September 28 to November 2 (silver from $21.74 to $24.91):

The Producer Merchant commercials, which include the big bullion banks have gone from 61,800 contracts net short to 54,811 net short, a REDUCTION  of 6,989 contracts net short.

The Swap Dealer commercials, the more mercenary of the commercial traders, have gone from 3,613 contracts net short to 1,237 net short, a REDUCTION of 2,376 contracts net short.

The Managed Money commercials, the Big Longs, hedge funds, etc, have gone from 48,532 contracts net long to 34,565 contracts net long, a REDUCTION of 13,967 contracts net long.

The “Other Reportables” traders, traders large enough to report directly but outside the other reporting categories, have gone from 2,949 contracts net long to 5,226 contracts net long, an increase of 2,277 contracts net long.

And that brings us to the last of the categories of traders the CFTC reports.  The “Non-Reportables” or traders small enough to be under the reporting requirement which includes the smallest traders.  The Non-Reportables  have gone from 13,932 contracts net long to 16,257 contracts net long, an increase of 2,325 contracts net long. 

As James Turk aptly asked, who is doing the selling?  From the data, apparently the correct answer up to November 2, is pretty close to no one in the COMEX futures bourse.  The “normal” Big Sellers have been net buyers.  The normal Big Buyers have been net sellers! 

We believe that we are witness to another case of a “rolling fallback” by the existing commercial traders, similar to the 2005 and 2007 examples, but perhaps this time the Big Sellers have a great deal less confidence that the price of silver will come back down.  At least so far.  Get that? 

A rolling fall-back is our term for where the big sellers are forced to close out losing short contracts while redeploying new short positions at today’s higher prices.  It explains the phenomenon where the price of silver advances sharply but the commercial net short position rises less than expected.  We believe, based on the data above, that some of the commercial net short positioning is NOT being redeployed.  At least not yet.

If you have managed to make it this far, do you find this data surprising? 

Yeah, so do we.  And we’d like to send our thanks to James Turk for inspiring us to take a much closer look at the data.   Having done so, we suspect that the data above is very strongly bullish for silver short term.  Essentially the market price for silver has gone up very strongly, but just as we have been saying in our KWN interviews, so far at least the commercial traders are not trading as though they are confident in lower silver prices.  To the contrary. 

That could change in the near future.  There could be a point where the Big Sellers become emboldened to sell the heck out of silver futures with “reckless impunity,” as our colleague Dan Norcini describes the historic action of the bullion banks.  As of this minute, however, the Big Sellers seem less than motivated. 

If not for the surprise margin price hike by the CME we strongly suspect that silver would already have eclipsed James’ $30 target, and maybe by quite a bit.  The silver market was very close to becoming disorderly on Tuesday.

We could be wrong, of course, but that is why we Vultures always use trading stops instead of trying to guess market tops.

That is all for now, but there is more to come and as always, MIND YOUR STOPS.


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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