Monday, March 28, 2011

GGR Excerpt – Silver COT

Just below is an excerpt of Sunday’s full 25-page Got Gold Report which was delivered to GGR subscribers via email and posted to the subscriber pages of the web site.  Depending on events and timing, we may post another excerpt in the very near future, so stay tuned.  

In addition to the full GGR this past weekend, we also noted for Vultures a new Vulture Bargain Candidate of Interest (VBCI) and posted a new 2-year tracking chart for it, bringing to 11 the number of VBCI charts, in addition to the now eight fully fledged Vulture Bargain companies.  There are several other issues we are tracking that could make the VBCI list in the next couple of weeks, so Vultures need to check in on the subscriber pages from time to time to see what’s new.   

With no further introduction, here is a small portion of the full GGR.  

Silver COT   

Silver surged $2.13 or 6.2% higher COT reporting Tues/Tues, from $34.21 to $36.34 (again the highest close on a COT reporting date for this silver bull yet).  As it surged, the combined COMEX large commercial traders as a group reported a smallish addition of 1,761 contracts to 55,182 contracts net short (LCNS).  That’s the first LCNS increase in four reporting weeks.  The open interest for silver increased a small 1,074 contracts to 135,988 lots open.  

Just below is the nominal LCNS graph for silver futures.  

Source CFTC for COT data, Cash Market for silver. 

As silver recovered from its minimal swoon to the $33s and back up into the $36s, the LCs basically returned to about the same net positioning as they were in the $36s two weeks ago.  This is hardly the kind of “action” we might call aggressive selling by the commercials.  


As we do with gold, we compare the nominal silver LCNS to the total open interest. We think that gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category – compared to all the other traders on the COMEX.  

When compared to all contracts open, the relative commercial net short positioning (LCNS:TO) for silver edged slightly higher from 39.6% to a still moderate 40.6% of all COMEX contracts open.  

By moderate  we mean that with silver at and/or near new 31-year highs again; with silver at the highest nominal price on a COT Tuesday of this bull market, the LCNS:TO is still not all that high, still remarkably under 45%.  The large commercial traders are not yet showing signs of being very confident in lower silver prices, having had to cover a good deal of their net short positioning in last year’s commercial retreat. 

On the other hand they are now more net short than they were in February when silver moved down to test the $26 region.  We can say that the commercials are more confident in lower silver prices near $38 than they were near $26, they just have not yet become aggressive in that view.   

See the silver LCNS:TO graph just below.   


Source CFTC for COT data, Cash Market for silver.

Backwardation in the silver futures strip, reports of tight physical supplies of commercial sized silver bars, numerous reports of strange, immense and determined dip buying in size continue to govern the tiny silver market.  With silver probing new high prices, the largest, best funded and presumably the best informed commercial traders of silver futures remain nowhere near a record net short position and well under the levels we would normally consider as cautionary.  However, this is anything but a normal period.    

On balance, and thinking very short term, we have to view this week’s COT report for silver as more bullish than bearish.  We believe the heaviest, most determined source of demand is surfacing in the largest physical metal markets overseas (primarily in the U.K. and perhaps in Switzerland).  There is strong, informed speculation of a sustained rush by holders of unallocated metal investments to convert those less-secure metal holdings into more expensive to hold, but more secure allocated storage.  As confidence in banks in general and bullion banks in particular declines, the propensity of metal investors to demand real allocated, defined metal and higher security is ascending.  

Unallocated Conversion a Silver Price Driver    

Certainly we cannot account for the recent historic run up in price with action in the futures markets.  We are likely witness to at least the perception of, if not an actual physical squeeze of sorts as dealers, warehousemen and operators that have sold “silver” to investors and speculators in “pooled” or unallocated accounts are now having to locate and allocate actual physical bar stocks , real metal, to their clients from what has been a fractional reserve metal system. 

The issue gained broad exposure when Gold Anti-Trust Action Committee (GATA) consultant Adrian Douglas, and GATA chairman Bill Murphy appeared before the CFTC in a hearing about one year ago and has been building to a crescendo ever since.   We suggest that comments then by CPM Group head honcho Jeffrey Christian were the seed of the current rush to physical metal.  Christian indicated then that the large bullion banks and metal dealers operated what amounted to a fractional reserve system for their paper metal transactions – with as much as 100:1 leverage, no less.  

Shortly after that hearing, Douglas and other like-minded analysts put a laser-like focus on the perils of holding unallocated or undefined metal as opposed to allocated metal accounts or actual physical metal. 

The reason that we mention this unique trigger event again in this report is that it is clear that the tremendous buying pressure that has catapulted silver from roughly the $18 level last summer to now more than double that amount simply cannot be explained by buying pressure emanating from the largest futures bourse in the world in New York.   

We can speculate that some fraction of the buying pressure for silver was not from new investors or hot money speculators, but instead from people who have already put up the capital to buy the metal in unallocated accounts, now requesting to convert that metal into safer, more secure allocated accounts.  Another fraction of the buying power for silver actually came from hedgers and short sellers of silver futures as they were overrun by a galloping silver price.  

We see no reason to expect either of those two drivers to end suddenly, but we do speculate that it will eventually run its course at some point.  The vacuum of liquidity that follows that event could be our next, best trading op for silver.  When is unknown at this time, but we Vultures are very patient birds.

End of excerpt.       

(Ed note:  The YouTube video below captures a portion of the important revelations in that CFTC hearing.) 


We do not mean to suggest that conversion of unallocated metal to safer allocated metal is the only driver behind silver’s spectacular price advance.  Clearly it is merely one of many drivers, but we think it probably served as the long-awaited tipping point – the trigger event as we called it in prior work.  


We may have another short excerpt from yesterday’s full Got Gold Report in the near future, so again, stay tuned.  

That is all for now, but there is more to come.  


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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