Wednesday, May 25, 2011

Got Gold Report - Silver COT Most Bullish of 2011

COMEX Commercial Futures Traders Not Confident in Lower Silver Prices 

Lowest Relative Commercial Net Short Position Since $12 Silver in April, 2009

HOUSTON – Just below is another excerpt of this past Sunday’s full Got Gold Report (GGR), which was delivered to Vultures (Got Gold Report Subscribers) Sunday afternoon via email and posted to the password-protected member pages then. In this section of the full 37-page biweekly report, we look at the legacy commitments of traders report (COT) issued by the Commodity Futures Trading Commission (CFTC) for silver.  Our focus in this section of the report is primarily upon the largest of the largest hedgers and short sellers of silver futures, the traders the CFTC classes as “commercial,” including the largest bullion banks.    

Our commentary on Sunday revealed in large part why our impression is that very large veteran futures traders are positioning for silver (and gold) strength more than weakness just ahead, as we mentioned in the introduction to the report. The introduction was posted on the GGR public web log Sunday. Indeed, based purely on the COT positioning we viewed the COT setup as the most bullish it has been this year.

With no further introduction, here is the second excerpt of the full report posted this week. The first excerpt, which looked at the previous parabolic corrections for silver and compared them graphically to today, was posted in the blog just under this one on the GGR front page. 

Silver COT Most Bullish of 2011  

The Commodities Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET Friday, May 20.  The report is for the close of trading as of Tuesday, May 17.  

As usual, is focused on the changes in positioning of the largest futures traders in that report – the traders the CFTC classes as “commercial,” including the bullion banks, large dealers and swap dealers combined.  We refer to those commercial traders as “LCs” for “Large Commercials,” or sometimes the “Big Sellers,” because they are the largest sellers of gold and silver futures. …

Silver COT   

Now that people have gotten a new taste of silver’s inherent high volatility via a bear raid triggered parabolic reversal, everyone’s focus has morphed to where the second most popular precious metal will end up finding overwhelming support.  Note, then, that in this third week of the silver correction silver failed to make a new lower low, fetching up at precisely $33.00 on COT reporting Tuesday, May 17 after having tested as low as $32.31 the week prior (Thursday, May 12).  

SLV since July 2010, daily, as a proxy for silver trading.  If any of the images are too small or get cut off click on them for a larger version. 

Going into the COT reporting cutoff this week silver appeared to be heading for another low early on Tuesday, only to catch a rather obvious short-covering bid and closing the day 93-cents higher at $33.93.  Still, that close on the COT cutoff day was almost $16.00 (-32%) under the interim high and silver was anything but “strong” then.  


What we find remarkable is the COT action of the commercial hedgers and short sellers with that price action in mind.  This week was the largest one-week plunge for silver in this bull market, as measured on COT reporting days.  Silver plunged a huge $4.54 or a stunning 11.8% COT reporting Tues/Tues, from $38.47 to $33.93, but now hear this:  as it did, the combined COMEX large commercial traders as a group reduced their collective net short positioning by a large 7,319 contracts or a whopping 17.7% to report just 34,017 contracts net short (LCNS).  

Incidentally, 34,017 contracts represents the paper-derivative equivalent of about 170 million ounces of silver.  Remember that number for a minute.  

The open interest for silver fell by less than half that figure, dipping 3,310 contracts to 120,227 lots open.  By Thursday of this week, with silver inching a little higher, the COMEX open interest was slightly higher, but not enough to comment on it. 

Just below is the nominal LCNS graph for silver futures.  

Source CFTC for COT data, Cash Market for silver. 

Consider that back on February 22 (three months ago) as silver first showed a $33 handle on the way up, the combined commercials then held a collective net short position of 57,793 contracts, or roughly 289 million ounces net short (sold into the market) then.  That means that today, when silver again showed a $33 handle this past Tuesday the commercial hedgers and short sellers had become less confident in lower silver prices from the $33 level by about 119 million ounces or about 41% less confident in lower prices in our way of looking at it. (That’s huge, by the way.) 

For comparison, Tuesday’s LCNS is the lowest commercial net short futures position for silver since July 21, 2009 (33,201 contracts then), back when silver had been knocked back to $13.54.  We can say that the commercials are just about as confident of lower silver prices today at $33 as they were in July of 2009 with silver then in the $13s.  Interesting, isn’t it?  When the LCNS reaches the bottom third of the graph, as it just has, it is usually after silver has corrected harshly and it is a time when we are on high alert for an upside reversal.      

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 fell from an already low 33.5% to a now quite low and potentially very bullish 28.3% of all COMEX contracts open.  Friends and Vultures, the commercials apparently want no part of the short side of the silver futures market while silver has a $33 handle as shown just below.   The silver LCNS:TO graph is just below.   

Source CFTC for COT data, Cash Market for silver.

Indeed, as silver has corrected very harshly from its parabolic top, the commercials have apparently used the opportunity to get very “small” on the short side.   How small?  This marks the lowest LCNS:TO for silver futures since the unusually strong short-seller get-out back in April of 2009 when silver had come in to $12.02 (and just ahead of a sharp summer rally up to the $16s). 

To us a very low LCNS:TO reading means several things. It means that the largest hedgers and short sellers are not motivated to press the short side and have instead seen fit to greatly reduce their net short exposure.  It means that there is now a much larger amount of bullish “horsepower” that could come back into the market at any moment.  It usually means that we are getting close to an upside reversal.  Finally, a very low LCNS:TO (below 33%) is almost always associated with silver lows or near silver lows.      

Two weeks ago we concluded this section with:  Sure enough the super-sell-down has liberated about 1,000 tonnes of silver from SLV back into the market.  Enough for a temporary respite (to the metal shortage), but we are of the opinion that is about 5% to 10% of the real metal demand (just our educated guess), so by definition we also have to believe that this sharp break will be as brief as it is harsh.  We’ll see.  Our physical silver is not for sale at any price in fiat money (we plan to trade for gold at a lower GSR remember?).  How about yours?   

Although we would prefer a secondary break, back down to test the $26-$30 region, where we would feel very comfortable with a reentry for silver futures or ETFs, we get the feeling that is merely wishful thinking having seen the positioning of the commercials in silver futures this week.  So for now we have to stand by that statement.   

We are sorely tempted to attempt a reentry into just about any significant dip at this point, but since physical silver already makes up a reasonable portion of our own exposure, we Vultures have the luxury of waiting patiently for exceptional opportunity at this point.  As we have said many times in the past, we need not trade every opportunity in order to have a good time, but we do need to be ready for when the door of exceptional opportunity opens for us.  And, mostly because it just seems a bit too soon for a reversal (as we will see a little later), that’s exactly what we intend to wait for with our short-term silver trading ammo for now.  

Despite what we view as a very bullish setup, we shall hold off for a secondary push lower down into our opportunity box on the graphs for at least the beginning of this new trading week.  That is even though we consider this week’s legacy COT report for silver as significantly more bullish than bearish short term.  We reserve the right to change our mind at a moment’s notice, as always.  

(End of excerpt)

We are in the excellent position of being disappointed that silver could not manage another thrust lower (so far) while being pleased that it has regained some of its footing (by virtue of our physical metal holdings and holdings of silver producers). Had silver gotten knocked back some more this week, down into our planned lower opportunity box, then great, we could have established a new short-term trading position with confidence. But since it has instead rallied, great, we have some. 

We continue to sense that there are legions of investors that would become buyers for silver should it somehow find a way to crack the so-far staunch support which surfaced between USD $32 and $33 over the past two weeks. Clearly (to us) the largest commercial hedgers and short sellers have been positioning as though they are not confident in lower silver prices near term.  That is the very same thing (to us) as saying that the commercial traders are positioning more for silver (and gold) strength rather than weakness, right, wrong, win or lose.  


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

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