Wednesday, May 18, 2011

Hedge Funds Show Lowest Net Long Silver Positions since February 2010

HOUSTON -- Although the data is now fully one week old, last week’s disaggregated commitments of traders (COT) report issued by the Commodity Futures Trading Commission (CFTC) showed that traders the CFTC classes as “Managed Money” (hedge funds, commodity trading advisors, etc.) held 22,250 COMEX silver futures contracts long and 4,973 short for a combined no-spread net position of 17,457 contracts long (about 87.3 million ounces).  The COT “evidence” is contrary to the notion that silver has already peaked and instead supports the idea that silver has merely corrected.  

That is the least amount of net long exposure for Managed Money since February 23, 2010, when the veteran speculators then held 12,624 contracts net long with silver then trading at $15.85.  Just below is a graph showing the net long positioning of traders classed as Managed Money as of Tuesday, May 10 as the price of silver closed at $38.47. 

Managed Money traders in silver futures. Source for all graphs  CFTC for COT data, Cash Market for silver price.  If any of the images are too small or are cut off click on them for a larger image.  

Managed Money traders have been reducing their net long exposure since February 15 of this year when they reported holding 34,314 contracts net long (171.6 million ounces), about double last Tuesday’s position.  Interestingly, while the price of silver skyrocketed from $30.75 in February to near $50 in late April, hedge funds and CTAs were actually net sellers of silver futures for the period as the graph above clearly shows.

Some in the media have attributed the recent rise in the price of silver (and other commodities) to heavy speculation in the futures markets by hedge funds and CTAs.  At least in the case of silver futures, these data suggest that the most experienced, veteran traders used the recent run up in silver price to exit their long silver positions more than not. 

Now the very largest of the typical speculators have build up a fairly large amount of buying “horsepower” in the event they believe that silver has found support and is ready to begin another assault on the record nominal high.  

Two things jump at us from the COT data of this past week.    


Firstly, it is crystal clear that whatever was driving the silver market higher, it was not the futures market in New York.  One cannot look to the positioning of futures traders as the source for the demand for silver.  Thus, the demand could only have come from the much larger and more opaque physical silver markets overseas and the over-the-counter or OTC markets in Europe and the U.K. 

Apparently the futures markets are merely answering the real physical market for silver then.  The recent CME five rapid margin hike-interference and its apparent psychological effects to the futures market and other markets notwithstanding, we believe that by far the major driving force behind this current market for silver is actual demand for real, sure-enough silver metal.  We sincerely doubt that demand is about to evaporate anytime soon. 

Secondly, and perhaps more telling to veteran COT watchers, we have to note a very curious development in the COT data released last week.  As it happens, the smaller traders the CFTC classes as Non Reportable (traders with positions too small to meet the reporting requirements) recorded their largest pure short position of this bull market with the April 26 COT report at 18,605 contracts short with silver then at $45.45.  

So that there is no confusion, we are referring to the short side only of the “Small Trader” collective positioning.  As a group they were net long on April 26 by 17,500 contracts or so, but just their short positioning was the highest in our dataset going back to the 1990s.

Why is that so doggone interesting, one might rightly ask?  Well, it means that a good many of “The Little Guys” apparently correctly positioned for the very harsh smack down on silver the first week of May.  

Here’s a graph showing just the short positioning of the traders the CFTC classes as Non Reportable.  Note that as silver has corrected harshly, their short positions have plunged.  

Score One for the Little Guy – For Now  

Most analysts are of the impression that smaller traders rarely “get it right” in the futures market.  Well, at least as of this recent silver pinnacle, a good many of the small traders in silver futures did indeed sell (or hedge) into an interim top of the silver market, just as a good many of the public sold their silver bullion, scrap and flatware to dealers on the way up from $25 to $49.75.  (We believe that to be a profoundly contrary bullish development speaking longer term.)  

We here at Got Gold Report believe that when judged in the fullness of time, we will indeed find that the “Little Guy” unloaded their silver in the run up way too early, as they almost always do.  But let’s not say that they were “wrong” yet.  As of this minute they must believe they were “right,” and The Little Guy short futures trades put on near the top, some of which have now been covered, were certainly “good trades.” 

Futures Trader Positioning Does Not Support Silver Top Theory 

But if The Little Guy actually got the silver market “right” and “sold the top” it will be a very rare, very unusual development in the commodities markets, to put it diplomatically.  

Much more likely is that the public and The Little Guy have instead transferred silver metal from those with less knowledge to those with more … when judged in the fullness of time.  That is, of course, if the world manages to more or less hold it together and people continue to have at least some confidence in our fiat currencies going forward. 

Much more likely is that when we do indeed reach a full-blown top in the silver market that the traditionally largest hedgers and short sellers of futures (the Producer/Merchants in the disaggregated COT which includes bullion banks like JP Morgan Chase and HSBC) will then have an extraordinarily large net short position.  Instead, today the Producer/Merchant commercials have an uncommonly low net short position about where they did during the January correction with silver then trading at $26.81.  At 41,213 contracts net short as of last Tuesday, the “usual suspects” are not at all “aggressive” on the sell side for silver futures.  

Remember that the PM net position in that graph is expressed as a negative number, so when the PM net short position falls the blue line in the graph rises and vice versa.  Clearly the bullion banks and the largest commercial sellers of silver futures are closer to their least net short position of the past three years than they are to their most aggressive selling stance.     

Indeed, to find a lower net short position for the largest silver hedgers and short sellers we have to go all the way back to May 5, 2009 (2-years), back to just after the 2008 panic when silver was then recovering up through $13.33. 

Pundits “Schmundits” 

Apparently the best informed and the largest bullion bank traders are not listening to the authoritative-sounding, but clueless pundits that have appeared on televised business shows over the past couple days proclaiming that silver has “peaked just as it did in 1980 when the Hunts tried to corner the silver market” and, “should be back to the teens real soon.”  (That comment had us chuckling here at Got Gold Report, and the pundit knows who he is!)  If the largest sellers of silver futures thought that we were indeed doing a replay of the 1980 collapse, we could give very high odds the commercials would be selling with all they have.  They are instead continuing to get smaller in the silver net short department.

The table below shows week-on-week changes in the positioning of the other traders as reported by the CFTC last week. 

In the change column a red figure indicates traders adding to short positions or closing long positions or both.  A black figure indicates traders adding to long positions or closing shorts or both.  The simplest way to think of it is that a red figure in the Change column is traders getting shorter and a black figure is of traders getting longer.  

Note then a couple of interesting changes from last week’s data.  In gold note the very large reduction in net short positioning by the traders the CFTC classes as Swap Dealers.  In silver, note an unusually large increase in long positioning by the traders the CFTC classes as Other Reportables.  Speaking of the Other Reportables, just below is a graph of their positioning in silver futures on the COMEX bourse in New York. 

What is interesting in that graph is that as silver was approaching its recent summit the Other Reportables sold out of nearly all their net long positioning, but after silver had then fallen back to about $38.50 they had already replaced those net long positions.  Get that?    

As of yesterday, Tuesday, May 17, Silver had fallen back by more than $5 since the prior Tuesday when the COT data cutoff, so it will be very interesting to see the changes in the upcoming COT reports, to be released on Friday at 15:30 ET.  

As of now we are planning a full Got Gold Report for this coming weekend and we are likely to have an update of the COT data in that report then.  To subscribe to the full Got Gold Report and all the Vulture Bargain Hunter offerings simply click on the GGR Subscriber link above-right and thanks very much for your business.  

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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