Tuesday, June 07, 2011

When Big Sellers of Silver Futures Seem Timid

A courtesy excerpt of the full Got Gold Report, by Gene Arensberg.  

Mondays have been consistently “up days” for much of 2011, but not so yesterday, Monday, June 06, 2011.  The Big Markets were all “red,” with the DOW off half a percentage point and both the NASDAQ and S&P 500 down more than 1% each.  Clearly the algorithm traders have skewed their machines with a downward bias just lately.  They are taking their cues from a developing trend and apparently multiple technical breaks or near breaks.  The Gold Bugs Index (HUI) followed suit, dipping about 15 points or 2.9% as the bell rang for regulation trading. 

20110607HUI

(HUI, 18 months, weekly.  If any of the images are too small click on the top of them for a larger version or click on the title of this post for the full page.)

As mentioned in our opening remarks in Sunday’s full Got Gold Report, we remain in a negative liquidity environment, as people become more and more nervous about Fed uber-loose monetary policy punch bowl removal.  We figure that it is reasonable to see people nervous and worried.  And we also figure, as Charles Biderman of Trim Tabs Research said late last week, that the Fed is likely to institute more monetary stimulus once it sees the market rolling over and unable to stand on its own, still monetary-heroin-dependent, wobbly legs.  

We rightly or wrongly reckon that before this negative liquidity event has run its course, we might get some super-exceptional opportunities via something we call Liquidity Vacuums or LVs (which Vultures know all about, because it is a Vulture Bargain technique we love to employ). – That might be a subject for a different, later offering, but not today - because today, as a courtesy to GGR web log readers, we are reprinting an excerpt of the full 32-page Got Gold Report from Sunday, June 5.

With no further intro, let’s get right to it.  

Continued…

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When the Big Sellers are Timid (For Silver Futures) 

This is the first of two excerpts we have planned to share this week, provided we are not first abducted by a fishing guide (or fishing buddy) and disappear for a few days again, so stay tuned to this page as well as to interesting and informative additions to the VultureInReview Section – right under the Comments Section on the front page.  One never knows what might show up in that section, but it doesn’t show up there unless we think it worthwhile.   

This particular GGR excerpt was a special section on the very low relative commercial net short positioning shown in this past week’s Commodity Futures Trading Commission (CFTC) commitments of traders (COT) report, which was released Friday (June 3) and covered the trading up to the close on Tuesday, May 31.  To help set the stage, we will pick up the narrative at the tail end of the regular GGR section on silver COT changes.   

Below is from the June 5 Got Gold Report reserved exclusively for Vultures (Got Gold Report Subscribers).    

 … As we do with gold, we compare the nominal silver large commercial net short positioning or 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 actually edged slightly lower, from an already very low 28.8% to an even lower and traditionally very bullish 28.4% of all COMEX contracts open.  

The silver LCNS:TO graph is just below.  

20110607SilverLCNS

Source CFTC for COT data, Cash Market for silver.

By Tuesday silver had bounced to a $38 handle (up from a $33 handle two weeks ago), but the commercials were NOT willing to materially increase their net short positioning as a percentage of the total COMEX open interest.  That is as clear as crystal in the graph just above and despite the troubling news recently, this COT action and the aggressive bidding we have witnessed on dips adds to our confidence for silver.

Recall that with the LCNS:TO below 29% it represents an equivalent amount of Big Seller confidence in lower silver prices as they held in April of 2009 with silver then $12.02.  That is to say that the COMEX commercials apparently do not have all that much confidence in lower silver prices short term as of now.  

Regardless of the news, and perhaps despite it, for whatever reasons, the largest hedgers and short sellers are once again unwilling to be aggressive sellers. …  

When the Big Sellers are Timid… 

We thought it might be of interest to Vultures to take a look at ALL the occasions since the silver bull market began in 2003 where the relative commercial net short position has fallen below 29%.  Just below is a table showing them.  Note how darn rare it is to see an LCNS:TO below 29% to begin with (18 of 118 weeks).   (Ed. Note: that should have read 18 of 386 weeks, or about 4.6% of the time. Aplologies for the obvious blunder in the original. Note added June 9.)  

20110607LowLCNStoTable

Source CFTC for LCNS, Cash Market for silver. 

Now, in the weekly silver graph below, note where those less-than-29% events occurred historically, and what tended to happen following them.  The Big Sellers were timid in March and April of 2003 with silver then in the low to middle $4s (yellow).  The next time they looked meek was in August and September of 2007 as silver sold down to about $12, just ahead of the first bull rush to $20 (green). The next time the large commercials held so small a percentage of the open interest net short was in September to November of 2008 during the 2008 Panic with silver then from under $9 to $12 and staging for a surge higher (light blue).  Then, just one week in April of 2009 the LCNS:TO fell below 29% with silver having fallen to $12.02 from $14.49, but silver was then gathering steam for a push back up to $19 later that year (tan or orange). 

Now, we see the largest commercial hedgers and short sellers once again at a very low LCNS:TO, below 29% after silver has corrected from $49.75 back to as low as $32 and change, or about a 35% dip (light brown).   

20110607SilverGraph

Can we say that historically it is more bullish than bearish to see the Big Sellers with a relative net short positioning under 29%?  If we use a 6 to 9 month time horizon following the low LCNS:TO events, all of them up to now, the answer is an unqualified “affirmative.”  The chart above is compelling evidence to support that contention. But, you be the judge.   As we all know by now, past performance is no guarantee of future results, but we do think it is worth the time and trouble to analyze the past just the same.    

The chart above is in part why we said last time: 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.   

(End of excerpt.)

*** 

Thank you for investing your time with us here at GGR.  We plan a second excerpt of the full report later this week, but one doesn’t have to wait for it.  To subscribe to the full Got Gold Report and view this week’s entire offering, all our archived reports, all our Vulture Bargain Hunter offerings and gain access to more than two dozen technical charts we update each week on the subscriber pages, simply click on the GGR Subscribe link above and to the right.  We’d be most grateful for your business.  

20110607Vik  

“Naw, the GGR ain’t free, but it ain’t all that much, either, and before long the price will be a might higher." 

That’s all for now, but there’s more to come.


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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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