Wednesday, July 13, 2011

COMEX Commercial Traders Positioning for Silver Strength

HOUSTON – Picking up where we left off on Tuesday, July 12, when we highlighted very tight supply of commercial sized silver bar stocks as one of two key indicators we believe short sellers of silver and silver ETFs ought to strongly consider (and perhaps be concerned about).  We noted in that offering that there were two important factors which suggested to us that silver may be merely catching its breath rather than what is usually expected of it following a broken parabolic peak. 

These two powerful indicators are suggesting that instead of a parabolic collapse, silver might instead be in the midst of “the mother of all mid-point consolidations.”

The second indicator is just as important as, and we think gives cover, or rather, confirms the first.  The second important factor is that the largest of the largest commercial traders of silver futures are near bull market lows in terms of their collective net short positioning following silver’s harsh margin-hike-influenced 30%-plus pullback in May-June.  

Consider the graph below as the focus of this second installment of our ‘silver short seller public service announcement for July.’  


COMEX large commercial net short positioning (LCNS), nominal, since 2007.  Measures the net position of both long and short contracts held by COMEX commercial traders, including bullion banks, producers, users and large dealers. If any of the images are too small click on the top of them for a larger popup version. 



Now please, check one’s bias at the door for a moment and simply allow the above chart to ‘speak’ for itself.  The blue line represents the nominal amount of net short positioning in COMEX contracts for traders the Commodity Futures Trading Commission (CFTC) classes as “Commercial” in its weekly recap of large trader positioning in New York futures.  That Commitments of Traders or COT report is useful to determine how the largest futures traders are currently positioned, but more importantly, when closely followed, the report reveals oversized changes in that positioning and other trading anomalies.  The pink colored line is the Cash Market price of silver as of the COT reporting cutoff each week.  

At Got Gold Report, we follow this government-issue report closely and report on it biweekly to Vultures (Got Gold Report Subscribers) more in depth than we intend to do with this public notice today.  The simple issue we wish to call to everyone’s attention is the graph above paints a very strongly bullish picture if we consider the following attributes in isolation. 

  • Lows for the silver LCNS near the lower portion of the graph are nearly always associated with lows for silver. (See if one can find any exception to that notion.)      
  • Silver shows a strong tendency to rally significantly following LCNS extreme lows.  
  • Since at least October of 2010, COMEX commercials have shown a tendency to reduce their net short positioning – they reduced net shorts as silver powered higher, and accelerated that process as it fell precipitously. Commercials want to ‘get smaller’ in the silver net short department.   
  • COMEX commercials position for what they believe the conditions favor, what the price will do three to nine months forward – positioning for silver weakness by adding to net short positions – for silver strength by reducing net short positions.     

Every once in a while the COT report is so dramatic or it shows something so unusual that it strikes us as urgent news for our valued readership.  That was the case on Friday, July 1, 2011, when we issued an important update on this free web log.  

Kindly indulge us for a moment to reprint the closing portion of that comment of nearly two weeks ago.  

For whatever reasons, the largest hedgers and short sellers of gold and silver futures have used the recent declines in the price of gold and silver to get a great deal “smaller” in their net short bets – and in a New York hurry as evidenced in the very important graphs shown.

Most anything can happen over the very short term, but historically very large, abrupt changes in commercial net short positioning have been like klaxons sounding for experienced traders to “get to battle stations.” These are indeed just the kind of very large changes of which we speak.

For silver specifically, the very low level of commercial net short positioning suggests that the Big Sellers of silver futures are not at all confident in lower silver prices just ahead. Notice that as the LCNS:TO reached the lowest levels on the graph above it almost always coincided with lows in the price of silver or very near them.

We certainly cannot say that the Big Sellers of silver futures are positioning as though THEY think that silver is set to plunge further - to the contrary. The Big Sellers are net buyers here - at a pretty fast clip, not net sellers.

Be sure to view the excellent commentary on silver by Eric Sprott and Andrew Morris linked in the VultureInReview section immediately to the right of this post on the Home page of the web log. It is indeed worthwhile in our opinion.

As we communicated to Vultures in our last full report, we viewed the COT setup this time as very strongly bullish for both gold and silver – especially so for silver for all the reasons we cited then.  

Yesterday, we also noted that September COMEX silver was trading in a tightening wedge.  We’d suggest that those who might favor the short side of silver also consider that post too, although it might have been better had they done so then. 

How interesting that silver is now threatening to break out of that wedge as we send this off to be posted.  Silver is currently thrusting above the $38 battle line as we do, up nearly $2.00 from yesterday’s New York last trade.  We’d bet some of that rise today are people who thought they had a pretty good short bet down on silver, having a market-induced change of mind.   

The bottom line: Very large, seasoned professional futures traders that should absolutely know if commercial supplies of silver are indeed tight are positioning as though they believe with certainty that is so. Short silver at one’s peril in light of these compelling indicators.   


This concludes our ‘silver short seller public service announcement.’   

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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