Tuesday, July 19, 2011

Recent COMEX Commercial ‘Opposition’ to Gold, Silver Prices Overrun

Current silver commercial net short positioning in futures not at all ‘high’ historically speaking.    

HOUSTON – Just below is a courtesy excerpt of the full Got Gold Report which was delivered to Vultures (Got Gold Report subscribers) Sunday, July 17, and posted to the password-protected GGR subscriber pages then. 

Today’s late-day sell-down for gold and silver in New York notwithstanding, as of Sunday, when this report went to our subscribers, we sought to put the increasing “opposition” coming from the largest hedgers and short sellers of gold and silver futures into context.  Our report focused first on the very large increase in the commercial net short positioning for gold, followed by this look into the commercial net short positioning for silver futures.  For reference and as a benchmark gold closed Friday, July 15, at $1,593.23 (Cash Market) and silver closed then at $39.26. 

It is key to note that the COT positions covered below were as of Tuesday, July 12, when gold closed at $1,567.50 and silver at $36.07 (both prices considerably lower than Friday’s close).  

Just remember as we post these excerpts on the free GGR web log that Vultures had access to this timely analysis Sunday afternoon in the U.S.    

Excerpt of the full Got Gold Report of July 17:  

The Commodity Futures Trading Commission (CFTC) issued its weekly commitments of traders (COT) report at 15:30 ET Friday, July 15.  The report is for the close of trading as of Tuesday, July 12.   

As usual, GotGoldReport.com 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. … 

Continued… 

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Silver COT   

Silver gamely challenged and then defeated somewhat heavier resistance than gold faced this week, but not really until after the COT cutoff on Tuesday.  For most of the COT trading week silver hadn’t done much of anything up or down. Similar to gold, silver saw an even stronger sell-down attempt in the early going on Tuesday, at one point down to the $34.70s (down about a buck), but then caught an impressive bid, trading off that early low and closing up above the previous day’s close.  As with gold, our point here is that the COT data includes the low-print of the week on the COT cutoff day.  Remember that the Big Sellers were in the process of hammering gold (or so they thought), and, as we will see, they allowed that sentiment to affect their positioning for silver, albeit to a much lesser degree.  

Apparently the LCs were gaining confidence in lower silver prices right up until the close on Tuesday.  At least that is what these data suggest.  The silver COT figures shown below were of a silver market in a more or less sideways holding pattern that could have gone either way up till the end of the COT trading week.  

With that firmly in mind, and forgetting for a moment what we know to have happened thereafter, as silver nudged $0.61 or 1.7% higher COT reporting Tues/Tues, from $35.46 to $36.07, the combined COMEX large commercial traders increased their collective net short positioning by a relatively large 4,039 contracts or 12.1% to 37,490 contracts net short (LCNS).  Clearly the Big Sellers of silver futures must have gained confidence in lower silver prices, as they took the opportunity of a modest 60-cent advance in price to add an additional 20.2 million ounces worth of paper-silver net short exposure.  

Interestingly, the open interest for silver only increased by a much smaller 1,544 contracts from a quite low 111,251 to 112,795 lots open.  Incidentally, last week’s 111,251 contract open interest was the lowest number of COMEX silver contracts open since the summer of 2009 with silver then trading in the $15s.  By Thursday of this week, with silver breaking above a tightening wedge in the $37s, the open interest had increased a bit more, to 115,389 contracts open.  On the surface that suggests a bit more “opposition” had then come into the silver futures market.  Emphasis on the words “a bit.”    

Just below is the nominal LCNS graph for silver futures.  

20110719SilverLCNS
 Source CFTC for COT data, Cash Market for silver. 

Given only a modest increase in the open interest thru Thursday despite a significant advance in the price by then, and given the quite low nominal amount of LCNS in historic terms, we cannot say that the increased “opposition” we noted in this week’s LCNS was particularly aggressive, but we do note it just the same.  Neither is the absolute amount of commercial net short positioning all that high, also in relative terms.  

For comparison purposes consider that back in the September 28, 2010 COT report, the combined commercial traders then held net short silver exposure of 65,413 contracts or about 327.1 million ounces.  That was just as silver was breaking out of a wide summer consolidation and trading through $21.74.  Compare to today’s collective net short position of 37,490 lots or a “mere” 187.5 million ounces (139.6 million ounces less net short exposure with silver about $14 higher). Notice also, that from that September 28 high water mark for the LCNS, the commercial traders turned into consistent net buyers even though silver continued to advance on up to above the $30 level by December.

What that shows is that when the largest hedgers and short sellers end up on the wrong side of a runaway market they end up being part of the buying fuel for that market – a beautiful thing to silver bulls.      

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 jumps for the second consecutive week, up from a very low and very bullish 25.5% two weeks ago, to 30.1% one week prior, to this week’s 33.2% of all COMEX contracts open, which, believe it or not, is still not all that high historically speaking.  Indeed, that very important figure taken in the context of the still very low open interest suggests there is still a great deal of hidden (or unemployed) bullish firepower waiting in the wings in the silver futures market.  That notion cannot be of much comfort to the traditional sell side. 

The silver LCNS:TO graph is just below.   

20110719SilverLCNSto
 Source CFTC for COT data, Cash Market for silver.

Clearly, as silver was trading still in the $35s to just over $36 on Tuesday, the Big Sellers of silver futures were becoming more confident in lower silver prices.  Not a lot more confident or comfortable, but we think the word “somewhat” describes it well enough.  At least as of Friday, however, that increased confidence in lower silver prices turned out to be at least the beginnings of a bear trap.    

We would not be very surprised to learn that the LCs had a change of mind and reduced their collective net short positioning Wednesday thru Friday, given the only modest increase in the open interest.   

Bottom line:  The largest hedgers and short sellers of gold and silver futures did seem willing to increase their “opposition” aggressively on gold, less aggressively on silver.  In both cases they have seen the market surge higher since the Tuesday cutoff, which is the same thing as saying that their opposition has now been overrun.  We must pay attention to both ideas. …

 End of this excerpt.  

Thanks for investing your time with us today.  We are likely to have a second excerpt of the full GGR tomorrow, Wednesday, so stay tuned.  That is all for now, but there is more to come.    


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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.

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