Saturday, September 06, 2014

For September/October We Suggest Watching Traders the CFTC Classes as Other Reportables in Silver Futures

Silver Lots of Big Bars at SLVHOUSTON – (Got Gold Report) -- We end this partial update on silver futures with a suggestion as to who (which class of large reporting futures traders) to watch going forward. 

First, as silver prices edged $0.20 or 1.2% lower (actually less of a move than might have been expected given huge U.S. dollar relative strength), from $19.35 to $19.15 (as of Tuesday, September 2), trend following Managed Money traders (large hedge funds, commodity pool operators, commodity trading advisors, etc., aka “The Funds”) piled on a whopping 7,396 short contracts in COMEX silver futures, from 28,228 to 35,624 gross shorts.

That's the equivalent of 178 million ounces of silver. 

As longtime GGR readers already know, we view large Managed Money gross short positions as “insurance shorts,”  the highest of high octane rally fuel (and probably the first shorts to be covered) once The Funds are convinced the downward price impulse has been exhausted. 

Managed Money can be expected to aggressively cover these short bets leading to upward price pressure on the COMEX if history is any guide.  (For evidence consider the sharp spikes in MM shorts on the chart just below. It is a lead pipe cinch that all of the Managed Money silver shorts will be covered (bought back) at some point.  At issue is the price.)

20140906 SI MM shorts

Since July 29, as silver drifted $1.42 or 6.9% lower in price, from $20.57 to $19.15, Managed Money traders increased their silver gross short position 420% from 8,496 to 35,624 shorts.  Silver down 6.9%, Managed Money shorts up 420%. 

 

Managed Money traders are very highly unlikely to possess the 178 million ounces of silver, worth $3.4 billion at USD $19.15, to deliver into those short sales, nor does anyone think they might deliver metal into those short sales, but the strong increase in the MM gross shorts helps to reduce The Funds net long position considerably, by a net 6,542 lots or 46.5%, from 14,063 to just 7,521 contracts net long.

20140906 SI MM Net

Meanwhile, traders the CFTC classes as Swap Dealers (SDs) remained heavily short silver futures.  The SDs covered only a small 2,514 of their collective downside COMEX silver bets (5.2%), from a very high 47,446 to a still very high 44,932 silver shorts.

20140906 SI SD Shorts

Swap Dealers also held 35,963 long contracts, so they ended the COT week 8,969 contracts net short silver futures.  That’s down considerably from July 8 (silver then $21.02) when the mercenary swap dealing banks reported an unusually high net short position of 25,245 contracts and a then extremely high (a record high) 58,381 gross shorts.  (Now down to a still extremely high 44,932 shorts held by the Swap Dealers.)  

20140906 SI SD Net

From what we have seen so far, since early July we might say that Managed Money traders have ridden the downtrend, adding considerable insurance short exposure, but their adversaries in the Swap Dealer camp have not really reduced their overly high gross short positioning all that much for the period.

A Suggestion.  Perhaps there is a class of traders we ought to be paying a bit more attention to just ahead – Other Reportables.

This past COT week, as silver tested a low $19 handle, traders the CFTC classes as Other Reportables (very large traders that trade COMEX futures for their own book, not for clients), increased their silver net long position by 42% from 8,461 to 12,034 contracts net long – to the point where it created an unusual signature on our Other Reportable tracking graph.  See for yourself below. 

20140906 SI OR Net

Arensberg Gene CaptainIn general we think of the various classes of traders in simple terms.  The Producer/Merchants are primarily hedgers and represent a good portion of the actual bullion industry.  They use futures to hedge a natural long position.  

The Swap Dealers are mercenary banks selling complicated derivatives to sophisticated (and usually well-funded guppies clients) on both sides of the battlefield, representing a variety of clients.

Managed Money traders are primarily trend following hedge funds who will press a trend to its breaking point then reverse on a dime and run it the other way.

  Other Reportable traders are the outlier and are more difficult to categorize, but we believe they are very large traders that are not above positioning in futures for longer term outcomes.  

That leaves only the smaller Non Reportables, who usually mirror what the Managed Money traders are doing, but not necessarily in lock step.   

Vik smallIf the very large veteran traders called Other Reportables are strongly increasing their net long positioning in silver futures (they are), it could be an early warning signal to watch for a reversal – and perhaps a violent one given what we have already reviewed with the now oversized MM insurance short position. 

Keep an eye on what the Other Reportables report just ahead in September and October.  Call it a Vulture Hunch, for lack of a better name. 

 

We are "on call" and may be 'out of pocket,' away from the Internet for an extended period just ahead, although we cannot know when that call might arrive.  So if we seem to be exceptionally scarce for a period of time it should not come as a surprise.  It should hopefully be temporary.

That is all... 

 


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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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