In attempting to get to the bottom of this COT discrepancy, I have gone back to analyze the data from the various reports and the exchange daily open interest readings.
If you look at the Daily chart of Silver showing the Open Interest at the top, you can see what has been occuring in this market.
Note that the recent run higher in price that began in late January was accompanied by a solid increase in open interest which jives with the CFTC COT reports. The COT reports showed a substantial build in the Managed Money net long side exposure which was being offset mainly by the Swap Dealers and the Commercial categories. That is textbook bull market action.
However, Open interest peaked on February 17, and then has begun a steady decline until levelling off some over the last week. Price however has continued to move higher as you can see from looking at the dotted line which matches the peak in open interest to the price on the chart below.
Since it requires energy to move price higher, buying must be present. That can come from either two sources - either from fresh longs instituting brand new positions or from old shorts who are covering or buying back existing short positions.
In the first case, fresh longs will cause open interest to rise if they are coming in at a pace faster than the pace of any old longs who might be selling out. This implies that there are fresh shorts coming into the market as well.
In the latter case, open interest will fall if these old shorts are getting out at a faster rate than new shorts might be coming in. FResh longs may also be coming in at the same time this is occuring but if both are not being matched exactly one for one by new sellers, open interest will decline.
Either way, we should be able to note this in the weekly COT reports as we look across the various categories of traders and see who was doing what. It is evident that buying was present in sufficient size to take this market from near $31.50 where it was trading when open interest peaked to $34.40 where it was trading when open interest levelled off and the date of this week's COT report cutoff. Yet, based on what the CFTC reports have been telling us over the past two weeks, Managed Money has been net sellers, Commercials have been net sellers, Other Reportables have been net seller, while the Swap Dealers were net sellers the first week and net buyers this week. The only category showing a steady increase in net buying has been the small spec category. I find that very odd given the extent of the price move.
Now, in digging a bit deeper into these COT reports, one of the reasons for the sharp reduction in Open interest has been that a fairly large number of spreads have been taken off. Spreads can be volatile as far as how they are put on or taken off but as a general rule of thumb, unless they are legged out of individually at separate times, lifting them will affect the backwardation or contango condition of a market structure only if there are a very large number of them.
This past week alone, 18,086 spreads in the speculative category were lifted while another 6,591 were lifted off of what is considered the commercial side. What might possibly be occuring is that these spreads are being reduced within the category reporting period of Tuesday to Tuesday but not on the same exact day. In other words, the short leg of the spread is coming off but the trader is attempting to ride the long leg a bit higher before lifting it and may be waiting a day or two or even more before selling that position. By the time that data is tabulated by the CFTC for the reporting period is tabulated, the trader has legged out of both sides of the spread, both long and short legs, with the end result that their overall spread numbers being reported to the CFTC is reduced. The CFTC then publishes that data.
However, the result is that during the week while this is occuring, the buying back of the SHORT LEG ONLY is producing the buying that is taking the market higher to the extent that we are seeing. The long leg is then sold off into the small spec buying eliminating the spread completely.
This is still not an open and shut case with me as I am still trying to sort through all of this but it might help explain some of what is going on here. The main thing I am attempting to discern in all this is WHERE THE BUYING is coming from that is generating so much vicious upside price action considering the fact that Managed Money is apparently not engaged if we are to believe the COT reports of the last two weeks.
As you can clearly see,
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