"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, March 4, 2011

Trying to solve the Silver COT Mystery

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,


  1. Hello Dan,

    By looking at the open intrest/silver chart it would appear at first glance that you are correct in that the price action is due
    to the lifting of the spread trades one leg at a time as it were.
    However, my impression is that it appears that in mid Jan. it was the long leg that was lifted first then a more normal OI/price
    structure until your deliniated time when the short leg was lifted causing the price run up.
    I judge this by the roughly matching changes in open intrest of 1500 and the price changes within those time periods.
    I must admit that lifting the long leg first seems counter intuitive but that's the way I read it. And if indeed that is the case
    it would go a long way toward explaining the confusion. Also, if a more normal market structure were to resume, it seems to
    me that it would also be the back side of the odd start of the lifting of the spreads and for this I shudder to think because
    it holds the possibility that the heavy buying by the small specs would result in their absolute shearing.
    I understand that there are many things to consider but just going by this picture I seem to looking into the abyss.

  2. lots of interesting analysis; wonder if the banksters know the answer, or will strategically change their tactics or make use of (to our detriment) the information being presented here.

  3. Dan,

    Thank you as always for all of your great analysis and excellent charts. I wonder if the data we are getting is being doctored like so much of the data that comes out these days. If the comex were on a verge of default could they produce fraudulent data to try and keep the charade together?

  4. Thanks Dan. This is way over my head, so I don't have a comment, just wanted to say thanks.

  5. Dan,
    What about non-Comex silver (LBMA, perhaps)?
    Could it be that OTC trades made a difference?

  6. @mg2

    sorry if this is a dumb question..but I am a newbie here..just trying to understand

    Am I interpreting you correctly..are you saying in the past the short interest always increased first(driving price down) then later the long interest increased (driving price back up)..but this report is different in that the longs have increased first, suggesting that the increase in the shorts may follow this time? Could it be possible that speculators are not placing those spread trades, but rather just betting on silver to rise?

  7. No, overal OI, it seems, has been moving down as the price has been rising which arguably indicates short covering.
    I was merely trying to understand why OI would drop if the spread trades were being closed on the long side as Dan implied with a rise in price.
    So I looked at the drop in Jan. and compared that number to the most recent drop and they appear almost the same. This seems to me that the long side of the spread was closed in Jan. and the short side closed recently.
    That's all.

  8. @mg2

    thanks for clarifying

  9. LOL. The whole thing appears to be a scam with a Ponzi on top. The people telling the truth these days seem to be in the small minority.

  10. If the rumors are true - where settlement is taking place outside of the market for a hefty premium - then technically that OI could be simply erased from the books. That might not be possible if the CFTC were doing its job but no metals investor believes they are.

    Helca released their previous quarter's earnings a few days back. They reported an average selling price of something over $32 per ounce of silver whereas the average LMBA price in that same time was around $26 per ounce. Further evidence that the paper price is manipulated and supressed and settlement is taking place outside of the market.

  11. Hi Dan,
    Isn't it just all possible that the physical market purchases are behind the price rising - is all physical purchasing captured in the COT data?

    I wouldn't have thought that purchasing throughout Asia and London would be captured in these stats.

    e.g - look at the COT data for currencies - differs greatly to what the Faros Trading Stats are revealing about currency trades on KWN.

    It might just be possible that the US traders/banks are all wrongly positioned and we shouldn't be reading too much into that data relevant to where the physical purchasing is going to take price

  12. Gold high in 1980 was $800, today it is $1430 as of 4 Mar 11. Silver high in 1980 was $50, today it is $35.57 as of 4 MAr 11.

    From a layman view, Silver is under performing as compared to Gold. If Gold is $1430/$800 = 1.7875 times as of 4 Mar 11. Silver should be at least be trading at 1.7875 x $50 = $89.375.

    As of 4 Mar 11, it is still very much under value as compared to Gold. So it is just playing a big catch up.

  13. Maybe the reason for spreads being taken off were the margin increases on February 18 for the spread contracts (I'd like to note again that the margin on the standard 5000oz contract has not increased on Feb 18).

  14. hypothetically, what would the OTC report look like if those waiting for deliveries were offered a cash settlement + some premium to roll over their contracts into some forward date? How would such settlement, whether in cash or SLV shares, be reflected in the COT?


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