Silver - Commitment of Traders

This week's release of the Commitment of Traders report by the CFTC contained some noteworthy developments in regards to the silver market. I discussed this with Eric King so make sure to listen in to the KWN Weekly Metals Wrap where we cover this.

If you want to have a visual to go along with that discussion, I am providing it here in the form of this chart.

First of all, the hedge fund category (Managed Money), has been steadily liquidating their long positions in silver for some time now and that continued this past week. The result is that their overall net long position is now at levels last seen in this category dating back to the late February- March 2010 time frame. At that time, the price of silver was trading between $16.50 and $17.30!  Yet here we are with silver sitting closer to $35. In other words, the price of silver has doubled since then while the hedge fund position is at the same level as it was when price was half of what it is today.

What this tells us is that once silver falls back into favor with the speculative crowd, it will launch its next leg higher from a substantially higher price level. Let's assume for the moment  that the interest to be on the long side reaches levels commensurate with what we have seen recently. It is easily conceivable that the price could effectively double from the point at which that next leg higher commences. I do not know from what level that will occur or the time frame, but with the large specs having been greatly cleaned out of the silver market, there will be enormous upside potential in this market when conditions are ripe.

The flip side of this and the second point worth noting is that the big commercial net short position is shrinking quite rapidly. As you can see on the chart by following the horizontal line across the chart, their net short position is now the smallest it has been since May 2009, a full two years ago! Silver was trading between $12 - $14 back then.

Also related to this is that the Swap Dealers are now net longs. They have not been on this side of the market since late November of last year.

What I am atttempting to say that this consolidation period for the metal is extremely healthy for the long term. It continues to see more and more speculative long side liquidation but that is being met by a very large amount of short covering from the biggest shorts in the silver market. The result of this has been to lock silver into a range trade which is keeping the metal from breaking down substantially further and producing the curent trading range that we see on the price charts.

We therefore would have to see a sharp pullback in commercial short covering activity for the market to collapse in price. They are steadily buying and their buying is of sufficient size that it is absorbing the hedge fund liquidation-related selling. Quite frankly, as long as the bullion banks keep buying I do not see where we will get the firepower of selling that would be necessary to cause silver to fall apart. One would almost have to see the hedge funds actively take to the short side of the market to generate enough force to press silver down through the kind of buying that the commercials are now providing.

The more the hedge fund long side exposure keeps dropping, the better as far as I am concerned provided that this trading range continues with the market holding above the recent lows in price. The ideal setup for silver would be for it to build a rock, solid base of support at a new and higher price level, let's say somewhere near and around $30 or so, from which it can then make the next leg higher in this now decade long+ bull market.