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,
The only thing I can say about this report is that it makes absolutely no sense whatsoever to me and this is coming from someone who has been looking at these reports when they first came out many years ago.
Over the last two week reporting period dating back to 2/15/2011, silver has risen 340 points from Tuesday to Tuesday. This week alone, it increased 157 points from the close of trading last Tuesday to the close of trading this Tuesday. Both today's COT report and the previous report show the managed money category actually reducing net long side exposure to silver. That is odd enough in the first place.
If that were not enoug the reports show a continued build in net short exposure among the big Commerical, End User/Producer category.
The Swap Dealers did a bit of short covering this past week reducing their net short exposure by 2,272 contracts (futures and Options combined) but the previous week they also increased their net short exposure.
Meanwhile, the "Other Reportables" category registered net selling in both of the last two reporting periods.
Only the small spec category, showed a consistent increase in net long side exposure.
When I look at this report and I see a market that has surged to the extent that Silver has, and I see Managed Money actually decreasing their net long exposure with the only category being consistent buyers being that of the small speculator, I am very skeptical as to the intregity of this data. Small specs do not buy in sufficient size to take markets for rocket rides of this extent. It takes much bigger firepower to do so.
Overall open interest in silver continues to fall off as the price works higher indicating the presence of a decent amount of short covering. It does not take a rocket scientist to understand that those with short positions in this market are bleeding profusely. What is strange and bewildering and the reason I suspect this data is because we are seeing what I believe is a disconnect between the daily open interest readings in silver which is provided by the exchange and what is occuring inside this market from the data being provided by the CFTC.
Additionally, the bank participation report actually shows a big increase in short side exposure in silver among the big banks for the March data.
What I want to know is where all the buying that is taking this market higher is supposedly coming from? It sure as hell isn't coming from the Managed Money side of things based on the last two CFTC reports. So, who's buying this market????
CME Group has announced a hike in the margin required to hold WTI crude oil contracts effective as of the close of business today (Friday).
Those of you holding crude oil contracts should take note. The same holds true for heating oil and gasoline contracts. This is standard practice whenever price volatility increases.
For West Texas Intermediate crude on the New York Mercantile Exchange, CME is raising initial margin requirements, or the deposit required to purchase a
contract, for speculators to $6,775 per contract, up from $6,075. Maintenance
margin requirements, or the additional deposit required for keeping a contract
overnight, increase to $5,000 from $4,500.
There really is not much that can be said in addition to what this price chart is telling us.
Note that the metal held solid support and moved along sideways refusing to drop sharply lower. That indicates a great deal of dip buying was occuring which prevented the shorts from pressing it lower. The result - the shorts had to run when they could not generate any downside action of signficance.
One thing to note is that the volume on the move up and beyond $35 was enormous. That is strongly bullish.
Also see how the price is hugging the center line drawn which is serving as a type of resistance zone but also as a magnet.
Even with a safe haven bid seen in the markets today on account of a roaring crude oil price, the US Dollar cannot get any sort of decent bid - This fact, more than anything else, is telling us that the Dollar is very close to crashing through major chart support just north of 75. After all, if it cannot rally on the payrolls number in combination with a safe haven bid, what is it going to take to rally it??
The facts are nearly every other major nation, with the exception of Japan, are now fully engaged in the battle against the Kraken (inflation monster). Only the US Federal Reserve refuses to see the obvious. They will print, print some more, and keep on with their damn printing, until they succeed in driving King Dollar into the latrine.
We are back to trading crude oil once again in today's session with its rise higher derailing equities and "risk trades" and generating safe haven flows.
That can be seen in the gain by the CRB against the CCI, the move higher in the long bond and the resultant rush back into gold and silver particularly when compared to copper.
For the time being, everything is about crude - not even the payrolls number matters right now.
Yesterday gold and silver were both sold off as crude sank amid a easing of concerns over the events in North Africa and the Middle East. That combined with hawkish talk from ECB President Trichet was enough to send gold and silver buyers scurrying for cover. With crude setting a fresh 30 month high today, that was all forgotten.
Expect this very dangerous volatility to continue as long as crude is as volatile as it is. If it were to move lower, gold and silver will follow it down. If it continues moving higher, gold and silver and not going to break down and will keep setting fresh highs. It really is that simple.
The charts are going to reflect this volatility as they generate sell signals which will then promptly reverse into buy signals. Therefore do not put much faith in any predicitions right now. The fact is no one knows what crude oil is going to do on any given day and no one can be sure how events associated with its rise are going to ultimatey play out. That uncertainty is going to keep gold and silver well bid on dips in price but it will also make for quick drops lower if it looks as if crude oil is hitting some sort of temporary top.
I can say one thing with absolute certainty however, if you are a hedger of mortgage risk, you have got to be going nuts attempting to read the bond market in an attempt to implement your risk management program.
Both gold and silver saw open interest drops during yesterday's move lower. Longs were booking profits after crude moved lower but shorts who had been losing money recently also did not hang around long either but decided to cover some as well. March silver keeps losing interest as per the recent pattern. Also, as was the case the previous day, there were no deliveries against the March contract.
