"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 11, 2011

Silver COT in Detail

Most of the readers are no doubt aware by now that every Friday afternoon the CFTC releases the data known as the Commitment of Traders report (hereafter referred to as COT). That data comprises the positioning of traders from the close of trading on Tuesday the previous week through the close of trading on Tuesday of the current week. The lag is to allow CFTC to gather the data which is provided by the various brokerage firms on reportable traders.

In looking over this week's data for silver, and this includes the Disaggregated report for both Futures and Options, I am once again struck with something that has me completely perplexed, namely the apparent lack of substanial buying noted in the report.

Let me explain, on Tuesday of last week, the active Silver contract closed at $34.42. Tuesday of this week, it closed at $35.65 after spiking as high as $36.74 on Monday of this week. Taken together, from its close to its best level, silver tacked on a whopping $2.32 before closing up $1.23 for the reporting period. Either way, whether taking into consideration the amount of buying required to take price to its peak near $37 or even to its closing print, that is a lot of buying that occured.

One would obviously expect this to show up in the COT report when examining the various categories of traders.

Let's start with the big Commercial Class, named as the Producers, End Users, Merchants, etc. The report showed them covering 1,739 existing short positions and adding 679 new long positions for a net 2,418 contracts. Summary - they were buyers on the week.

Then lets move to the Swap Dealers category - they sold 551 existing long contracts and added 1,423 new short positions or a net total of 1,974 shorts. Summary - they were sellers on the week.

You will note that these two categories of traders make up the entire short interest in the Silver futures contract. So for the most part they ended up offsetting each others positions with the exception of 444 longs not accounted for.

Then we move on to the Managed Money category - this is the category that generally drives markets up or down. Once again as has been the case now for two consecutive weeks, this category supposedly was a net seller over the reporting period to the tune of 214 new short positions. When we consider that over that same two week reporting period, silver has moved from $32.85 to a high of $36.74, a distance of $3.89 we are somehow supposed to believe that Managed Money was selling during the entire period. That defies common sense given the extent of the move higher and the fact that the technical indicators were in a buy mode. Summary - net sellers on the week.

Moving on to the next category, Other Large Reportables. This includes the large locals, large private traders and other traders such as CTA's. This category added 660 new longs and ended up covering or buying back 1,164 existing short positions. That totals out to a net buy of 1,824 contracts. Summary - net buyers for the week.

The last category of traders is the Non-reportables. This is the small traders or general public category. This week they sold out 1,770 existing longs and added 284 new short positions which makes them net sellers of 2,054 contracts.

This is the first week since January 25, that the giant Commercial Class, the biggest shorts in the Silver market, showed a reduction in their extremely large net short position. We know from the Bank Participation report, that they increased their short positions early in the month of March but it should be noted that this week's data includes the March delivery process. It is perfectly normal during the delivery stage for the Commercial category to show a reduction in their net short position since some of that is due to deliveries and come downs in the active contract.

What has me perplexed however is that practically all of the change in the net short position of the Commercial class was offset by the Swap Dealer category, which is the other large short in silver.

This week's data showing net selling on the part of the Hedge fund community then means that it was left to the large locals and private traders to take the price higher with no assistance from the biggest longs in the silver market. Once again, I find this at odds with the extent of the overall price movement; a $2.32 move higher takes a lot of firepower to generate. The more I look at the less sense it makes, especially coming on the heels of the previous week's numbers. I had hoped we might get some clarity that would help explain what we were witnessing when comparing price movement to the shift in traders' commitments.  Maybe next week?


  1. The COT plot thickens. Probably a really stupid question, but barring an ignoble accounting mistake (or slight of hand), is it possible that China, Soros or someone like Sprott or Buffett (or a group of like-minded hedge funds) could take the price higher under cover of multiple entities?

    Not that I'm comparing any of the above people, entities or nations... all as different as night and day.

    Hunt brother heirs?

  2. your premise is that a major change in buying in one of the five categories is necessary to for a rise in price. That premise of course is not always true. Price can rise from new longs taking the place of old longs and old shorts covering and new shorts entering.

    As you have seen with the extreme volatility, silver prices can move dramatically with few trades occurring. Think of it as a collection of gaps. New longs/old shorts get desperate and start lifting all offers, old longs/new shorts see their panicking and jack up their offers.

    Sure, its an abnormal scenario, but nothing is normal about this silver market.

  3. doublecross where JPM goes long and doesn't tell its cohorts in crime? Great info Dan. Thanks for all you do.

  4. Brian;

    I have been analyzing these reports back when they came out every two weeks and for as long as I can seemingly remember. I cannot recall seeing a price move of this magnitude with such a relatively minute change in the composition of traders' categories. Nor can I recall seeing a price move of this magnitude accompanied by net selling on the part of the largest speculative forces on the planet. I am of course referring to the hedge fund community.

    Incidentally, if new longs take the place of old longs at the same rate then open interest would never change.

    If old shorts are "desperate" as you posit in your example, they DO NOT lift their offers; they RAISE THEIR BIDS. In other words - "GET ME OUT" - "I do not care what price I have to pay". Maybe you simply had a poor choice of words there as I do not think you meant to use the term "offers".

  5. One could guess that CRIMEX does not wish to show the amount of true buying demand that is apparently driving the silver market. Maybe the algo's out there are affected by stats like this.

  6. indeed, I was mixing terms and wasn't clear and appreciate your clarification.

    You have no doubt been analyzing these reports far longer than me and I respect your experience. But when I look at silver, I see a completely disorderly market. The price seems to move on air at times (like today), switching from greed to fear and back in a heartbeat. In gold, there is more rational movement and correlations and it travels usually by backing and filling. Silver is a rocket up and a rock down. In gold, the CTFC data is almost always consistent. But with silver, I wouldn't quite be seeing any conspiracies if the CFTC data didn't explain the moves.

  7. Jack, the COT report comes from the CFTC, not Comex. Why would Comex what to hide the true buying demand? Comex is neither long nor short silver. It's an exchange and clearinghouse. Their only job is to make sure both sides have sufficient margin/financial capacity to fulfill their obligations.

  8. Brian;

    You are right about silver - it is indeed disorderly. We do not jokingly term silver, "the play toy of the funds" for no reason! I am not saying that the CFTC is engaged in a deliberate conspiracy however. I am merely saying that the report is not consistent with what I believe is typical hedge fund behavior in a strongly rising market. Hedge funds drive today's markets and that they would be net sellers during the last two reporting periods when silver has tacked on almost 400 points is not even consistent with previous COT reports from the CFTC.

  9. When people or entities buy silver outside the COMEX system, can that affect price?

  10. Dan -

    Obviously you know this, but novice readers should notice that the net change across the entire line sums to zero. Of course, that's a fact of futures trading if you're accounting for all categories of traders: the number of longs equals the number of shorts.

    So i guess the question is: what conclusion do we draw when we see that it's the Commercials and Others doing the net buying?

    Perhaps it means that the hedgies thought that the other buyers would be desperate - so they held out for higher prices...

    I remember an old quote from Alex Elder in his book on futures trading: "prices rise when buyers panic and sellers demand a premium for their shares"... It sounds like that's what happened this week

  11. ps - it sounds to me like the smart money (hedgies) were selling to the dumb money (public)... interpret the future price implications of that however you like, but at first glance it seem bearish to me - a "sold to you, sucka" kinda thing.

  12. Kid;

    Yes, I understand that - the sum of all buys has to equal the sum of all sells but it seems as if many are missing my point - I do not see any large buying in silver coming from the Managed Money or Hedge Fund community. According to this data, they have been selling over the past two weeks yet silver has gone up nearly 400 points. Also, it was only this past week that we saw any short covering by the big Commercial Class and that was all offset by the Swap Dealers. I am simply trying to get a handle on where all this buying is coming from that is taking the market so sharply higher.

  13. lord koos -
    Yes, buying outside of the Comex affects the price of silver but for analysis purposes of the COT,I am only interested in what is occuring within that market.

  14. Brian F. - Yes, I know where the data comes from. The CFTC is part of CRIMEX, long compromised....there to protect the interests of the US Gov't and large banks first and foremost and not the people or the market.

  15. Hi Dan,
    How would options on futures contracts affect these numbers?
    Would there be enough leverage from options to skew the OI numbers without the presence of a large buyer or large short?

  16. Sounds like the physical market is overwhelming the paper market. Why go long more paper if the physical isnt there to back it up?

  17. mg2;

    the data used for the COT analysis that I have provided includes both futures and options and would therefore address your thoughts on this.
    I am thinking that perhaps once we get the open interest in the March contract down below 300 - 400 contracts maybe these COT reports will make some sense. It could be that the delivery process is messing with things. I am also suspicious of the number of EFP's being done and am hoping to write up something on that soon

  18. A basic explanation might be that the COT reporting is fraudulent in that new open interest
    of Hedge Funds and the offsetting short sale
    are being zeroed out to covertly disguise open interest and the squeeze situation the shorts are in.

  19. Thank you Dan.

    I think any available data on EFP's would only give us more information to work with and that's a good thing.
    Unfortunately, from what I've read they seem mainly like an offshoot of OTC instruments and we all know how good reporting is in the opaque OTC markets.
    However the numbers end up squaring, one thing is for sure and that is that official reporting and transparency is sorely lacking.
    That frustrates me to no end because nobody can make good decisions when officially reported information is incomplete.

  20. Dan - can you elaborate on what conclusions you draw from the EFP data without the EFP prices?

  21. Kid and Mg2;

    The nature of those EFP's is totally opaque since they are conducted off exchange in the sense that the details are worked out between two private parties and only facilitated by their respective brokers. About the only thing we can glean is the whether the actual number of them being done is perhaps abnormally high. The problem is obtaining an historical database to use as a reference for comparison. I only recently started tracking the info when there were some rumors being floated that Morgan was paying high sums of cash to settle some shorts.


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