What can I write that I have not written time and time again of late – once more we witness yet another week in which the silver market becomes more and more lopsidedly imbalanced.
Let’s start with the overall NET POSITIONS of all the categories of traders. Feast your eyes on this monstrosity.
It seems as if with the passing of each new week, I have to once more change the y-axis settings to allow for the new record number of net long positions being established by the hedge fund crowd.
Here is what is so remarkable about this. The cutoff date for the COT report data is the close of the Tuesday trading session.
Look at where silver was sitting that day. It closed at $19.683.
As of the close of trading on Friday, silver was sitting at $20.347, an increase of some 66 cents. That means that the lopsided chart COT chart you are looking at on this commentary, is already obsolete because the odds are that it has become even more lopsided yet!
The Swap Dealers’ record net short position was for the most part unchanged while the net short position of the Commercials increased yet further and is now only some 8000 contracts or so away from hitting their all time high.
Breaking down the hedge fund OUTRIGHT POSITIONS yields the following chart:
Here is the same data, using only their long positions, in a percentage of total open interest format.
In looking at these two charts, you can see that the number of both NET LONGs and OUTRIGHT LONGs by the hedge funds has gone “parabolic” in the sense of its incredibly steep rise.
Yet for all this, the weekly silver chart has not.
The last week of week of June, which you can see on this chart, silver closed at $19.588. Tuesday, the day of this week’s COT cutoff, silver closed at $19.683, a mere 10 cents higher. Yet, over that same period of time, the hedge funds have piled on another nearly 17,000 long positions. All of that to move the price a piddly dime! ( I wonder how many more they had to pile on from Wednesday to Friday of this week to bring the price up to $20.347?
I am really unclear what the thinking behind this is – is it similar to what has been going in with copper?
In six weeks, the hedge funds have gone from their largest net short position on the chart to a rather large net long position. Based on what? Nothing that I can see from a fundamental standpoint. The entire premise behind the hedge fund copper buying is the notion that China, the world’s largest source of copper demand, is going to take steps to further stimulate its economy.
The Bank of England did not cut rates further in response to the Brexit vote, the Bank of Canada also stood pat, the ECB again disappointed the markets with their announced monetary stimulus plans and just last night the Bank of Japan laid an egg based on the manner in which the Yen soared. We all know that the Fed merely sounded less dovish than before but they too offered no further monetary stimulus measures. So where is all this copper demand supposed to come from in an environment in which interest rates are abysmally low and the yield curve not only here in the US but in many places globally is flattening further? Beats me.
If you notice that copper chart once again, you can see that the other Large Reportables are not going with the Hedge funds. They are selling alongside of the Commercials while the hedge funds buy.
Interesting also is the fact that the same category of large traders is also moving off the long side of the silver market as they too are meeting the hedge fund buying with selling of their own.
They are a mere 2200 contracts away from being net short this market. Odds favor them perhaps being neutral as of this Friday if their recent pattern of selling to the hedge funds holds intact.
Could it be with silver that the same sort of thinking that has gripped the hedge funds over copper is behind their blind buying of silver in a slow growth environment? Maybe they believe that all of this Central Bank activity must, has to be, successful in generating growth/inflation. I don’t know. What I do know is that we have been down this road for so long with no success whatsoever in getting anywhere near achieving an annual inflation rate of 2% in most developed nations around the world. These hedge funds have a great deal more faith in the ability of Central Banks to achieve that heretofore elusive goal than I do.
Obviously there is a growing contingent of large traders who are of the same view that I am – namely, that these prices for both metals are too high given the current state of economic malaise. Certainly the commercials who make their living mining this stuff believe prices are too high. One side or the other is going to be very, very wrong.
As I have written many times, for me to feel comfortable being long any sort of industrial metal, I want to see an economic backdrop in which the yield curve is steepening. That would signify economic growth is the sentiment in play and that industrial demand is on the rise.
Remember not that long ago when we had that divergence between Crude oil and Copper? The situation at that time was crude oil prices rising on expectations of increasing demand and decreasing supply but the rise in oil was being accompanied by falling copper prices. I noted at the time that copper was signaling the growth was not there.
Now we have the situation where Copper is moving higher while crude oil sinks lower.
Here we go again? Can these two barometric commodities ever again get in sync so we poor traders can get some sort of consistent read? Apparently not, it would seem.
Back to silver one last time…
We still have the metal stuck in a sideways trade noted by the shaded rectangular area. You can see both sides have dug in by both the price action and the COT charts. I am sitting this one out until we get something resolved. While speculators drive our markets, I don’t like any market that has become this imbalanced and is remaining that way for such a long period of time. It is a powderkeg looking for a reason to detonate. I do not want to be on the wrong side of that event but would prefer to have the luxury to come in after one side finally blinks.