Silver Commitments of Traders : An Historic Imbalance

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.

silver cot

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.

Chart_16-07-29_21-33-29

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:

silver hedge funds

Here is the same data, using only their long positions, in a percentage of total open interest format.

silver hedge percent

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.

Chart_16-07-29_21-43-16

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?

copper cotChart_16-07-29_21-51-38

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.

copper cot

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.

silver cot

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…

Chart_16-07-29_22-11-27

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.

17 thoughts on “Silver Commitments of Traders : An Historic Imbalance

  1. Dan
    The one lone gold stock that did not disappoint in the last five years did not make new highs with the ^hui breakout. Perhaps just resting?? I just have to wonder when the hui gives us a correction.

    • bokkie – that is very interesting.. I am glad you brought this to our attention. Please keep us posted…ABX is also interesting along that same line. NEM definitely broke out. GG is a laggard. RGLD very,.very impressive.

      Looks like a bit of a mixed bag in the sector making one having to be a good individual stock picker.

  2. Dan,
    It wasn’t long ago this same kind of situation took place in the oil COT, and oil went from under $30 to almost $50. Yes it has corrected to $40, but that is because the demand has not kept up with the increase in supply. My sense is that silver is breaking out because its ratio to gold is out of whack and is in the process of catching up. There may still be a correction in silver, but I doubt if it will have much strength. Take a look at Hecla’s figures on Tuesday. My sense is that they will show a BIG improvement, and this will give silver another reason to keep on moving up.
    By the way, platinum is moving up more than gold on a percentage basis. Platinum mining shares are also moving.
    Jim

    • Jim – If you get a chance, see some of my responses to the various posters below. I am not the best typist!

      Keep us posted as to how Hecla does if you would…

      I agree with you on platinum moving., I am at a loss to come up with a fundamental reason for the industrial metals moving higher in the face of a flattening yield curve and falling interest rates. Gold – absolutely! I can definitely understand that in such in environment as there is no opportunity cost to hold the precious metal but silver, copper and platinum are all industrial metals ( platinum and silver are quasi precious metals) which most of the time tend to reflect the state of economic growth/inflation, etc.

      Right now no Central Bank from the West is anywhere near achieving their goal of 2% inflation. Nor does it look as if we are going to be getting any of that anytime soon. That is why I am at a loss to understand the copper market or the platinum market for that matter.

      Traders have to go with the flow and trade the charts in front of them but I also trade only those things I can understand and right now I do not understand industrial metals moving higher.

      If the yield curve would flip and interest rates start moving higher then I would be very comfortable with higher industrial metal prices. Perhaps the metals are leading the yield curve instead of the other way around? I do not know – I only know that it makes no sense to me to see copper prices and platinum prices moving higher in this environment.

      I am an old-fashioned fundamentalist and therefore want to be able to wrap my head around the “why” behind a move. That comes from many long years of trading the most fundamentally based markets in the world, the ag markets. Those are the purest markets in my view.

      These other ones are too wacky at times.

      • Dan, Have been away for a couple of days and just got back. From a technical view point, you are absolutely right as far as industrial use is concerned. BUY, it is my sense that the precious metals are moving to a different drummer. There are immense investors and especially corporations that cannot purchase stocks under $5. If you watch total sales per day on the silver mining shares they are selling over millions of shares. There are only about 35 silver miners in the world and some 50,000 gold miners. There are even fewer platinum miners, in fact only about 10 of them.
        The world is concerned about interest rates. Negative rates are going to be a disaster, and they are just beginning. In my opinion, the 3 precious metals are going to be the recipient of a great deal of new money. The same thing happened back in the late 1970s and early 1980s when the precious metals exploded upward. The cause then was inflation. This time it will be interest rates. Sure there will be volatility, there always is, but my sense is that we have just begun a 3-5 year upsurge never before seen, and we have only seen the first inning.
        By the way, back in the 70s and 80s the mining shares were making so much money they were paying out dividends of 10 per cent or more. Look at the figures from ABX the largest gold miner in the world. They just showed net cash flow of $250,000 mil. They will have over $1 bil to pay off debt by the end of the year.
        I am anxious to see Hecla’s figures in a couple of days at an average price of silver at about $14. Imagine what it will be at $20 where it is now for the 3rd quarter.
        This is a long answer, but I hope you start buying some mining shares NOW.
        Jim

  3. love it … “a powder keg looking for a reason to detonate” great explanation. Gold failed to close above 1362 on a monthly basis, while not terribly bearish its one in favor of the bears, the time window is closing. 1306 must hold. If silver loses 19.30-.20 given the current set up, its going to be a bloodbath. Lets see how serious are HFs about defending their position.

    • beegle – good observations.. I have a “show me” attitude when it comes to the precious metals at this time…I want to see some sort of resolution to the current sideways price action. If they break out to the upside, so be it. That will be the start of a new leg higher but if they fail to the downside, the bulls need to be objective enough not to stand in front of all that potential hedge fund long liquidation.
      Your support prices are right on target. Those will be key levels on the downside.

      Gold actually corrected some of its internal imbalance this past week as we got some hedge fund liquidation off the long side.. it is silver that seems to be in some sort of enormous test of wills.

  4. Dan, your tons in GLD model works. The COT analysis you put out is brilliant, but like you point out with copper and oil, do the old correlations still hold? The shares’ enthusiasm, the recent low on Tuesday followed by a steady advance, a lot of ‘other’ indicators are contradicting. Funny however that for a ‘hot’ growth item (50% price rise, ten bagger CDE shares since January), SLV call options in the money seem cheap. Perhaps there are a lot of sellers of such calls. If one believes silver price will rise but cannot stomach the futures’ volatility, 2017 or even Jan 2018 SLV calls may be the way to go. Of course, SLV itself is not a secure financial holding, many think.

    • Neuman – You would know the SLV a lot better than I do since I work with the futures markets but that might indeed be a better way for some to handle the volatility.

      You are right on those mining shares as well… they have been very choppy but the strong showing in the HUI to end this week needs to be respected.

      I am trying to figure out all of the past models that have been so accurate in the past to see why there are such contradictions between them and the industrial metals right now.

      Over the years, the yield curve has always been incredibly reliable and accurate since the bond guys are the best and brightest on the planet but right now, the flattening yield curve seems lost of the hedge fund buyers of copper and silver and I really do not understand why.

      The “silver is manipulated lower” crowd will tell us that silver is merely trying to break free of its prison and move to what should be its normal price were not the “manipulaters” forcing it lower but that does not explain what is also taking place in copper.

      Do they know suggest that copper has been manipulated lower as well as silver?

      My point in the article is that I do not understand the rapid shift of the hedge funds from being big copper shorts to big copper longs in 6 weeks when the yield curve is flattening and interest rates are falling further. That has never made sense in the copper market.

    • shortstack.

      See my response to Neuman just above…just keep a trailing stop in those longs and ride it as long as it wants to move higher.

      I have learned never to fight with a market that I do not understand but to respect the fact that there is so much hot money flooding into it.

      My big concern with this is that I see the moves in both copper and silver, and for that matter, platinum, as counterintuitive based on the flattening yield curve.

      Maybe even the accurate yield curve has now been rendered useless by the Central Bank idiocy that we are living through. I don’t know but it has always been very reliable.

      Welcome to our brave new world where nothing matters any more.

      I suppose this is the price we pay for having computer models replace humans at the trade desks.

      • dan,

        not to worry.. i have a trail in place and may take partial off or entire off before major cb announcments even if trail not hit (i actually plan to sell into strength should things continue higher even before trail is hit). .

  5. Dan, could the answer be in the reporting? Say that those who report the figures have ‘tweaked’ the categories so the hedge fund category now includes some deeper, less skittish pockets, who have different strategies and timelines? This is pure speculation (pun intended) on my part.

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