Silver COT update

The strong payrolls number on Friday of this past week sent silver reeling lower as the metal, which has been trading as a safe haven of late and not a risk trade ( it is constantly morphing back and forth between the two), took its cues from gold and of course, the surging US Dollar.

Note on the daily chart that the sharp drop in price took the metal down through BOTH the 10 day moving average and the 20 day moving average. Prior to Friday, silver had not CLOSED below the 20 day since very early in June.

Chart_16-08-06_15-34-23

I noted in my earlier post about the Utility stocks sector that when comparing it to gold, both were moving in near perfect lockstep to the point that both had posted secondary and lower tops. Notice that the price pattern in silver is very similar. You can see that there are more divergences between silver and the Utilities; nonetheless, the patterns track closely.

Chart_16-08-06_16-06-29

See how closely these two classes are tracking since the beginning of June.

That tells me that silver has been acting more as a safe haven metal the last two months and not in its more usual industrial metal role as far as speculators go.

Back to the silver chart.

Chart_16-08-06_15-34-23

If you look closely, you can see that on Tuesday of this past week, silver actually notched its best CLOSING price for this entire rally. That however, was the high point for the metal. It was also the cutoff date for the data to compile this week’s COT data.

Here is an updated chart of the current status of the COT.

silver cdot

Two things stand out in this week’s data. First is the fact that there was both some light long liquidation from the hedge funds as well as fresh shorting by that same group. It was however miniscule by comparison to that massive net long position of theirs.

silver hedge funds

Secondly is the important fact that both the Swap Dealers and the Commercials actually increased their net short positions. The Swap Dealers set yet another new record high net short position.

Look at the two groups combined….

silver comm

Once again another week has come and gone and I have add to increase the Y-axis scale to allow for the yet even larger build in their combined short positions.

The question now before us is whether or not we had much in the way of fresh short selling during Friday’s plunge lower in the metal or if it was entirely due to long liquidation on the part of these hedge funds.

Chart_16-08-06_15-34-23

I remain of the view that we will not see large scale long liquidation from the hedge funds commence unless silver falls below the support zone noted on this chart. That zone extends from near $19.50-$19.30. If the metal breaches this level, something it has not done in over a month, then the potential for a sharper selloff rises considerably. Such a selloff would probably not stop until price reached closer to the 50 day moving average down near $18.60.

Also, should the support zone be breached, it would confirm a short term top on the chart.

On the weekly chart, the metal remains in a sideways pattern. The bias however is friendly as the DMI lines clearly show.

Chart_16-08-06_16-29-50

I would feel a whole lot more comfortable being on the long side of silver if some of this lopsided long position by the hedge funds was wrung out. There are simply too many of them in there for my taste, especially in a market that is losing upside momentum. Every single one of those hedge fund positions is based on momentum; if it falters, they are going to come out. That is why I am uncomfortable about silver at this juncture.

Maybe we get the scenario where the funds do liquidate but there is sufficient short covering by the Commercials and Swap Dealers to absorb a great deal of that selling and that keeps the price from falling too much further. That is a very real possibility. The worst case scenario is that the buying tied to Swap Dealer and Commercial short covering is insufficient to absorb all of the selling from hedge funds that want out and the price falls more sharply than it would under the first scenario.

Of course all of this would be rendered moot if the bulls were somehow able to completely reverse Friday’s losses and take price up through $20.80.

We’ll see what happens this coming week. As goofy as silver is ( they do not call it the plaything of the funds for no reason), it could decide it wants to become an industrial metal and then move higher on ideas of improving growth prospects and the potential for inflationary pressures building in the economy. That is why it is best to leave off predictions like some never learn to cease doing for some reason. None of us know how all of this Central Bank created madness is eventually going to play out.

10 thoughts on “Silver COT update

  1. Thanks Dan. I do have a hard time believing the 20.80 is going to get taken out in my opinion rally loosing momentum. They may give it a last try though. We will see what happens next week, lots already discounted in the price.

    • beegle – it is definitely losing upside momentum but whenever the Dollar weakens, gold gets a bid and that props up silver. Hard to see it falling below that key support level down near 19.30 until either the Dollar moves higher or gold breaks lower. So far it is stuck in a range.

  2. Dan,
    Regarding the jobsreport: the most important is the increase of the hourly wage. This is measured against the same month last year. It increased 0,3%. Theoretically the inflation can never go higher. But it did, as it was 1% year on year. That means that the buying power decreased with in average 0,7%.
    Then the jobnumber itself. It were specially jobs in the government, followed by health care. Two sectors that are “costing” money for an economy. So it are the taxpayers who have to take these jobs on their shoulders.
    My appraisal is that the markets reacted too optimistic.

    • piet – thanks for that analysis; the problem we have with the markets these days is that everyone looks only at the headline number and then the computers react off of that. Pretty hard to trade off of data that the computers are not interested in examining… sort of fits with the shallowness of our generation anyway!

  3. Dan,
    You are right on. Who knows what this week will bring us. However, 2 things. As of this moment (6:30 AM,) silver is down a whole penny. The rest of the world is not knocking it. Secondly, one of my newsletters just listed 5 silver miners (SLW, AG, HL, FSM, and GPL), and with their following you should see some major buying on them, and that could affect the entire day. Should be interesting.
    Jim

  4. Dan- what is your take on lean hogs? Looks like the bottom you posted about Friday may be a little more likely after todays positive action. Also are the feeder cattle looking a little heavy to you here? They touched up against resistance today. Maybe cattle will start to weaken as labor day approaches but one never knows with these cheap corn prices.

    • trinity;

      hogs still probing for a bottom but the fundamentals remain iffy. those buying them here are bottom picking on account of the steep discount to the current cash prices but the hog numbers continue to swell. maybe prices have fallen low enough to bring in some export business. still nothing conclusive in there yet.
      feeders keep moving higher on account of the cheap corn. grass conditions are good and so guys are chasing replacement calves. I still donot have a clear read of these things yet.

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