The sharp drops in precious metals prices have seen a big reduction in commercial net short positions on COMEX for gold – and particularly for silver – showing where the smart money thinks precious metals prices are headed.
Author: Lawrence Williams
Posted: Monday , 03 Oct 2011
LONDON – Some encouragement for the beleaguered silver investor may come from the latest CFTC figures on COMEX commercial net short positions for the precious metal. The figures as at Tuesday 27th September showed silver net short positions plunged to the lowest level since November 2008 – the point where the silver price started its runup from a little over $10 to almost $50 achieved at end April this year. Silver has since fallen back, at one time to around $26 but is currently, at the time of writing, a little over $30.80 an ounce.
Gene Arensberg’s Got Gold report has published an extremely interesting graphic (See article: Stunning Plunge in COMEX Commercial Silver Net Short Positions) plotting the COMEX commercial net short positions against the silver price which is reproduced below:
Do read the Got Gold report as it contains a number of interesting factoids relating to the reduction in COMEX short positions for both gold and silver.
The graphic shows that each time these commercial shorts fell to the latest reported level, this has presaged a sharp rally in the silver price. Now given the latest CFTC figures are from Tuesday, it is possible that the short positions have fallen even further as precious metals were relatively weak beyond then and the fall in short positions was certainly in part stimulated by the low metal prices. The actual figure for the fall in commercial shorts for silver was a remarkably large 16,446 contracts showing a balance of 24,262 contracts net short – this is the lowest level since late November 2008 at the height of the Lehman inspired global financial collapse and about the time the silver price bottomed.
For whatever reason though, the sharp fall in short positions on COMEX does suggest that the smart money is far less confident that precious metals prices are tending lower and is probably betting on increases – and given the comparatively small size of the silver market the big banks, institutions and hedge funds combined have the power to make this happen as long as its suits them to do so. The inference is that the traders feel that the latest fall in the silver price has been overdone and are looking for an upwards correction – which could be substantial, although silver, with its industrial market aspects remains more vulnerable than gold to adverse perceptions of the global economy.
But, of course, it isn’t only silver which has seen a sharp fall in short positions. Gold has too, although the gold market is less easy to be manipulated given its overall size in dollar terms. Here the commercial net shorts are reported as having fallen nearly 27% since early September when the gold price peaked. Total net commercial shorts on the latest figures stood at 166,683 contracts which is the lowest level since early May 2009.
With Asian and European stock markets declining sharply again so far today, gold in particular is already picking up climbing back above the $1,650 level while silver is showing a more minor improvement this morning after its drift downwards on Friday. As noted above silver is caught between its true precious metal status and its industrial status and perhaps ominously the true industrial precious metals, platinum – and particularly palladium – are looking weaker so far today. Platinum looks like remaining at a discount to gold as long as economic uncertainty reigns. Unless some positive economic news breaks this overall pattern could well continue.
iPad Verson – Bars of 1000 gram silver are seen in this picture illustration at a precious metal refinery in Istanbul: Murad Sezer / Reuters
Stunning Plunge in COMEX Commercial Silver Net Short Positions
Friday, September 30, 2011
http://www.gotgoldreport.com/2011/09/stunning-plunge-in-comex-commercial-silver-net-short-positions.html
The CFTC just released its commitments of traders (COT) report at 15:30 ET for trader’s positions as of the close on Tuesday, September 27 and the data show a stunning drop in the large commercial net short positions in both gold and in silver futures.
For example, as silver fell $7.88 or 19.8% Tues/Tues, from $39.76 to $31.88, traders classed by the CFTC as “commercial” reduced their collective net short positioning (LCNS) by an extremely large 16,446 contracts to show 24,262 contracts net short. This, while the open interest fell by 10,089 to 102,014 open.
Just below is our graph for the commercial net short positioning for silver futures on the COMEX.
Source CFTC for COT, Cash Market for silver.
Not since November of 2008, during the heat of the 2008 Panic, has there been a smaller commercial net short position for silver futures. We can say that as of Tuesday, the largest, best funded and presumably the best informed commercial traders of silver futures had taken the price downdraft opportunity to very strongly reduce their short bets for the second most popular precious metal.
We will have more commentary on this unusually large reduction in commercial net short positioning, including a 30,945-contract reduction in the LCNS for gold futures, in the technical graph comments for Vultures, which we intend to complete by the usual time this weekend.
(Ed. Note added at 16:35 ET. The last time the combined commercial traders were this “small” on the short side of silver futures, November 25, 2008, the price of silver then was $10.33 the ounce. Therefore, with silver at $31.88 on Tuesday, having tested as low as $26.04 in panic liquidation selling the day before, we can say that commercial traders had about as much confidence in the price of silver going lower as they did at $10.33 silver three years ago.
Incidentally, for Vultures, the relative commercial net short positioning also plunged to a very low and usually bullish 23.8% of all COMEX contracts open – the lowest LCNS:TO since October of 2008. (Graph below.) This is a very bullish COT report for silver. Let’s see if the market “gets” that in the days and weeks ahead.)
***Further notes added at 18:31 ET: ***
Factoids about this unusually large reduction in commercial net short positioning for discussion purposes.
Silver LCNS
Minus 16,446 contracts net short is the largest 1-week drop in large commercial net short positioning (LCNS) since February 14, 2006 (-25,048 contracts then, with silver then $9.22).
24,264 contracts net short is the lowest LCNS since November 25, 2008 (LCNS was 23,682 then with $10.33 silver).
23.8% is the lowest relative commercial net short positioning since October 21, 2008 (23.2% then with $10.10 silver).
As silver fell a net 19.8% Tues/Tues the large commercial traders reduced their net short bets by 40.4%. To find a larger 1-week drop percentage wise we have to go all the way back to March 25, 2003 (-47.7% then with $4.39 silver).
The largest portion of the net short reduction was by the Producer/Merchants, the category which includes bullion banks. They covered or offset 11,213 down to 33,563 contracts net short – the lowest net short position for the Big Sellers since December 9, 2008 (32,878 contracts net short then with $9.83 silver).
Swap Dealers, the “other commercial” traders, increased their net long positioning for silver futures by 5,233 to 9,301 contracts net long. They more than doubled their net long position in other words.
102,014 is the lowest open interest for COMEX silver futures since August 25, 2009 (101,539 then with $14.28 silver).
Gold LCNS
Since September 6 (3 reporting weeks) gold has declined a net $224.95 or 12% (from $1,874.87 to $1,649.92 Tuesday) while the large commercial net short positioning (LCNS) fell by 61,031 contracts or 26.8%.
166,683 contracts net short is the lowest LCNS since May 5, 2009 (160,445 then with $896.75 gold).
465,414 is the lowest COMEX open interest for gold since February 1, 2011 (462,907 then with $1,341.10 gold).
Since August 2, (gold $1,659.23), gold drove up to test the $1,920s and round tripped back to about $1,650 for this COT report. As it did the large commercial traders got the heck out of 42% of their net short positioning (from 287,634 to 166,683 contracts net short). So, in effect, since August 2 gold has dropped a net $9.31 or 0.6% but the large commercial net short positioning plunged a net 120,951 contracts or 42%. – Gold is very close to where it was August 2, but the commercials are hugely less net short, 12.1 million ounces less net short at virtually the same price today.
Producer/Merchant’s reduced their net short positioning by 19,531 or 10.7% for the week.
Swap Dealers were down to just 4,270 contracts net short gold, having covered or offset 11,414 contracts for the week. Swap Dealers have reduced their collective net short gold positioning by a stunning 87,424 contracts or 95% just since August 2.
465,414 is the lowest open interest for gold since February 1 (462,907 then with $1,341.10 gold).
That is all for now, but there is more to come.
(Edited Sunday, Oct 2, at 13:25 to improve the visibility of the graphs by request.)