-- Posted 22 July, 2005 | |

Something most remarkable appears to be developing in the silver market.

The funds are continuing to move over onto the short side having now built up the largest short position they have carried since APRIL 2003!  What is particularly interesting is that the funds are still net long but the total number of shorts they are now carrying is almost the same as their net long position. For some reason or the other, there are a goodly number of these guys who are quite bearish on silver even at these absurdly low levels.

The commercials on the other hand are now at the smallest net short position they have carried since JULY 2003 – that is more than 2 years! However, I what I find even more astounding is the commercial long category. These tend to normally be the end users of silver – they are now carrying the LARGEST NUMBER OF LONG POSITIONS THAT THEY HAVE CARRIED GOING ALL THE WAY BACK TO THE BEGINNING OF 2001. I stopped looking after that point as that was far enough for me. There has been heavy and substantial new buying by this category of traders when silver dipped briefly below the 7.00 mark. What that would indicate to me is that this group sees silver as having value anywhere below $7.00. That is something that should not be lost on the rest of us.

Here is another thing – the ratio of Commercial Longs to Total Open Interest is also at the highest level it has been at since APRIL 2003. I might point out that at that time, silver was trading between 440-460 or so before it shot up another 100 points in a few months time. It then went on to embark upon a 300 point further gain over the next year before peaking near 850 in April 2004, exactly one year later.

Normally I take this sort of thing with a grain of salt but the fact that we are setting new peaks in these category positions that are multi-year peaks is very significant. The funds can be safely ignored in the silver pit – as a matter of fact, one can make quite a good living fading those nitwits. They are nothing but ATM machines for the sharper traders of silver as they inevitably end up selling bottoms and buying tops. In other markets they are a force to be respected but when it comes to silver and for that matter, gold, I have nothing but disdain for the managers of those funds who continue to let their black boxes tell them what to do with their clients’ money instead of thinking and using their brains for a change.

The spreaders also increased their positions by a substantial amount – that give quite a kick to the open interest as well. Could it be some of those guys are sensing some tightness going forward and want to position themselves accordingly? I do not know but this category of traders tends to be one of the most knowledgeable of any group in the market.

Since Tuesday’s report we have had about a 3,000 contract reduction which my instincts tell me are the hapless funds being squeezed out of their newly established shorts below $7.00. While silver failed to follow through to the upside today, it does look like it has found some very good support between 688-690 and could be laying a solid base for a move higher. It has temporarily stalled after encountering selling near the 720 level which appears to be the upper boundary of the 2 week long trading range it has carved out. We will see whether the month of August can see it shake out of the shackles placed on it right there.

The point in all this is that a sea change is taking place in the silver market right before our very eyes. Something seems to be afoot. We will need some more time to observe this to see how and where this goes from here. If however the pattern that appeared back in 2003 repeats itself, we could very well see silver near $10.00/ounce next year at this time.

Dan Norcini

July 22, 2005

Dan is a professional, off-the-floor commodity trader residing in Texas and can be reached at dnorcini@earthlink with comments.