-- Posted 9 April, 2006 | |

It’s over 6 months since I wrote my last public article on silver and we are up more than $4 since then. Many things have changed in the silver market the past few months, but one remains more or less the same: the rather large COMEX commercial short position. Will this move in silver break the commercials backs and force them to liquidate a more significant part of the paper losses that run in the hundreds of millions? Will we see a massive commercial short covering rally? Or will the commercials be able to trigger yet another sell off in silver and cover their shorts at (much) lower levels? 

Let’s take a look some of the major changes in the markets the past few months. We will start with the silver ETF. The Silver ETF could be a few days or weeks from approval. If somebody would have asked me only 3 months ago about where the Silver ETF will stand in early April I would not have believed that we would have SEC approval. I’ll believe the ETF will trade when I’ll see it trade. I would not be surprised if some obstacles would still turn up at this point. Yet, rationally thinking, I guess I believe we will see a Silver ETF listed on the AMEX in a matter of weeks. The implications of the ETF will be significant.

Another significant change is the amount of attention silver has gotten from the mainstream media. Even though much of the coverage in silver is what you can expect from the mainstream, I would still say that almost all publicity is good for silver. Silver hasn’t been on the radar screen of many investors the past 20 years. If the media manages to attract any new interest to silver I believe the fundamentals will eventually speak for themselves. That is, if some new money manager takes the time to analyze silver for a few hours or a full day the structural production deficit, limited influence of traditional photography, depleting inventories, increased industrial demand in both known and new application and in general a very tight market, will speak for themselves. As a result we will get new investment demand for silver. With the amount of liquidity seeking good investment opportunities in today’s global economy the tiny silver market does not need to attract much new investor attention for it to have significant implications on the price.

At the same time the dollar rally has lost its momentum and the dollar has been moving more or less sideways for the past few months. If the dollar resumes it long term downtrend in the coming weeks and months this will aid gold and silver on their way to higher levels.

With these positive developments for silver investors (not to mention the $4 rise in price) one thing that has not changed too much the past few months is the big commercial net short position in COMEX silver. The commercial side has basically stayed with their shorts they accumulated at prices below $8/oz the previous fall. Silver has moved up $4 after that. On thing is for sure: these past 6 months did not unfold as the Commercials hoped. The question is will they be able to get out of their currently huge paper losses by yet again triggering a massive fund sell off or not? Will it be different this time?

Previously similar COT structures have resulted in sharp sell offs but I’m not so sure it will happen this time and even if it does, I’m not sure it will happen in the immediate future. That being said, I’m not very surprised even if it would happen.

It is however worth to notice that even though there has not been any significant liquidation of the huge commercial short position some capitulation seems to be taking place on the commercial side. The commercial shorts have gone down a bit more than 10000 contracts from 117726 in late November to 107566 now in early April. At the same time silver has gone up from $8 to $12/oz.

The commercials have certainly tried to trigger a sell off at least 15-20 times the past few months without too much success. I’ve watched the market go down 15-20 cents during European market hours only to see it rebound strongly later on and often end up higher. This kind of strong rebound with significant buying coming in during a sell off didn’t much happen in silver before last fall. Clearly there is much stronger buyers in the Silver market than the commercials are used to. The question is how strong hands are these new buyers? Are they in for a quick profit in the anticipation of the silver ETF or are they believers in $20+ silver in the quite short term and intend to roll over their longs no matter what? The answer is, I don’t know. I guess there are new buyers of all sorts, both short term speculators but also new longs who are in for the long term for fundamental reasons.

I’m not a believer in commercial supremacy in general, but anybody who has been following silver COT for the past several year must admit that the commercials have done quite well in silver (until maybe these past few months). The reason I follow the COT structure in Silver quite closely is that as Ted Butler pointed out in his recent article, I also see the big commercial short position as “the only negative” for silver.

I want to emphasize that I am and remain strongly invested in Silver and intend to for many years to come. I’ve liquidated a part of our futures positions last week at $11.42 and $11.89 knowing that I might “regret” this the following week. The liquidation represents only about 5% of our portfolio so there has not been any significant profit taking on our part. In our share portfolio we’ve done some restructuring but essentially invested the money back to the silver market one way or the other. (E.g. we have bought more physical silver and taken delivery with some of the phenomenal profits we have made in some silver juniors lately.)

The last thing I would like to see is a silver investor selling any of his/her silver or silver shares after taking a look at the COT structure and not considering how the market is different now from what it has been. A large commercial short position does not mean a sell off is imminent.

I do believe the market must take a breather at some point before the years end but I’m not sure it will be now (for cyclical or whatever reasons) and my price target for silver by years end is well above $15 so why be too concerned about the short term? I simply intend to emphasize buys with the small cash position we hold and if no great buy opportunities materialize, I’ll just enjoy the ride.

Even with this big commercial short position in silver, I have my money on the long side. One way or another, I think we have big moves ahead in the silver price. The commercials are definitely being squeezed and we might not see a big sell off but rather a quite explosive move to the upside if we see the ETF trading and the commercials covering their shorts more seriously to rising prices.

Carl Löfberg

Tampere, Finland