-- Posted 5 May, 2006 | |
It's been 4 weeks since I wrote my last article Big moves ahead in silver. Silver was trading then around $12. After that we have seen a climb up to almost $15, a plunge of more than $3 in less than 24hrs and a recovery up to levels above $14. These have been quite big moves IMO, but we are bound to see much bigger.
The good news is that based on this weeks COT data the moves are likely to be to the upside. All the long term fundamentals favor silver. The launch of the Silver ETF with good trading volume has put the commercials with their backs against the wall and now we can see their capitulation in the COT numbers. We have very interesting times ahead of us. This kind of commercial short covering to higher silver prices has never happened before.
The COT data last week already indicated some capitulation was happening on the Commercials side. Ted Butler has once more done an excellent job commenting on these developments the past few weeks. (Read Mr. Butlers article A Long Time Coming, April 25, 2006). Before going more into detail about this weeks COT data I would like to take once more the opportunity to thank Mr. Butler for the wonderful work he has done to spread the word about silver the past several years. I got interested in the silver market in 2002 after a friend referred Butler's writings to me. After that I have never missed a single one of his excellent commentaries. Whenever someone new to silver asks me about the silver fundamentals I ask them to spend half a day reading Butlers archives. What we now see happening in silver Mr. Butler has told us a long time ago, over and over again. Personally I'm on board the silver train thanks to Mr. Butler and for that he has my warmest thanks!
Now, let's take a look at this week's numbers which further confirms what Mr. Butler already read in last weeks numbers.
The Commercials have covered over 7400 of their shorts dropping net shorts to roughly 55000 contracts. Commercial shorts stand at 87950 contracts. This is a level last seen in September 2005 when silver was trading in the $7 range.
If you look how the fund tops (green line) have correlated with silver tops until the end of last year, you can see a remarkably clear correlation. The correlation started to fall apart in the last quarter of 2005.
What we are now seeing is almost a commercial short low with a silver price spike. This is unheard of and IMO bodes very well for the future silver price.
The low risk entry point Mr. Butler so often has referred to in his discussion of the COT data is even more apparent when you take a look at the COT data for the past 5 years and look at the trend lines for fund long lows and commercial short lows (green and red lines respectively).
The correlation between the fund lows and the silver price lows until the past 8 months is very clear. Based on COT data from a historic point of view it looks like we are rather at a price low in silver than an unsustainable spike.
I think Silver could still consolidate for a while in the $12-15 range before breaking up. The recent anticipation of the Silver ETF had been building into the price of silver but the new demand from the SLV is already squeezing the market. The COT data further confirms my suspicion that we will not see any significant correction in silver but rather a short consolidation period in the $12-15 range before heading towards significantly higher prices. Or then we might not have too much of a consolidation at all and just keep on heading stubbornly higher and leaving everybody out of the market who are desperately waiting for a significant correction in price before entering the market fully. I am prepared for volatility in the silver market in the coming years and in the immediate future but I am and will remain heavily invested in silver for years to come. The real silver bull begins now. Be prepared for the ride of your life!
May 6th 2006
-- Posted 5 May, 2006 | |