It looks like we are getting close to a low risk buy point in silver. The latest COMEX Commitment of Traders data related to the short position of the Commercial Traders (commercials) shows that the commercials have closed out a large portion of their short position. This is the first time, however, that they have had to close out at a loss. The price of silver did not correct to the low levels at which they originally went short. I first published the graph below in January and I’ve been updating it weekly to see when it gives us the next indicator to buy. In the past, whenever the commercials’ Sum of of $ Short reached zero or close to it, it coincided perfectly with a great time to buy more silver at a low price. This time, the shorts have covered their positions at higher prices and the spot silver price has rebounded to test its recent high of near $14.50.
-- Posted 9 May, 2006 | |
Ted Butler published an article last Tuesday and mentioned that he thought we had bottomed out around $12. He very well may have timed it perfectly. Without the large commercial short position overhanging the market, the only thing that can push the silver price down is if investors get frightened and decide to sell. We’ve had a great run up in the price of gold, silver, copper and other commodities lately. Some seasoned commodities traders are expecting a large sell off in the copper market that could also take the wind out of the sails of gold and silver. While I am very bullish on silver and gold in the long term, if you look at the chart of gold, it looks a lot like silver did before it sold off two weeks ago.
Gold is reaching overbought territory again, having hit $700 in the aftermarket today and showing a relative strength indicator of 76.93. Since March 27, the 10 day moving average (MA) of gold has provided excellent support. If gold closes below its 10 day MA during its next pullback, then I expect to see further price declines. A little cooling off in the gold market is in order after its spectacular advance, and this will likely put pressure on the silver market in the short term.
Silver ETF and Warren Buffet
Another thing that needs discussion is the Barclays silver ETF and the sale of Berkshire Hathaway’s silver. It was the contention of the Silver Users Association (SUA) that the silver ETF should not be approved because they would have to buy so much silver (130 million ounces) on the open market that it would cause a large spike in the silver price and negative effects on the industrial users of silver. The SEC disagreed with the SUA and approved the ETF to start trading April 28. Common sense tells us that the fund would not have been approved if the SEC believed that Barclays would disrupt the silver market buy purchasing so much silver in a short period of time. I read many bullish articles in the past few months that talked about how much silver would be taken off the market due to purchases by the new fund. However, the fund has already amassed 48 million ounces as of yesterday. How and where did they get that metal so fast? Well, they had to have arranged the metal to back the fund before the SEC approved the launch of the ETF. Besides the COMEX, Warren Buffet’s Berkshire Hathaway company held the largest known silver inventory in the world, around 130 million ounces.
On Saturday, Buffet announced at the shareholders meeting that they didn’t have the silver anymore. The silver was known to be stored in Europe and it makes sense that Buffet’s silver must be what is backing the ETF, which stores its silver in London. I have no inside knowledge of how Barclays assumed control of this silver, but it’s the only explanation that makes sense to me. Barclays needed 130 million ounces of silver, which is the same quantity that Buffet owned, and they gained control of that physical silver, which allowed the SEC to approve the launch of ETF.
Ultimately, I think this is very bullish for silver, because the silver owned by the ETF will not easily come back on the market. Buffet could have decided to sell the silver at any time in the future, which would have seriously depressed the silver market. However, the ETF should have to move slower to sell any metal that it controls. I have not read their prospectus so I don’t know the exact legal steps that they would need to take to sell the metal. However, as a publicly traded fund it would seem that that silver is unlikely to be available for industrial use as easily as if Buffet held it.
In the short term, I wonder how the speculators that just recently got into silver will take the news that the ETF will not deplete existing silver inventories. The hype about the ETF, which lead to the quick increase in silver price this year, was that the ETF would have to buy a lot of silver on the open market. Now it appears that the ETF is unlikely to buy any silver, as they already have all the silver available needed to back the fund. In addition to a correction in the copper and gold markets, this too could dampen enthusiasm for silver in the next several months.
Going forward I think it will be much harder to trade the silver market profitably, and it will take a lot of experience to trade it correctly. In the past, the commercial short position provided a reliable indicator of the future direction of the silver price. As I wrote in January, there was an 80% correlation between the commercials’ gross short position and the silver price. So far this year the correlation is a negative 75%. The commercials have been no help at all to predict the future silver price. It remains to be seen whether they will short silver aggressively again or not. For now we need to look at other indicators to determine how to trade silver.
I do think there is still some downside potential for silver, given gold’s rapid price increase and the new information that the silver ETF should not need to buy more silver on the open market. I strongly advocate having a physical position of silver paid for in full, without leverage, and stored in a secure location. If you have not established that position yet, then I do not recommend trying to time the market to get in at the best price. We are likely to see a lot of volatility up and down in the next few months. Dollar cost averaging your purchases over the next few months is probably a good strategy. I would suggest that you invest an equal portion of your funds each week until you have established a solid core position of physical silver.
If you are inclined to trade a portion of your funds, then here’s what I am watching right now. As I mentioned earlier, I’m looking for a correction in gold near the 10 day MA of $666. If it breaks below that, then further downside is likely. Gold has been leading silver up this past month, so it may lead down on the correction too. If silver can close above $14.50 for three trading days in a row, then it is likely that we will see further increase in the silver price. If it starts to correct, then $11.70 is the support level that should be watched closely. If silver finds support there, then it is probably a good time to go long again with your trading position. If the $11.70 support fails, then it will have broken its 50 day MA at $11.80 as well, and it would then probably correct further and consolidate above the 200 day MA at $9.00. I really doubt that we will reach these low levels again, but I would love the opportunity to load up on cheap silver on more time!
Timothy Silvers is an independent analyst who has been following the silver market since the late 1990’s. Yes, Silvers is his real last name, so it only makes sense that he follows the silver market. If you are interested in more of his analysis, please visit his website at www.silverbrothers.com
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.
-- Posted 9 May, 2006 | |