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Swap Dealers Flat for Silver, Not Overbought

By: Gene Arensberg

-- Posted 13 September, 2010 | | Discuss This Article - Comments:

ATLANTA - Well, okay it’s Sunday and we are supposed to be taking the day off today.  But what better thing to do on a day off than to pour over COT data, charts and ratios?  While we are at it, why not share a few of our observations with our best friends and the people who make this service possible? 

Below are a few random observations that have emerged from our review of the data pile this weekend.

First up, what is the chart just below and why do we find it interesting?   It is a chart showing the net positioning in silver futures of the more mercenary of the traders the CFTC classes as “commercial” – Swap Dealers.  What this particular chart shows is that with silver literally at resistance (silver was $19.79 on COT reporting Tuesday) COMEX Swap Dealers were essentially flat the metal.

To be precise, the Swap Dealers reported being net short silver 194 contracts which is close to nothing.   In recent memory, we can point to at least two separate occasions where the SDs stepped in to cap silver either at critical near breakouts or just ahead of a big sell-down, the most recent of which was in the May 18 COT report where they added over 5,000 contracts on the short side with silver then nudging $19.00.  (The other came in July of 2008 during the July Massacre.)

Contrast the flat positioning by the SDs with the commercials the CFTC classes as Producer/Merchants… just below.  This is the category which we think includes the largest bullion banks.  This week’s COT report shows that the PM commercials added 3,323 contracts to show 61,604 contracts net short silver.  As we might expect with silver literally at its technical resistance, the PM commercials are near record net short.   As of this latest report the PMs are essentially all of the commercial net short positioning on the COMEX for silver. 

To quantify the PM commercial positioning, the highest nominal net short positioning for the PMs in our records came on February 26, 2008 at 64,216 contracts net short as silver was marching higher through $18.76 then (about 2,600 contracts more than now), but the open interest then was much higher – at 173,340 contracts (versus 139,522 now). 

Can the Big Sellers of silver manhandle the silver market lower if the Swap Dealers are not on the sell side?  In a word, yes, it has definitely happened in the past.  But unless and until the Swap Dealers join in on the sell side of silver we think there is a higher likelihood of a material breakout for the second most popular precious metal.

Can silver rally or break out despite heavy selling opposition by the PM commercials?  Yep, it surely can and it certainly has in the recent past.  One good look at the PM graph above will show that when the PMs take a heavy short stand (the blue line low on the graph) they are usually “right” and silver usually retreats shortly afterward.  But when they are “wrong” they can be spectacularly wrong in monumental percentages!  (Note the action in 2007 as the most glaring example.  And just for fun see if you can see a contrast in that example between the PMs and the SDs.  Hint:  That is partly why we call the Swap Dealers the more mercenary of the commercial traders.)

What we are reviewing today is yet another reason why we veteran traders use trading stops instead of trying to guess the very short term movement of the markets to within a few dimes in price or a few hours or even minutes in direction.  That’s a game for others that use black boxes and real time quantitative analytics.  We cannot know when, or even IF the mercenaries in the COMEX pits will decide to throw in with the short side, or maybe even the opposite.  We can only see their “tracks” well after they have taken the steps to make them. 

Having said that, we think it pays to keep up with what the largest of the largest traders in precious metals are reporting to the CFTC.  If for nothing else because it adds to our own impression of the market and our own intuitive analytics.  When we mice can see what the elephants are doing on the battlefield, we can better decide the right log to hide under! 

Moving on, when we said in the interview with Eric King of King World News on Friday that the small miners have been strongly outperforming the larger miners, this is the chart we had in mind.


A link to that interview is in the post just under this one on the Main page of the web log.  As anyone can see, we are not kidding that the smaller miners represented here by the Market Vectors Junior Gold Miners index or GDXJ are strongly outperforming their larger cousins that reside in the AMEX Gold Bugs index or HUI

In general we have to view outperformance by the smaller miners as a much more bullish than bearish signal short term, but we would all gain a great deal more confidence if the big miners would also get enough of a bid to defeat its long-term resistance.

Finally, for today’s brief look at some of the charts, we thought this next chart was worthy of our mentioning it.   The chart is self-explanatory, but we won’t bother to post links to the recent stories saying that silver is “overbought.”   We will just point to the chart below and ask, “By what measure?” 

That is all for today, from Atlanta.  Thanks for spending time with us here at GGR and a very special thanks to all of you who have signed up for the full Got Gold Reports.  Subscribers make this service possible. 

Good luck, good trading and as always, MIND YOUR STOPS.

Gene Arensberg
-- Posted 13 September, 2010 | | Discuss This Article - Comments:

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