-- Posted 5 September, 2011 | | Discuss This Article - Comments:

The COMEX reported a massive change in silver stockpiles, an indication that at least some traders are hedging their bets to take cash off the table.  On August 19, 2011, the exchange reported a serious change in total silver available, noting that silver supplies reached a high not seen since December 2010.

Silver available to trade surged to 106.5 million ounces on August 19th, and as of August 26^th, very little silver is leaving the market.  On the 16^th, the COMEX reported a slight decline from the August 19^th high to 105.3 million ounces, a change of just over 1.15%.

Forecasting from COMEX Data

All goods and services ultimately derive their value from the available supply and level of demand.  This is also true in the financial markets, even if the change in supply and demand doesn’t necessarily make sense intra-day.

Silver investors should focus on the reported silver stockpiles to gauge the propensity for silver to move higher or lower.  After silver stockpiles reported by COMEX surged past 106 million ounces, the price of silver declined some 8%. 

The fundamentals of the silver market become incredibly important toward the latter end of the month, when old contracts for options are exchanged for the new.  Rising supplies indicates that options are being left to expire without claim, and more importantly, the right to ownership of the metal through the CME is exchanged for cash. 

Ahead of options expiration, a point at which speculative capital flees the market for non-speculative industrial interest to take hold, the price of silver declines with regularity.  This trend becomes more pronounced as retail investors buy and sell silver through over-the-counter spot instruments like SLV or even PSLV.  Exchange-traded funds may not be expressly tied to the futures market; however, institutional arbitrage transactions to eliminate price discrepancies between markets and provide risk-free returns for investors do cause a soft tie between both markets.

Confirming with the COT

The Commitment of Traders report can serve as a confirmation of emerging trends. For the August 19^th week where silver stocks increased at the COT, institutional speculators reduced their open short interest considerably.  However, the industrial users of silver came into the market to snap up inexpensive silver from weak speculative hands, confirming that the end of the month trade for silver is in play. 

Investors would be wise to accumulate silver at points which offer the lowest price per ounce.  One might say such a goal is easier said than done, however, it does appear that the accumulator is best to enter the market when the short-term speculators leave.  Ahead of any options expiry where silver stocks have increased, investors should prepare for some minor consolidation.  Often small, but measurable, the difference between end of the month pricing and the market averages for the first few weeks of the month do suggest that there are plenty of bargain hunting opportunities late in the month.  If nothing else, hedge with paper to lock in paper profits and hedge out falling prices, or roll the cash gains into greater silver purchases.

Dr. Jeffrey Lewis

www.silver-coin-investor.com