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With commercial short interest in silver (future & options) up last week for the ninth week in a row, it is becoming painfully obvious that we are drawing closer to either a historic short covering rally or a notable correction that permits the shorts to reduce their position. On an absolute basis the 76,467 contracts the silver commercials are currently holding short (futures & options) does not match the 97,635 contracts the commercials were short on March 9, 2004. However, it is worth remembering that the 57% increase in the net commercial short position in silver over the last nine weeks has coincided with a 30% price surge in silver, and the price of silver is more than double what it was back in March 2004. In other words, it can safely be said that from a financial perspective the commercial shorts are under more pressure today than at any other time COT history and, to reiterate, this ‘pressure’ seems destined to resolve itself in one of two ways: panic covering or notable price correction.
While most the media ignores the COT data in favor of stories about the ‘safe haven’ qualities of precious metals, some have focused directly on the data. Notably, Ted Butler’s conclusions mirror almost exactly what can be gleaned from the data today:
“It seems reasonable to conclude that this concentrated silver short position can’t go on indefinitely. Sooner or later, something has to give. But what and when? The short answer is I don’t know.”
“…the danger to the concentrated silver shorts is so extreme that it is almost imperative that they rig one more, and maybe final, sell-off to relieve some of their obscenely large short position. The only question is, can they do it?”
Ted Butler. February 19, 2008
Turning to gold, the outlook is much the same, with commercial short interest hitting a bull market high of 267,073 contracts last week, and holding above 200,000 contracts since the last week of September 2007. That the commercials have not run scared even as gold has rallied by more than $200 an ounce in recent months is a little surprising, and adds validity to the speculation that, akin to silver, either a historic short covering rally or a notable correction is overdue.
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With precious metals ETF dealings, hedge fund flows, and Chinese demand regarded as the main drivers in the precious metals market today, it is easy to overlook how potentially important the COT data can be in determining tomorrows price of gold/silver. However, what can not be overlooked is the fact that commercials are short 382 million ounces of silver and 26.7 million ounces of gold as both metals surge ahead in price. Those looking for a potential catalyst for even more spectacular gains in precious metals need not look any further than these two numbers; numbers which represent a short position that dwarfs the reported warehouse stocks at COMEX and, theoretically, can not be covered unless gold and silver trade significantly higher.
In short, now is an excellent time to reduce your precious metals exposure if you think that the COT manipulation will continue. I did exactly that yesterday, based on the conclusion that precious metals exposure of around 8%-10% is more preferred than 15%. Conversely, if the commercials are about to soon panic, look out…
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