1-2-3-Go! COT structure getting better for silver investment entry, 17.9.2004

When analyzing a market I look for at least 3 things:

1. Fundamentals. First, the fundamentals must be right. Technical analysis is only a timing tool IMO. The fundamentals for silver are very bullish: structural deficit for more than a decade, depletion of silver stocks, increasing new industrial applications and so forth. The silver community knows the story all too well. For those of you who are new to silver I refer you to Ted Butler's writings.

2. TA (technical analysis). The long term technical support is also intact even though silver plummeted through its 50 and 200 day moving averages earlier this month. After trading between $4.0-5.5/oz for the best part of the past 5 years [point 1] silver prices went parabolic earlier this year and came to a sharp correction [2] in April. Still, the second up trend has been a solid support for the past several months [3]. Even if the support at UT2 breaks I would not be too worried. The fundamentals are simply too bullish to have any significant effect in the longer term. What matters in silver in the short term is IMO the COT structure.

3. Who are the market makers? In the short term the third fundamental thing which to look for in silver is COT structure. I believe that the silver market is strongly manipulated and therefore it is good to know at least to some extent what these manipulators are up to and what their position is. The COT-reports provide some usefull data.

After the orchestrated sell off in April [point 1, lower graph] the commercials significantly covered their short positions at the expense of speculators, both small and large as defined by Comex. The commercial short postiotions/long postions dropped from an annual peak of 7,08 on April 2nd to 3,09 on July 2nd. The commercials built up their short positions again in July and August [2] to a short/long ratio of 5,34 on Sept. 3rd. When silver prices started flirting with $7/oz they triggered of a new sell off [3]. At least so far, only the large speculators have been triggered into selling. For the past two weeks you can actually see a small increase in small speculator long positions [4]. This was also true in the April sell off [5] so the coming week(s) will show us whether the small speculator positions and structure have changed or not. 

It is obvious to me that the large speculators with their tight margins make the profitable manipulation possible for the commercials [3 and 4]. Since things regarding large speculators don't seem to have gotten any better (no lessons learnt from April) the commercials can very well be able to pull the same trick off a third time later this year. Still, it is only a matter of time before the fundamentals catch up with everybody and silver prices will rise significantly from todays levels (silver closed at 6.23 on Sept. 17th 2004).

At this point with commercial short positions and open interest [6] at its lowest this year, the commercial short to long ratio at 3,52 and large speculator long positions down 38% to 32304 contracts in only two weeks the silver market seems to be once again getting more and more dimes to the downside and dollars to the upside.

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