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Significant commercial short selling in silver, COT-structure analysis, 23.10.2004

When I was writing my last article a month ago silver was trading at $6.23 and the COT structure looked very favorable. In the past month this has changed significantly. During the last month when silver has gone up a dollar to trade well above the $7 level commercial short selling and tech fund buying has practically exploded.

What does this mean for silver? In the long term not much. Eventually market fundamentals will take silver significantly higher. In the short term though, the chance for a sell off has IMO risen significantly. The real problem is not the commercial short selling but the tech fund buying and the way it is done (which makes profitable short selling possible). 

As the chart above demonstrates small speculators [thick blue line] have become more cautious and have actually not increased their long positions even though silver prices have been in an up trend for the past several months. Large speculators have been buying aggressively [thick green line] again after the September sell off. It seems to me there has been no lessons learnt on that front. 

I am afraid that the recent rice in silver price will not be the beginning of 'the big one' but will end up once again in significant dumping triggered by commercials. If the funds would not have their stop-loss triggers trailing a few percent after the silver price the whole market would change significantly. I do not know if it will be silvers turn to experience a similar drop as the base metals experienced last week when Non-commercial Long Positions in Copper dropped to 20478 contracts (on Oct. 19th) from 47591 the previous week (on Oct. 12th) while Commercial short positions dropped to 56963 contracts from 73410 accompanied by a 15% drop in price. Other base metals dropped also significantly. 

To get to the core of the ongoing silver price manipulation I think we need an in depth analysis of who the TA-oriented, computer traded tech funds and the individuals behind them are and why they are willing to take a beating time after time. 

A month ago I wrote "At this point [Sept. 17th 2004] 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."  

We got the dollar but now the COT-structure is entirely different: Commercial short positions broke 100.000 contracts (101248 contracts on Oct. 19th) and are approaching levels prior to the April sell off. Commercial short / long ratio is up at 5,6 and Large speculator long positions are up 87% to 65146 contracts in 4 weeks. I do not know if the commercials are able to trigger a significant sell off but I'm certain they will try in the not too distant future.

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