Silver and COT changes, 23.04.2005
Silver closed at 7.26 on Friday April 22nd, still trading very much in the short-term upwards trend direction. It is yet to be seen whether the big triangle formation will be resolved to the upside or the downside. Either way, I believe that the move will be more substantial than the price fluctuations that have occured during the past few weeks.
(Chart courtesy of StockCharts.com)
Recently there has been a lot of discussion about the COT structure in gold. Several prominent commentators have noted that the commercials are surprisingly short considering the comparatively strong correction in the price of gold to the downside. Among them are Ted Butler (see Butlers article April 19th), Dan Norcini (See Norcinis article April 16th) and most recently, Brady Willet (see Willets article April 21st). This has led to different interpretations about what this means for gold (and silver) in the short term.
Even though gold and silver are strongly realted, thay are not the same. I believe that we are in a generational bull market in both gold and silver. Many of the reasons for their price apreciation are linked, but there are some fundamental differences. Among them, the number one difference, IMO, is that silver is primarily a industrial metal that we are running out of (structural supply deficit and depleting inventories). Gold will move higher for different reasons.
Silver COT analysis
When analysing the COT structure in silver, some changes can be seen, but we are not witnessing the same changes as in the COT structure of gold, even though the changes can be related.
Firstly, the commercial short/long ratio stands at comapratively low levels, even though the commercials are significantly net short (blue line). The comercial short/long ratio has been at todays levels in the three previous market bottoms (yellow circle) the past year.
At the same time, the non-commercials have not started to accumulate long positions in any significant amount (green line). In the past year, the second week (confirming the low) after a comparatively stong decline in non-commercial long positions has proven to be a safe point to increase silver assets. We are still at that point, in this fourth corrective move since the beginning of 2004.
The change in the market structure is that commercials have not been this long in silver (in absolute terms) ever before in recent memory (28137 contracts, thin brown line).
The commercial shorts and the net commercial shorts are at comapratively low levels (dark red line and red line), though higher than at previous market bottoms.
I do not know what this commercial long positioning means for silver in the short term. I do, however, believe that it is not the commercials by themselvels that have made the sharp downside moves in silver possible in the past. Rather, it has been the non-commercials, with their tight stop orders, which has made a downside domino effect possible. Perhaps the accumulated commercial long positions will work the same way. Or, maybe some commercials are going long(er) for real.
Since the non-commercials are not very long, and commercials are increasing their long positions, I therefore see a bigger chance for a strong move to the upside than to the downside.
If gold takes a blow, like Willet, for instance, predicts, I am sure silver will take a blow, as well. However, I see an even bigger risk (for silver bulls) in not being long on silver at the moment, though stops are in order for more speculative postions, as always.
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