Silver - Bullish COT structure, July 22nd 2005
The COT structure in silver has become quite bullish the past few weeks. The recent numbers on Friday further confirms this.
Looking at today's bullish COT structure, there are some differences compared with the short/mid term bottoms (marked with green) of the past 18 months, as one reader pointed out after the COT update from last week.
After the sharp sell off in April 2004, the bottoms have occurred when commercial net positions (pink graph area) have been roughly between 50-60.000 contracts short. During all of these times open interest has stood roughly at 110-125.000 contracts. During the past couple of weeks open interest has been closer to 150.000 contracts. Open interest has peaked with the two price peaks the past 18 months (2 orange circles). It could be argued that the high open interest is of concern to silver bulls in the short term.
If you take a
closer look at open interest just before the two previous price peaks (April
2004 and Dec 2005, yellow circles), you can see that open interest
climbed to 150.000 contracts, at the time an 'all time high', in Jan
2004 when price was a bit above $6.00. If you were put off by the high
commercial net short and absolute short positions and the high
non-commercial long position along with the high open interest, you
missed an over $2 price rally. Similarly, in late October 2004 open
interest stood at about 150.000 contracts with price around $7.00.
Commercial shorts were comparatively high and still we had an over $1
rally in price.
So, even if
you associate high open interest with price tops, I don't see much
reason for concern in the current COT structure in silver, if you judge
things based on the past two years. The current high open interest could
be seen as only a climbing open interest just before a real price rally,
not a price and open interest top.
to open interest, there is another difference in today’s COT structure
compared with the four previous short/mid term lows (marked with green) since the 2004 sell
off. Commercial longs stand at unprecedented levels (red circle). This
could be seen in many ways, depending on how manipulated you believe the
silver market to be. Previously, absolute commercial longs have
stood at today’s levels in early 2003, preceding both a
short term and a major one-year rally.
With the recent COT structure changes , as well as the strong fundamentals of silver unchanged, silver looks like a strong buy to me at the moment, as long as you are not too leveraged to take the few possible 'dimes to the downside', for which you should always be prepared with silver.
As an endnote I, would like to offer a few words of thanks. I would like especially to thank David Bakkegård Karsbøl at liberator.dk, who first introduced me to silver back in 2002, and Ted Butler to who's writings David directed me to. These mens reasoning quickly convinced me of the 'case for silver', and I did my own further research, running into a few other market commentators who also focus on silver. I took a closer look at the COMEX COT data Butler referred to and started to do my own charting. I was surprised by the positive feedback I got for publishing some of my simple excel charts, but since there still seems to be limited access to graphical representations of the COT data, I will keep publishing these COT charts as long as they seem to be of interest to silver investors. (There are some COT charting services online, such as Sofware North's charts and Tradingscart's COT diagrams. I also got an e-mail recently from Nick Laird at www.sharelynx.com who has put together and impressive database for analyzing COT data.) I would also like to thank all the 'silver site' owners who have published my market updates and to all my readers who have sent me valuable feedback and comments.
July 22nd 2005
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