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.

In addition 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

Carl Löfberg

Tampere, Finland


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KultaKeskus.com makes no guarantee about the accuracy or completeness of any data or information given in this article. This article should not bee regarded as investment advise. All investors should make their own market research and base their decisions on their own analysis and judgment. In no event shall KultaKeskus.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein. The writer of this article owns bullion, mining and explorer stocks and has in general a bullish view on precious metals. The author has not been paid to write this article, nor has he received any other inducement to do so. The author's objective in writing this article is to invoke an interest on the part of potential investors in gold and silver to the point where they are encouraged to conduct their own further diligent research. You may reproduce and copy this article provided that you link it to the original source.

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