Silver - Commercial net shorts at 2 year low, September 3rd 2005
Before taking a look at this weeks COT charts I would like to comment on a few excellent articles that have appeared recently: Ted Butlers More To The Picture on August 9th 2005, It Takes Two To Tango on August 16th 2005 and Dan Norcinis COT Propaganda posted at www.jsmineset.com on August 18th 2005. I'll comment on the latter first.
I don't believe in Commercial supremacy in general. As Mr. Norcini demonstrated there is plenty of evidence how the commercials have been on the 'wrong' side in a multitude of commodities numerous times. If a market works as it's supposed to, commercials hedging their production without speculative or manipulative intent, this can go on for a long time.
However, I believe that both gold and silver are quite different and have a different set of market participants with a different agenda than most other commodities, not least because the monetary history of the metals in question. I operate under this assumption (which might be wrong). The past few years COT has worked quite well as an indicator for gold and silver.
I think that COT has worked so well in gold and silver because we have such a big portion of 'weak hands' in these markets as Mr. Butler points out (regarding silver) in his article It Takes Two To Tango, August 16, 2005. "The reason the COTs have been so effective as an analytical tool is precisely because they measure what causes prices to move. It's not a case that tech fund/dealers trading is coincidental to price moves. It's much more than that. Tech fund/dealer trading is why prices move. It's causal. Because it is not the trading of real producers and consumers that is setting prices, but rather the paper trading of the tech funds and dealers on the COMEX that is setting prices, the price setting is illegal. Period."
I believe that the Commercial side won't be squeezed before we get new demand into the market. This has started to happen in gold the past few months and I feel it's very much possible that we will see gold prices move substantially higher while having comparatively large commercial net short positions at the same time as Mr. Norcini points out.
I believe that eventually we will se more and more new buyers enter both markets. When we get significant buying from stronger hands than today's Tech funds we are likely to see a scenario where commercials just keep on piling to their short positions while prices climb. If you happen to sell in a scenario like that, at the time when commercial shorts have climbed to a certain level, lets say, levels of previous price peaks, you will miss on the (possibly very significant) major move to the upside.
Like I've said before, I started to post the COT charts a few months ago, originally inspired by Mr. Butlers excellent commentaries on COT developments in silver. I have felt that the fundamental side of silver and (gold) has been very well covered by several prominent commentators and that I have very little to contribute in this discussion. However, I've gotten a lot of positive feedback for the graphical presentations of COT-data I have put together. Even though my calls on gold and silver have been quite well on the mark the past year, I believe that the market is changing and interpreting COT data based on the past few years performance won't be as straight forward as it has been.
I feel that to provide the service I originally intended to do, to give a good graphical presentation of silver and gold COT data with price info, it's prudent for me to be more objective about the charts and post them as they are with less short term price predictions for your own consideration. (There are also a number of sites that provide COT data for free, some of them with price info. These include at least: Software North, Tradingcharts, Sharelynx and Freecotcharts.)
Without further ado: this weeks Cot charts for your consideration.
COT chart for silver, Sept. 3rd 2005
COT chart for gold, Sept. 3rd 2005
Remember that the last COT data is from last Tuesday, when the price info goes all the way to Friday.
Notice how silver net commercial shorts stood at two year lows with fund shorts at comparatively high levels and Commercial shorts at comparatively low levels. The market is changing. I let you do your own consideration on the possible effect on price.
The current COT structure where we have comparatively high commercial net shorts in gold and comparatively low net shorts in silver is new and I don't claim to know what will happen short term. When I don't have strong opinions about the short-term I stick fully with the fundamentals. I believe that we are in a generational bull markets in both gold and silver for fundamental but different reasons. (Simply put: in Gold because of increased US deficits and dollar weakness and globally a lack of trust for any of the fiat currencies around and in silver mainly because it's an industrial metal with depleting inventories and a structural supply deficit [Any additional monetary demand for silver will simply take us to stratospheric levels IMO].) Whenever I make short term bets on the market it is only with a small portion of my portfolio.
Let me end with thanks to both Mr. Norcini and Mr. Butler for indirectly reminding me of concentrating on providing the service I originally wanted to. That is, to post good graphical presentations of COT data for silver and gold. Whenever I post any ponderings on short-term price developments I urge you to do your own analysis. Since I post COT charts my commentary is quite 'COT-centric'. I always consider the fundamentals and whatever TA indicators and tools that have worked well for me in addition to COT data. I hope things are changing and fundamentals will start to kick in stronger in both silver and gold.
I would also like to thank all my readers for all the constructive feedback they have given me. I haven't been able to reply to all e-mails lately since we had a happy family event. Our second son was born at home on August 10th and we have spent a bit more family time lately enjoying the last summer days up here in Finland.
September 3rd 2005
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