Commercial Hedgers are at their largest net short position in silver futures in over 7 years.
We take a break today (though, it may be a brief one) from our theme of the week on the thinning stock market rally and venture into the commodity space. Specifically, today’s Chart Of The Day pertains to an interesting development in the silver futures market.
We’ve talked about the CFTC’s Commitment Of Traders (COT) report on occasion in the past. To refresh, the COT tracks the net positioning of various groups of traders in the futures market. One such group is comprised of Commercial Hedgers. As their name implies, their main function in the futures market is to hedge. By definition, therefore, they typically build up positions contrary to the prevailing trend. As a result, this group is typically correctly positioned (and extremely so) at major turning points in a market. It is for that reason that the group is usually referred to as the “smart money”.
At present, these Hedgers’ net position in silver futures could reasonably be considered “extreme” – on the short side. That is because these Hedgers are net short the most silver contracts in more than 7 years.
Specifically, Hedgers were net short 66,800 silver contracts as of October 20 (the COT report is released on Fridays showing positions as of the preceding Tuesday. Thus, the October 20 data is the most recent). That is their largest net short position since July of 2008. This is somewhat startling, really, considering the price of silver experienced a veritable parabolic blowoff from 2010-2011. But it is what it is.
And what it is is likely not a good set-up for silver bulls. There are certainly challenges to using the COT data as investment guidance. For one, these Commercial Hedgers are not always correctly positioned at key junctures, as we have seen recently in the Euro currency futures. Secondly, extremes in positioning can always get more extreme, as price continues in its prevailing trend.
Therefore, it is entirely possible that the price of silver continues to climb in the near-term as the Hedger short position presumably gets larger. However, the current positioning would not be on my wishlist if I were a silver bull. I would rather take a stab long-side when the Hedgers were on my side – and the Non-Commercial Speculators (on the other side of Hedger positions) were net short, and forced to cover.
Particularly concerning for bulls, perhaps, is the eagerness to rush in to the long side on the part of Speculators, in the context of a rather pedestrian rally. Yes, the metal is up over $2 (~15%) from its August lows. However, in the context of a $35 decline over the past 4 years (>70%), that is not a big move to engender such a large long position on the part of Speculators.
Again, the COT analysis is more art than science. The metal has gotten demolished and it certainly has room to continue its rally further in spite of the large Hedger short. In fact, if it does, it would probably be a good longer-term sign for the metal. However, that is a small, rather subjective silver lining for bulls as it pertains to the COT positions.
More ominous would be the rush for the exits among fellow bulls should the metal experience more -4% down days like today.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.