Submitted by SD Contributor Marshall Swing:
Silver COT Report 10/19/12
Commercial paper stacks increased a mere 37 longs on the week and a smallish 127 shorts to end the week with 45.80% of all open interest, a decrease of -0.26% in their share since last week, and now stand as a group at 285,470,000 ounces net short, which is a increase of 450,000 net short ounces from the previous week.
Large speculators reversed their buying trend by reducing their long position by 357 longs and added also covered -660 short contracts increasing their net long position to 200,640,000 ounces, an increase in their net long position of 1,515,000 ounces from the prior week.
Small speculators sold off a net -447 longs and covering -234 short contracts for a net long position of 84,830,000 ounces a decrease of over 1,000,000 ounces net long from the prior week.
Silver is right at or above $32 as of this writing. It was also about $32 on September 4 of last month. However, on September 4 of last month the commercial net short position stood at 224 million ounces. Today, and at the same price the commercial net short position is just over 285 million ounces. Does this knowledge give us an indicator of what the near term future holds for the silver price?
Silver was down just about $1 during the reporting period and much more since the period ended on Tuesday afternoon but for the second week in a row the change in open interest positions on the part of the commercial traders does not reflect the movements we would expect to see in a price decline of this magnitude.
As of this afternoon, silver is down almost $3.50 from its most recent high almost 14 business days ago and yet large speculator’s net long position has increased while the commercials net short position actually increased as well. Usually when the price drops this much in a week or more we see significant declines in commercial net short positions.
We also saw an increase in overall total open interest by 979 contracts so the trader’s interest in this market is not waning such as one would normally expect to see in a period of declining price.
So what do we make of all this?
I believe firmly that when the market exhibits significant price declines yet open interest positions remain virtually the same or even increase that there exists significant turnover in contracts yet the open interest is being bought back at lower price levels. For instance, where some large and small specs are selling big long positions there are other speculators rushing in to buy back those positions at lower prices. Hence this appears to be a war fought by speculators against speculators and not commercials against speculators. This always happens in a declining price scenario as the speculators try to guess the bottom so they can be the first to reap profits from being the first to go long in a rally. Risky guesswork!
If this is true, then the commercials are sitting pretty with a significant cache of short contracts in hand at higher prices and much in the money and when they decide to unload those contracts there will be a dramatic decline in price. They probably will not allow much of a long rally before unloading those contracts and booking the profits.
The so-called raids or price declines we have seen recently could be no more than commercial HFT transactions to the downside to get the speculators to play against one another to the downside while the commercials sit back and relax with their huge net short position intact and growing ever more in the money.
Such huge net short positions on the part of a few traders should not be allowed. Period.
They have the innate ability to easily distort honest attempts at true price discovery.
The Producer Merchant commercial trader category stands at about 230 million net short paper ounces.
As always, for your convenience, if you would like to contact the CFTC and express your views to them, I have provided you their phone numbers and I hope earnestly that you fill up their phone lines: http://www.cftc.gov/Contact/
firstname.lastname@example.org Chairman Gensler
email@example.com Commissioner Chilton
firstname.lastname@example.org Commissioner Sommers
Somalia@cftc.gov Commissioner O’Malia
email@example.com Commissioner Wetjen
firstname.lastname@example.org Director Meister
See you next week!