“The worrisome part about this is that…This would mean that those shorts and the price of Silver would have some way to fall.”
We just started getting COT data again, and although it is out of date by over a month, it does provide some interesting information.
Starting with Gold. The closing price on December 31 was 1281, up over $80 in six weeks. Given the rally, it is no surprise that Money Managers (aka “Funds”) were net long again and the Commercials have increased their short position.
What is remarkable is the speed with which those positions were added, especially on the short side.
Peaks and troughs in price are often identified by extremes in total net long or short positions, but extremes in the rate of change, or delta, in those positions can also signal a pending top or bottom. Swaps (aka “Banks”) added to their net short position at the second-fastest pace ever on both a 3-week and 8-week basis. Suffice to say that the so-called smart money was racing to get short.
Banks have already increased their shorts to the highest level since September 2017, when Gold peaked at 1363, and higher than when Gold peaked at 1369 in April 2018.
This was when Gold was at 1281. It rose to 1331 on January 31. It’s a safe bet that those shorts increased significantly during those four weeks. Given the speed with which the Banks were adding to their shorts, they could have increased their net short position to its highest level since 2016. Funds have likely piled on the longs at the same time.
This does not bode well for Gold in the short-term. Although Gold has already fallen back to 1314, it could go lower yet.
The Daily Sentiment Index hit a peak of 80% bullishness on January 31, which signaled the peak in price.
Gold continues to fall back from a negatively divergent higher high at 1331 also.
Support is at 1300, 1280-75, and 1250.
Now back to the COT data with respect to Silver. Funds piled on the longs in December after the break of multi-month resistance and the following move up to a $15 handle.
Moreover, they did so at the fastest pace ever on a 3-week basis.
Given the rate that they had been adding new longs until December 31, when the price was 15.54 (and the price has risen to 16.20 since), they have likely reached at least as large a long position as at the prior peaks in June (17.35) and January (17.70) of 2018 or higher.
It is not surprising that we are seeing the mirror image on the short side. Banks and the broader Commercials have raced to add to their net short positions. Banks did so at the fastest pace ever on a 3-week and 8-week basis. Commercials added shorts at a record level on a 3-week basis also.
The worrisome part about this is that on December 31 the Banks had already exceeded their net short position at the June and January 2018 peaks and matched the September peak position when it reached a high of 18.29. This was when it was at 15.54. The price rose to 16.20 over the next four weeks to January 31. Although the price has fallen back since, given the rate at which shorts were being added prior to year-end, it’s highly probable that the Banks have increased their short position significantly, perhaps to their highest short position since 2016. This would mean that those shorts and the price of Silver would have some way to fall.
In order to avoid repetition, suffice to say that the same conditions apply to the broader Commercials category.
Silver’s Daily Sentiment Index never reached as high as Gold’s, topping out at 64 and falling to 50 since.
It, too, is falling back from a negatively divergent higher high and could have further to fall.
Support is at 15.60 and 15.20-30. If we get through the latter, Silver could fall all the way back to critical support at 14.50.
In conclusion, while the government was shut down and we were not receiving any positioning data, the prices of Gold and Silver rose, but so did the long and short positions of the Funds and Banks respectively. In particular, the short positions of the Banks and Commercials increased significantly and are very likely to be even higher today, which would support further moves to the downside in both metals.
That said, I still believe that this is the last pullback before a substantial rally to follow, and it is the last BTFD opportunity before we break the 2016 high of 1377. The only question that remains is how low do we go before that rally begins.