COMEX Commercials and Swap Dealers Put Floor Under $37 Silver

Got Gold Report

Combined COMEX commercial traders and Swap Dealer net buying in part responsible for $37 silver support.

HOUSTON The CFTC commitments of traders (COT) report for last week showed that commercial traders covered or offset a considerable amount of their net short positioning in gold futures as we reported in these pages yesterday. The report also showed a similarly large ‘get-out’ by the commercial traders in silver, but that’s not the only thing analysts find interesting in the government reports covering the positioning of the largest metals futures traders.

As we reported in our linked charts for Vultures (Got Gold Report Subscribers) on Sunday:

As silver fell $3.25 or 8% Tuesday to Tuesday (the cutoff for COT data released each Friday), to close at $37.52 on the Cash Market, the collective net short positioning of the traders the CFTC classes as ‘commercial’ (LCNS) dropped by a very large 9,247 contracts or 20.7% from 44,588 to 35,341 contracts net short. Silver -8%, LCNS -20.7%.

Just below is our graph showing the commercial net short positioning and the price of silver.

Sources: CFTC, Cash Market. If any of the images are too small click on them for a larger version.

It is interesting to note that in the five reporting weeks from June 28 to August 2, as silver traveled from $33.91 to $40.77 (+$6.86 or 20.2%) the combined commercials, which include the Producer/Merchants and Swap Dealers, increased their net short bets on silver futures by 15,422 contracts, each covering the action of 5,000 ounces of silver metal. Thus, in the five weeks prior to this latest report, as silver rose just under $7, the Big Sellers of silver futures added about 77.1 million ounces worth of bets that would benefit if silver fell in price. As we noted above, in the past reporting week, as silver gave back $3.25 or roughly half of the 5-week price advance, the combined commercials covered or offset contracts representing 46.2 million ounces or roughly 60% of what they put on net short for the period. For each $1.00 drop in the price of silver, the combined commercial traders covered or offset about 14.2 million ounces worth of futures contract net short exposure.

We compare the commercial net short positioning to the total open interest to determine the positioning of the commercials relative to the entire futures market (LCNS:TO). This reporting week the open interest actually fell by 4,446 contracts to 115,939 lots open, so the LCNS:TO falls and falls sharply from 37% to a low 30.5% of all futures contracts open on the COMEX bourse.
Just below is our graph of the relative commercial net short positioning for silver futures with the silver price.

Sources: CFTC, Cash Market

We believe that when the LCNS:TO reaches the lower third of the graph it is generally more bullish than bearish. We also believe that the higher the LCNS:TO goes, the more confidence the traditional Big Sellers of silver futures have in lower silver prices and vice versa. A low reading of 30% or below suggests to us that the Big Sellers are not, repeat not, confident in lower silver prices near term.

Recall that in yesterday’s (Monday’s) report we noted that the traders the CFTC classes as Swap Dealers were aggressively covering or offsetting their gold net short positioning? And remember that occurred as gold was on a sharp rise in price? (Swap Dealers were in full retreat with gold shorts.) Well, note just below what the more mercenary Swap Dealers were doing in the silver department as they were getting the heck outta’ Dodge with their gold shorts. Just below is our graph of the Swap Dealer commercials in COMEX silver futures.

Swap Dealers were adding to their net long positioning in silver as they were covering their net shorts in gold. To quantify that blue line in the chart, from August 2 to August 9 the Swap Dealers collectively increased their silver futures net long position from 1,772 to 7,722 contracts, an increase of 5,950 contracts net long. So when silver had gotten to the $37.70s that was apparently low enough for the Swap Dealers to become aggressive on the long side of silver futures.

Clearly the Swap Dealers’ “confidence in lower silver prices” is a great deal less than that of the combined commercial traders. Indeed, if their net long positioning is any guide, they have instead positioned for the price of silver to move higher, not lower. As it happens, since that Tuesday data cutoff, the price of silver has recovered back up to a high $39 handle and traded as high as the low $40s today (Tuesday, August 16, 2011).

Note that since about July of 2008 the Swap Dealers have been net long silver futures more than not, while their commercial compadres, the Producer/Merchants’, (the largest hedgers and short sellers of silver futures), have, of course, remained net short. Notice, however, in the graph just below that the Producer/Merchant’s are a great deal less net short than they have been in the recent past.

Sources: CFTC, Cash Market. Note that the net position is expressed as a negative number, so when the net short position of the PMs decreases the blue line rises and vice versa.

The Producer/Merchant’s also took advantage of the $3.25 drop in the silver price to cover or offset some of their collective net short positioning. For the week they covered or offset 3,297 lots or 7.1% of their hedges/short sales to show 43,063 contracts net short silver. As of Tuesday, the
Producer/Merchants, the category that includes bullion banks and the largest users/dealers, still held approximately 215.3 million ounces worth of bets that would benefit if the price of silver fell.

If that sounds like a lot of net short “action” then compare to their net short positioning on October 27, 2009 when the PMs held a collective net short silver position of 64,125 contracts (320.6 million ounces or 9,973 tonnes with silver then $16.70 the ounce). That net short position was their second highest “opposition” to silver in the CFTC disaggregated data set (since 2006), second to their 64,216-contract net short position set February 26, 2008 with silver then $18.76.

Indeed, without putting too fine a point on it, take an objective look at the PM graph just above and just note that as silver has broken out to its new higher zone in price, notice what the trend of Producer/Merchant net short positioning has been since about last September as the second most popular precious metal has more than doubled in price. Wouldn’t it be correct to say that the Big Sellers of silver futures have been generally getting smaller in the net short silver business since then?

With good reason. Just look at the price for the reason.

Bottom line: The COMEX combined commercial futures traders strongly reduced their net short positioning for silver futures on that $3.25 drop in the price of silver and the Swap Dealers increased their long position significantly. Since then the price of silver has crawled its way back to almost where it was the prior Tuesday, so the commercials apparently had good instincts when they decided to get smaller on the short side with silver in the $37s. We can say that their short covering and the Swap Dealers long position taking helped to put the floor under silver in the $37s instead of a lower mark, can we not?

And can’t we then say that it looks like the largest, best funded and presumably the best informed traders of silver futures were positioning more for higher prices than lower prices as silver only dipped to the $37s? We certainly cannot say that the Big Sellers were even net sellers over the past week. They were net buyers instead.

That is all for now, but there is more to come.

Got Gold Report – Natural Gas Cheap Again

ATLANTA — The natural gas producers in North America have done such a good job at telling us how plentiful the clean-burning resource is that NatGas has become one of the cheapest of energy sources around again. We intend to focus on that exclusively in this one-time special report, but first here’s this week’s closing table:

April 2, 2010

Got Gold Report Indicator Comparison
This WeekPrior Week Changew/w Chg % Gold Weekly Close (USD)
$1,126.80 $1,107.10 $19.70 1.8%Silver Weekly Close (USD)
$17.93 $16.91 $1.02 6.0%GLD Metal Holdings (Tonnes)
1,129.821,124.655.18 0.5%SLV Metal Holdings (Tonnes)
9,217.179,278.18(61.01)-0.7%Gold Close COT Date
$1,103.76 $1,105.49 ($1.73)-0.2%Silver Close COT Date
$17.30 $17.03 $0.27 1.6%Gold LCNS (Contracts Net Short)
207,691223,823(16,132)-7.2%Silver LCNS (Contracts Net Short)
46,31745,698619 1.4%HUI EOW Close
428.04401.4826.56 6.6%US Dollar Index Weekly Close
80.7181.59(0.88)-1.1%ICE Commercial Net $ Pos. (Contracts)
(39,311)(35,125)(4,186)11.9%Gold:Silver Ratio Weekly Close
62.8465.47(2.63)-4.0%Gold Intra-week High
$1,127.93 $1,109.65 $18.28 1.6%Gold Intra-week Low
$1,102.57 $1,085.54 $17.03 1.6%Silver Intra-week High
$17.98$17.13$0.85 5.0%Silver Intra-week Low
$16.86$16.57$0.29 1.8%Gold High/Low Spread
$25.36 $24.11 $1.25 5.2%Silver High/Low Spread
$1.12$0.56$0.56 100.0%
The big news this week in the gold patch is that the largest of the largest gold futures hedgers and short sellers in New York were still “getting out of Dodge” as of Tuesday, March 30, according to the latest COT reports. The details of that gold short seller exodus can be found in the linked charts for gold below. We will undoubtedly have more about that in our next full Got Gold Report, but for now, we’ll take another look at what we think is an imbalance opportunity developing in natural gas, just as it did last year about this time.

Cooking With Gas

Even though there is not really all that much more NatGas in storage right now than there was this time last year, the price of natural gas, at near $4 per MMBtu, is cheap by historical standards. How cheap? Well, even though “natty” is within the extremely wide range of pricing as shown in the long-term NatGas chart below, we thought it might be interesting for our readers to see it compared to a suite of other commodities.

Here’s the NatGas story in pictures from Got Gold Report’s Comparisonville.

First, just the dollar price of NatGas over the past decade:

Notice that NatGas peaked in January around $6 per MMBtu and has since corrected about 62% of the Aug-Jan price increase. Fibonacci theory aficionados are many, and we probably don’t have to point out to our readers that 50% to 61.8% retraces are not only common, they are commonly traded.

Looking at that log-scale chart alone we can see that NatGas is near the lower end of the 10-year price range. However, that kind of view ignores what has happened with the dollar over the last decade.

What would a chart like that look like if we take out the logarithmic smoothing you ask? It looks a lot different, doesn’t it, see below.

When we give each dollar level equal weight on the value axis, it tends to do two things (at least). First, it tends to better define when the graph is approaching historic support in absolute dollar amounts, and second it tends to exaggerate previous extreme advances. Both can be valuable to a short or medium term trader from time to time.

We like things simple here at Got Gold Report. And what could be simpler than looking at the no-log chart above? Straight-away we can see that the natural gas market is getting pretty close to the low side again. We can also see that natural gas is “uncomfortable” above about $9, because whenever it gets up above there it tends to get back below that level pretty fast.

Just last year, with the world reeling from the 2008 collapse and a glut of natural gas, NatGas edged to a high $2 handle very briefly, but we think it was equally “uncomfortable” down there too. So, let’s say the broad trading range we can identify is something more like $3 to $7 to be conservative.

NatGas actually traded below $2 a decade ago, but dollars certainly went a lot farther in 2001 than they do today and it sure didn’t stay down there very long.

With NatGas probing just under $4 last week, we are close enough to the bottom of the range to begin thinking about positioning again. But, aren’t we constantly hearing there are literally oceans of natural gas now compared to then? Hasn’t that become the popular view today?

Not a Natural Gas Glut, but Natural Gas is Priced for One

Well, actually, according to the U.S. Energy Information Agency (EIA), as of this past week (report for March 26) there was about 1.63 trillion cubic feet (tcf) in the various NatGas storage facilities in the lower 48 states. That compares to 1.65 tcf in storage for the same reporting week in 2009 or about 1% less gas in storage than then. (Incidentally analysts were looking for an injection into storage this past reporting week of 20 billion cubic feet (bcf), but the EIA reported a smaller injection of 12 bcf. )

There is currently about 10.8% more NatGas in storage today than the 5-year average (1.63 tcf vs 1.48 tcf), so there is more NatGas available, but that is hardly a glut of gas. With that in mind, how can we judge just how inexpensive NatGas is today?

All we want to accomplish with this Got Gold Report offering is to get an idea of just how inexpensive NatGas is or isn’t. To see perhaps if it has gotten “too cheap” again, and maybe if it’s time to begin positioning in vehicles that track it again, like we did successfully last year at this time.

Why don’t we start with the most obvious comparison and chart NatGas relative to West Texas Intermediate Crude Oil. See the chart just below.

According to that chart NatGas is once again exceedingly cheap relative to oil. Either oil has become too expensive, or NatGas has become too cheap. By itself that doesn’t mean oil can’t rise further or that NatGas can’t fall lower. They can and they might, but as of right now that chart is screaming that an imbalance in the market is currently underway.

We Bargain Vultures just love imbalances because they represent opportunity.

Comparisons of just one commodity to another can be helpful, but oil and NatGas are in the same basket, so to speak. In order to better understand relative price or value it helps to look at other commodities and benchmarks. So let’s do so right now.

Take, for instance, something we know well, like NatGas in terms of gold metal:

Yep, according to that comparison chart, either gold has become exceedingly expensive or NatGas has become very, very cheap, or both.

What about silver?

Sure enough, it’s the same story with silver. Remember these are very long-term charts. NatGas is nearly at the cheapest it has been relative to silver in 15 years.

How about copper?

Yes, relative to copper NatGas has gotten really cheap, hasn’t it? Or, has copper just gotten really expensive relative to natural gas?

Okay, by now we are becoming comfortable that NatGas really is cheap on a historic basis, so cheap in fact that it pegs some of our other comparisons. NatGas is dirt cheap by most any measuring stick one wants to use.

So one might think given the historically cheap price for the commodity that the companies that produce natty might be getting trounced these days, right?

Let’s compare the XNG index, which tracks a basket of natural gas producers to NatGas itself and see what it shows:

What’s this? The price of natural gas is filthy cheap and yet the companies that produce it are actually expensive relatively speaking? How can this be?

It is simple, really. The NatGas producers also produce oil, which is expensive relative to NatGas right now, so producers benefit from that. However, we still think the chart above is useful because it shows that the natural gas producers are priced near their all-time 2009 highs relative to the price of natural gas. We think that if fund and portfolio managers were convinced that natural gas was going to stay this low, it would start to show up in the producers in the form of lower, not higher relative prices for them.

Are the Fundamentals Really all that Bearish?

The producers are not discounting the currently low natural gas prices, so what is keeping the NatGas price so close to the basement?

Well, with the price of oil so dang high, there must be a bazillion rigs out there drilling for both oil and natural gas, right?

Unfortunately for NatGas bulls, the onshore rig rate has risen for 13 consecutive weeks and as of March 26 there were 941 rigs turning in the U.S. looking for more NatGas according to data supplied the EIA by Baker Hughes.

Certainly the analysts we affectionately call the “Big-Gass-Bears” who are often seen on the televised business cable channels (they know who they are) have been out in force just lately to hammer the point that the drilling rig rate is going up. If you watch the T.V. business channels you’ve seen them. The Negative Nancy’s of Natty have also been pounding the table with comical statements like, “We have so much natural gas right now we don’t know where to put it!”

We can’t hold it against the usual suspects that they are consistently net short NatGas when they are motivated to appear on T.V. or send in dire notes via Blackberry to the microphone holders, but we do wish they would do a better job of disclosing their positioning when they do.

Rig Rates Have Risen To a Low Level

While the idea that the rig rate is climbing may sound imminently bearish, the price of NatGas is relatively low already, so it might help to consider the recent increase in drilling in some kind of context. Luckily, the EIA just happens to provide us a graph showing the U.S. drilling activity specifically for NatGas in the lower 48 states. Presto:

While we have to admit that the rig rate drilling for natural gas has increased for seven consecutive months, when we compare today’s 941 rigs to the previous, say three years of activity, drilling for NatGas is still on the low side. That is likely because we are still digesting all the new shale gas wells brought on line the previous several years.

Rotary rigs reported drilling for natural gas bottomed in June of 2009 at 691. After seven months of increases to 941 rigs now turning, the 2008-2009 historic plunge in NatGas drilling appears to have ended. That’s the last little “hook” on the graph above.

However, one year prior to June of 2009, in June of 2008, there were still 1,510 rigs exploring for natural gas. That shows the power of very high prices. (Ed note: In June of 2008 NatGas had just peaked near a ridiculous $13 per MMBtu, proving the “cure” for high prices is high prices.) In June of 2007 ( a year earlier) there were 1,483 rigs turning and in June of 2006 there were 1,376. We have to look all the way back to June of 2000 (677 rigs with NatGas near $4.50) to find a month with fewer rotary rigs that were looking specifically for natural gas than June of 2009.

Sometimes eyes just glaze over when there are a bunch of figures in a paragraph, so the upshot of that statement just above is that yes, the rig rate is moving higher, but it is still well below where it has been in recent years.

If we compare last week’s Baker Hughes report of 941 rigs to all the months from January of 2009 prior, we have to go back to September of 2003 (6 years) to find a month which shows fewer than 941 rigs looking for the cleanest, most fuel efficient domestic energy source available in North America.

Production Not Keeping Pace?

The natural gas producers have done an admirable job of finding new sources of natural gas and perfecting the technology necessary to produce it. That’s the good news. However, what is lost in the discussion is that these new “tight” shale gas plays are both very expensive to drill and they tend to come in strong, then decline in production rapidly.

We borrowed this graph of first-year decline rates of gas wells in Texas from .

The graph is self-explanatory. In 1971 a new gas well could be expected to drop about 10% in production after the first year. There were no horizontal “tight” gas wells drilled in Texas in 1971. The technology hadn’t been invented yet and really wouldn’t come into wide use until the middle 1990s. As of 2005, the first year decline rate was over 60%, meaning that production from new wells declines very quickly in the first year of production with newer, horizontal “tight formation” gas wells.

Some sources say the year-1 decline rates are approaching 70% today when all shale wells are factored in.

Not all shale wells are the same and production declines vary from field to field, but we think that graph tells a compelling story for the entire shale gas patch. The most obvious point is that it takes more wells and more drilling now to maintain the same level of natural gas production. Perhaps less obvious, but just as important, the effects of high or low prices should show up and be felt a lot faster these days than in decades past. If our unscientific, back-of-envelope analysis is correct, about six times faster. (Y-1 decline of 10% versus 60%+).

When we consider that the depletion rate of new “tight” gas wells is very high in the first 12 months of production, and we add that to the fact that the rig rate bottomed in 2009 at less than half of the 2008 peak, we just might be moving into a period when we are seeing rapidly declining production from existing wells at the same time we have fewer new wells coming on line to replace that production for a little while until the price returns to a level which sparks another drilling rush.

Open the Vulture Opportunity window.


Here’s the quick conclusion of this gaseous trip to “Comparisonville.”

·Natural Gas is cheap any way one wants to look at it.

·Contrary to conventional wisdom and to recent “Big-Gass-Bear” T.V. talking points, there is not really all that much more gas in storage than normal, about 10% more than the 5-year average.

·Drilling for NatGas has picked up, but remains at a relatively low level compared to recent years.

·Much of the new NatGas production is from “tight” shale gas plays, which have very high depletion rates, so it takes more wells to keep the gas flowing.

We could be wrong, but while we could see natural gas futures trading to even lower levels soon, we plan to try to take advantage of any further weakness, as good Vultures sometimes do. We just don’t think NatGas can stay so strongly underpriced in the current environment.

We would normally rather play it through the natural gas heavy royalty trusts, like San Juan Basin Royalty Trust or Permian Basin Royalty Trust, but compared to where they were this time last year price wise, they are definitely not as interesting as then. We’ve already booked our dandy profits on them from last year’s foray into the gas space. Still they both pay handsome monthly distributions, and that’s a lot better than paying margin rates to brokers.

The CME futures are a dangerous and expensive place to try to play it given the still too-wide contangos there, so perhaps it is time to once again consider the NatGas ETNs, such as the IPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (GAZ) or the more popular ETFs, such as United States Natural Gas Fund (UNG). They have recently been trading at much closer to their NAVs as compared to last year at this time when the CFTC was first rattling investor cages in the energy markets and overly wide premiums had developed on them.

The premiums are gone now, and both tend to track short term moves in the daily price of NatGas, but with the wide contangos in futures they will likely continue to see “slippage,” just not as much as last year.

For short periods of time, say a few weeks or months, we can see taking a shot at a natural gas “imbalance conversion” with an ETN or an ETF and maybe both in the very near future. Not without well-placed trading stops, as always, and not without a well-defined entry/exit strategy going forward.

Lest we forget to mention it, we will remind ourselves and everyone reading that just because something is “cheap” that doesn’t necessarily mean it’s a “buy.” Imbalances tend to get strangely and wildly a kilter before they come crashing back to reality in this biz, so easy does it. By looking at a range of comparisons and the historical averages we can reduce some of the guesswork; maybe even gain enough confidence to trade it, but no one can see the future and all we ever have is probabilities to work with.

Full disclosure, we added a first tranche of both GAZ and UNG this past week. We did so thinking we just might be a little early in the game this time, willing to add once, but only once at lower prices for an entry average play, but we’ll see. We may add more in the very near future, if the “Big-Gass-Bears” get really, really frisky on the T.V. in April.

It has been our experience that they tend to show up aggressively just before the market puts in one of its signature high percentage reversals. And of course we Vultures just love those too.

Got Gold Report Coming to a Website Near You

We remain on the hunt for special situations and “vulture opportunities” via “stink bids” for obvious lack-of-liquidity, non-news-related, over-reaction sell-downs on the miners via our Vulture Bargain Hunter Method. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin covers in his highly acclaimed Gold Newsletter.

Please note: This special issue of the Got Gold Report was filed Sunday, April 4, and delivered to Gold Newsletter Alert subscribers shortly afterward.

Before long, unless a wheel comes off our Texas-Georgia chariot, Got Gold Report will have its own web home, to be located appropriately at (Nothing there yet, so please wait for an announcement.) We expect to announce details of the new web site and blog in our next official report next weekend, but the situation is “fluid,” as they say, so don’t hold us to a tight schedule on that.

The plan is to invite sponsors for the new blog initially, then, if there is enough reader support, we plan on moving to an exclusive subscription-based model.

Our valued readers will find much more technical and fundamental commentary in the linked charts just below. Remember, the links to the charts just below will be changing in the near future, but will remain “live” for now and through at least April 14.

Got Gold Report Charts

· 1-year daily gold
· 2-year weekly gold
· 1-year daily silver
· 2-year weekly silver
· 1-year daily HUI
· 3-year weekly HUI
· 1-year daily HUI:gold ratio
· 2-year weekly HUI:gold ratio
· 2-year weekly U.S. dollar index
· 3-year weekly CDNX index
· 2-year weekly CDNX:HUI ratio
· 2-year weekly CDNX:gold ratio
· 6-month gold:silver ratio

That’s it for this special one-time report from Atlanta this week. Until next time, good luck, good trading and , as always, MIND YOUR STOPS.

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a long position in SPDR Gold Shares, long iShares Silver Trust, long United States Natural Gas Fund (UNG), long iPath Dow-Jones Natural Gas Subindex ETN (GAZ), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last year: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Gold Port Resources (GPO.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V), Constantine Metal Resources (CEM.V), Canadian Shield Resources (EXP.V), Rye Patch Minerals (RPM.V) (new) and currently holds various (approximately 15) other long (and occasionally short) positions in mining and exploration companies. The author has received no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web.

For the past fourteen months Gene’s more in-depth market reports, insights and trading ideas have been an added service for subscribers of the very popular Gold Newsletter (GNL). For more information visit Got Gold Report is currently transitioning to its own new web home. Watch for an official announcement shortly as we launch in the very near future. We hope to see you there.

Got Gold Report
Gene Arensberg