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.