10 Oct 2011

COMEX Commercial Silver Net Shorts Lowest in Eight Years

Large traders the CFTC classes as “commercial” report lowest combined net short position for silver since April 1, 2003.
--COMEX Commercials reduce net short bets on silver by 60% past month as silver drops 28.5% - position suggests low confidence in lower silver prices.  

HOUSTON -- The Commodity Futures Trading Commission  (CFTC)  just released its commitments of traders (COT) report at 15:30 ET Friday for trader’s positions as of the close on Tuesday, October 4, and according to that report traders the CFTC classes as “commercial” reported their least net short positioning for silver in more than eight years.
Recall that a week ago we reported a stunning drop in the large commercial net short positions (LCNS) in both gold and in silver futures. The “commercials” continued to reduce their net short positioning in this week’s report, a small 1,932-contract reduction in gold futures,but another relatively large reduction of 5,339 contracts in the LCNS for silver futures.

To put the silver changes in our usual format, as silver fell $1.84 or 5.8% Tuesday to Tuesday, from $31.88 to $30.04, commercial traders reduced their collective net short positioning by a large 5,339 contracts (22%) to show just 18,923 contracts net short.  The total open interest edged 912 contracts lower to 101,102 open. 

Just below is our graph for the commercial net short positioning for silver futures on the COMEX. Note that the current LCNS is lower than all the previous data on the chart, meaning that the current net short positioning of the commercial traders is not only quite low, it is historically so.
(Silver LCNS – Source CFTC for COT, Cash Market for silver.)
Indeed, we have to go all the way back to April 1, 2003 to find a lower commercial net short position for silver futures (15,845 contracts then with silver then $4.43). Just below is a much longer term chart of the silver LCNS for reference.  Apologies are in order.  This is a very large chart and it has to be reduced quite a bit to appear in this format. 

(Silver LCNS – Long Term. Click on the graph for a somewhat larger version.)

As of Tuesday, the largest, best funded and presumably the best informed commercial traders of silver futures continued to get much “smaller” in their net short positioning for silver futures.  There can be no doubt that the commercials view the current downdraft for silver as a silver plated opportunity to very strongly reduce their short bets in the leveraged paper silver contracts. 

As shown in the graphs above, just since September 6, as the price of silver declined $11.95 or 28.5% COMEX commercial traders have reduced their collective net short positioning for silver by a remarkable 28,383 contracts or 60% (not a misprint), from 47,306 to 18,923 contracts net short. 

We compare the nominal silver LCNS to the total open interest.  We think that gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category – compared to all the other traders on the COMEX. When compared to all contracts open, the relative commercial net short positioning (LCNS:TO) for silver fell from an already low 23.8% to a shockingly low 18.7% of all COMEX contracts open.  (Remember, just four weeks ago the LCNS:TO reached 41.7%, the highest LCNS:TO of the year.)  The silver LCNS:TO graph is just below. 

(LCNS:TO - Note that we had to adjust the right axis to accomodate a lower reading.)
The last time that the relative commercial net short positioning was below a very low and very bullish 18.7% was also in that April 1, 2003 COT report, when the LCNS;TO came in at 17.8% (with $4.43 silver). 
Clearly we can say that the large commercial traders have taken advantage of the current drop in the silver price to get the heck out of a huge portion of their formerly underwater net short positions.  Indeed, as of Tuesday, they had reduced their net short positions to the equivalent of where they were with silver bottom hugging at $4.43 eight years ago. 

Just as clearly, the usual Big Sellers are not positioning as though THEY believe that silver has much in the way of downside left in it.  We would have to say that the usual Big Sellers of silver futures are positioning as though they believe the opposite is more likely.
Does that mean that silver is set to rally sharply?  No, not necessarily, of course.  Anything is possible short term, especially with all the angst out there and potential black swans circling (and landing).  But what we think it does mean is that the heaviest of the “heavy hitters” in silver futures are positioning as though they really don’t want to bet on a falling silver price very much.
As a matter of fact, in the Bank Participation in Futures report, issued monthly by the CFTC, we note that the less-than-four reporting U.S. banks in silver futures reported a net short position of “only” 14,388 COMEX contracts, a reduction month-on-month of 9,471 lots (39.7%) to their smallest nominal net short positioning since July 1, 2008 – just ahead of the 2008 Panic (6,177 contracts net short then with silver then $18.10). 


(Banks in Futures Report – U.S. Banks, less than 4 reporting, monthly, source CFTC for COT, Cash Market for silver). 
Interestingly, although the U.S. banks are at their lowest nominal net short positioning for silver futures in three years, what net shorts they still have actually rose as a percentage of all commercial net short positions – from 50.44% to a relatively high 76% as of Tuesday.  That is in part because the commercial net short position is itself quite low at “only” 18,923 contracts net short.  
(Banks in Futures Report – U.S. Banks net positioning as a percentage of the entire commercial net short position.)
We are sure we do not have to point out to Vultures (Got Gold Report Subscribers) that what remains of the very low commercial net short position is pretty concentrated in “less than four” and probably just two large U.S. bullion banks.  Probably just two U.S. banks hold three-quarters of the remaining commercial net short positions on the COMEX, division of CME.
We must be very close now to the point where the commercial net short positioning becomes inelastic regardless of the price of silver.  We must be very close to the point where a majority of the remaining commercial net short positioning is in the form of long-term hedges – we believe.  An enormous amount of bullish firepower (the other side of the LCNS by inference) has hauled to the sidelines with the silver price still clinging to the $30 level.  In a normal market this COT report would be pound-the-table bullish. 
Bottom line:  The market price of silver is liable to do anything very short term, but the largest of the largest commercial traders are positioning as though they believe that silver has a great deal more upside than the opposite. 
For the week silver down $1.84 or 5.8% - LCNS down 5,339 or 22% - to the lowest LCNS in 8 years.  This suggests little confidence by the comercials in lower silver prices looking ahead.   

Edit at 23:15 ET to add graphs from the disaggregated COT report by request. 
The Producer/Merchants (PMs) commercial traders, the category of traders that likely includes bullion banks, reported a reduction of 3,689 contracts for the week to show 29,874 contracts net short, the lowest PM net short position since September 4, 2007 (26,909 contracts net short then, with silver then $12.09).

(Producer/Merchant commercials)
Remember that in the PM graph, the position is expressed as a negative number.  As the PM net short position falls the blue line rises and vice versa.  The PMs have reduced their collective net short positioning by 19,972 contracts or 40.4% just since September 6, when they reported holding 49,846 contracts net short with silver then $41.99.   So as silver has fallen $11.95 or 28.5% the PMs have reduced their net shorts by 40.4%. 
The traders the CFTC classes as Swap Dealers (SDs), “the other commercials,” reported an addition of 1,650 contracts to their net long position, to show 10,951 contracts net long.  This marks the largest net long position for the SDs since April 21, 2009 (12,316 net long then with $12.02 silver).
(Swap Dealer commercial traders)

Netting between the PMs and the SDs roughly approximates the combined commercial LCNS reported in the legacy COT report (the first three graphs above) although not exactly. 
Finally, the traders the CFTC classes as Managed Money (MMs), liquidated or otherwise reduced their net longs from 14,354 to just 10,392 contracts net long – the lowest net long position for the usually long traders since July 21, 2009 with silver then $13.54. 

(Managed Money traders)
Since September 6, as the price of silver fell $11.95 or 28.5% the traders classed as Managed Money have liquidated 16,014 contracts or 60.6% of their collective net long positioning in silver futures on the COMEX, division of CME.   
That is all for now, but there is more to come.

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