Silver: There Is Excessive Optimism But Not The Highest One In History

Quite many people use the COT Report to catch turning points in gold, silver and other commodities. Most recently some analysts has spotted that big speculators are currently holding the largest net long positions in silver futures. Is that a case?

Well, they are partly right. Why only partly? Look at the chart below:

The chart shows net positions in silver futures, held by big speculators. And indeed, it looks like now these players hold the biggest net long positions in silver futures in history. According to the last report (published on April 22), their net long position was standing at 71,428 contracts. The second highest reading was printed on December 5, 2006 (net long position of 66,730 contracts). 

However, there is a catch. Since 2006 the silver contracts market has grown substantially. In my opinion, the best indication of this change is an increase in open interest. As the chart below shows, in 2006 the open interest was standing at around 125 thousand contracts. Now it is around 180 thousand:

It looks like the market has changed. Therefore, in order to make proper comparisons, I have modified the first chart a little bit. This time the net position, held by speculators, is divided by open interest:

As the chart above shows, taking into account the size of trading, the net positions, held by speculators, are quite far away from their maximums (printed in 2006, during the raging bull market in gold and silver). Today the net long positions, held by speculators, account for "only" 36.7% of total trading, expressed by open interest. In 2006 they hit much higher values: 47.2% in June 2006 and 47.1% in December 2006.

Summarizing - in my opinion, although there is currently an excessive optimism among big speculators, it is not the highest one in history. Markets change and the silver market is now much bigger than it used to be in the past. The analyst should take this issue into account.