Wednesday, December 13, 2017

It Looks Like Silver Is Bottoming

Commitments of Traders reports are, in my opinion, a very helpful tool to measure the traders' sentiment. Let me take the silver market as an example. Here is the chart documenting historical movements in silver prices, starting from the beginning of 2016:

Let me analyze two latest legs down during the current bull market cycle in precious metals (please, forgive me for calling this flat market a bull cycle - I am an incurable gold bug).
Leg down number 1

The first move is marked with the red arrow. It started in middle April 2017 and ended in early July. During that period (a 16.8% drop in silver prices) the Money Managers (big speculators trading silver futures) increased their gross short positions by 42.9 thousand contracts and cut their gross long positions by 54.5 thousand contracts. As a result, a net long position held by these speculators dropped by a huge amount of 97.4 thousand contracts.
Leg down number 2
The second move (blue arrow) dragged silver prices from $18.2 to $15.7 per ounce (a drop of 13.7%) but this time the shorts (Money Managers holding gross short positions in silver futures) increased their short bets by 17.7 thousand contracts and the longs (Money Managers holding gross long positions in silver futures) cut their exposure by 13.1 thousand contracts. As a result, a net long position held by Money Managers went down by 30.8 thousand contracts.

Thesis: the latest leg down in silver was accompanied by significantly lower selling pressure among big speculators trading silver futures. So, if I am correct, we may be ahead of another strong move up in silver prices. What is more, now Money Managers hold a net long position of 21.6 thousand contracts. It means that this group of players is less pessimistic than during the bottom established in the beginning of July (a net short position of 6.4 thousand contracts). Lower pessimism at similar prices may be an indication of an ending bear cycle.

Last but not least. Here is the chart documenting this year's silver flows reported by the iShares Silver Trust (SLV):

source: Simple Digressions

Note that in December up-to-now as many as 9.6 million ounces of silver were added to SLV vaults. Well, it is not a common pattern. Usually, SLV reports silver inflows during bull cycles. Most often (but it is not a strict rule) during bear cycles the silver goes out of SLV so...this time is a little bit different.

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