The commercial shorts are fighting a losing battle in controlling the price of silver. The chart above comes from Jim Willie’s most recent article “The Silver Platter Opportunity”. Willie makes the point that this is one of the four best buying opportunities of the past eight years….according to the COT structure. Even though this is true, I find the overall trend in commercial short/long vs. the price action more interesting.
To simplify the chart above for those investors who are not that familiar with the COT Report, the RED line shows the commercial short positions divided by the commercial longs. The BLUE line shows the price of silver. According to Ted Butler, silver has had the highest commercial short to long position in history compared to every other commodity. The commercial shorts have been able to control the silver market by mere size and leverage of their positions forcing the weaker spec longs to capitulate time and time again.
The one thing that Willie fails to mention in his article is the overall trend of the commercial shorts since 2005. In 2006 we see that the commercials had over 5 times more shorts to longs. Below is a comparison of the Jan 31, 2006 COT Report to the most recent COT Report of July 5th, 2011.
JAN 31, 2006 COT REPORT (SILVER $9.91)
COMMERCIAL SHORTS = 98.383
COMMERCIAL LONGS = 19,688
NET SHORT/LONG = 4.99
JULY 5, 2011 COT REPORT (SILVER $34.76)
COMMERCIAL SHORTS = 66,999
COMMERCIAL LONGS = 33,548
NET SHORT/LONG = 1.99
Now that silver is nearly $25 higher than it was in JAN 2006, the net commercial short/long is almost at the same level it was when silver hit $9.00 in OCT 2008. This is extremely bullish….but this is only part of the good news.
Hardly anyone in the investing community took notice that something very interesting took place in the month of Oct 2010. We can see for the first time the RED line falls below the BLUE price line. This indeed is a significant event. It is my contention that the commercial shorts no longer have the leverage to control the price of silver. Furthermore, the failure of the commercial shorts to control the price led to the CME and other Exchanges to raise margin requirements to help assist in bringing the price of silver down.
Even though I have written about this in previous comments on the SGS blog, I wanted to put it on a chart so everyone could see just how obvious silver was taken down. The chart starts on April 4th and ends on May 5th. The dates on the bottom highlighted in yellow correspond to the closing of the COT REPORT on each Tuesday.
The first thing we notice is the pathetic attempt to take silver down on April 8th. During the week the commercials liquidated 3,700 contracts even as the overall price of silver moved up $0.76 to close at $40.06. In the following two weeks, there must have been panic in the commercials as they liquidated 8,000 more short contracts with an additional $5.40 move higher in silver. In those three weeks the commercials liquidated 11,530 short contracts as the price moved up $6, but only a lousy 5,094 contracts as the price declined the following week….a most dismal performance indeed.
We can see that on April 26th the first CME Silver Margin Hike was announced which brought the price of silver down $1.40. As the price of silver continued higher over the next two days the CME announced the second Silver Margin Hike to take place on Friday, April 29th. At the end of trading on Friday the price of silver fell a lousy $0.55 to close at $47.87.
The third CME Silver Margin Hike was announced to take place on close of trading on May 3rd to be followed by the fourth to occur on May 5th (not to forget the fifth margin hike on May 9th). It was these five CME margin hikes in coordination with several other hikes by other exchanges that the price of silver was finally taken down to the low $30’s. This was not to limit a speculative frenzy as the nitwits on CNBC touted or as the CME reported, but to stop the bleeding of commercial shorts from an ongoing short squeeze orchestrated by strong hedge fund buying.
It is now evident…the damage has been done to the commercial shorts. There is no heading back. With the pathetic 28 million ounces in the Registered Dealer category, the commercial shorts do not have the ammo to increase their positions to any degree without severe risk. We must remember the Fed and US Treasury want silver to behave like a commodity and not a precious metal. When its price finally explodes higher due to fundamentals, any remaining confidence in the dollar will be lost.