Today we are talking silver on the COMEX and, to get this article started, specifically hedging, given recent commentary out there in the public domain shared with us over the weekend by others. To get started, take a look at the graph below.
That’s the Producers, Merchants, Processors, Users (PMs) Net position for silver futures. Like we do for gold futures, we liken this category to the commercial Silver Trade. The largest bullion dealers, producers, silver processors and, interestingly, the bullion-trading banks many of them end up trading through. And yeah, the PMs have a net short position, but BULLETIN: Despite commentary that would lead one to think that the commercial traders have an enormous concentrated net short position what do we actually find? (The higher the blue line on the graph, the smaller the number of net hedges put on by the PMs in the graph above.) (*** Resume here. ***)
It’s near the lowest net short position for the PMs in the DCOT records at just 21,608 contracts net short as of May 20. (The lowest in the DCOT dataset was on June 27, 2006 when the PMs only held 17,872 contracts net short with silver then $10.26 the ounce, by the way, a different time period to be sure.) Now, stay with me as we move through a little more of the data.
Notice that the “normal” case is for the PMs to have considerably more hedges on for silver – more like double or triple what it is today. With silver near $19 the motivation for the PMs to hedge is certainly less than normal, but not near zero like it is with gold near or under $1300. That seems clear enough.
The commentary shared with us this weekend seemed to indicate that the analyst thought the current net short position for the Producer Merchants was egregiously high. Instead we end up reporting that it is actually historically low. What else can we glean from the COT data?
Next graph is just the PM short bets.
About all we can say is that the Producer Merchant short bets are at the lower edge of the “normal” zone. Are they abnormally low or high? Nope. Anyone who says they are abnormally high is not looking at the data. The Silver Trade is hedged about as you might expect them to be with silver near important support and having fallen by more than 60%.
More data please… Here’s the Swap Dealer NET position…
As of May 20, Swap Dealers reported 36,016 contracts short silver offsetting their 40,027 long contracts. So, that’s 4,011 contracts net long.
The mercenary banks who sell other participants complicated swaps, knock-out options and other derivatives are not very far from net flat overall with silver near $19. But man, take a look at how they get there. The chart below is of just the Swap Dealers’ gross short positions.
As of May 20 Swap Dealers reported holding 36,016 contracts short silver on the COMEX. That’s a bunch and a near record high. (The record high came on March 25 of this year with 38,062 shorts reported.) In case the graph is not as clear as crystal to you, the Swap Dealers are very close to their largest ever number of gross short positions for silver in the DCOT data set.
So how about the hedge funds and CTAs? The category the CFTC classes as Managed Money showed this as a net position as of May 20:
That’s 837 contracts net long. Might as well call it net flat also. But, just as in the case of Swap Dealers, look how the Managed Money traders got there. Just below are just their gross short positions.
Well, well, look at that. Another new record high for short positions for “The Funds.” The non-commercial funds. The trend-following hedge funds and others who trade futures for clients. Record-high shorts on now, with silver probing $19.
Quickly rounding out the rest of the COMEX positioning, below is the graph for the net position for traders the CFTC classes as Other Reportables. The traders who trade futures for their own book, not for clients. These are very large traders, by the way.
Finally, the net position of smaller Non Reportables, which includes traders with positions too small to fall in the reporting requirement.
In case one might be wondering who, or rather which class of trader is the most vulnerable to a material move in the price of silver just ahead, take a good look at the graphs above and see which ones seem to be “out of whack.”
Would you say that between the Swap Dealers and Managed Money traders, there is a huge amount of potential short covering horsepower currently in play? and, would you say that those two graphs seem to be about as far from “normal” as we have ever seen them?
Yeah, we would too. The only question I have is where, exactly, the squeeze they suggest has become very possible might get triggered and of course, the more important question, when.
That is all.
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