Swap Dealers ‘Goal Line Stand’ for COMEX Silver Futures in Jeopardy, Squeeze Very Possible Now

HOUSTON –  A sure-enough short squeeze might be developing in the volatile silver market.  We attempt to identify who, or rather which class of futures trader, might be squeezed in this brief offering.

The inspiration for this article is actually misinformation found elsewhere.  We have seen and read commentary on the Web from various analysts and market watchers that have attributed, or rather misattributed,  the very large increase in large commercial net short positioning (LCNS) for silver futures to the Producer/Merchants –  which would be to the “silver trade” itself. 

Recall that the Producer/Merchants primarily use futures to hedge a natural long position by those who hold or manage significant amounts of gold or silver inventory – either for themselves or for others. 

Looking at the Legacy COT graph for the combined commercial traders, we see a quite large increase in the amount of net short positioning, but what we cannot see in the old style report is which class of commercial trader is more responsible for the big addition of net short interest.  Here’s the Legacy COT tracking graph for silver futures for reference.  The reason we share it here is it forms the basis for much of the misinformation out there on the Web. 

Graph:  Legacy Silver LCNS (Large Commercial Net Short Positioning).  July 1 data shows 51,955 contracts net short by the commercial traders.  COT data from CFTC, silver prices from Cash Market. 

While here, what is the data and chart telling us?  From June 3 to July 1 silver advanced $2.22 or 11.8% (from $18.79 to $21.01).  For that same period the combined commercial traders – as reported in the Legacy COT report —  added  a pretty darn large 42,315 contracts to their collective net short positioning (from 9,640 June 3 to 51,955 contracts net short July 1 – the equivalent of about 211.6 million ounces of silver bullion apparently sold into and presumably attempting to put the brakes on the silver rally). 

Some of the commentary out there has attributed the increase to the analyst’s  favorite or pet adversary, such as sinister bullion banks, with one in particular often blamed (for the record we do not believe that bank is making a one-way bet on any commodity, but that topic will have to be covered in depth another time). 

The trouble is, it is not really the Producer/Merchants, which is where most analysts believe the bullion trading banks report their own positioning and their positions taken for clients as well …,  it is not, repeat not, the Producer/Merchants that are responsible for the huge increase in commercial net shorts for silver recently.  Not really, and we are about to see it in spades.   

We are not going to stay with the Producer/Merchants in this offering, but while we are talking about them, let’s look at their actual positioning for silver futures as of July 1.  For that we can use the data provided by the Disaggregated Commitments of Traders report (DCOT).   

The graph below tracks the Producer/Merchant’s  net position in silver futures.  What the data show is that as of July 1 the Producer/Merchants (PMs) held a total of 29,800 contracts net short.  That’s up a modest  9,469 contracts from the June 3  PM position of 20,331 contracts net short.  Below is the DCOT tracking chart for the Producer/Merchants net position for silver futures for reference.   

Graph PM Net Silver. 

Recall there are two classes of trader the CFTC considers commercial, the Producer/Merchants and Swap Dealers, and together their collective positioning are what the Legacy COT report (the first graph) captures each week.  Until 2008 we were not able to distinguish between commercial traders, but with the advent of the Disaggregated COT (DCOT) today we can.  The DCOT breaks the old commercial category into Producer/Merchants and Swap Dealers and reports them separately. 

We have already looked at the positioning of the Producer/Merchants.  Let’s turn now to the other commercial actors, the mercenary Swap Dealers.  Whereas the Producer/Merchants showed a modest increase in net shorts from June 3 to July 1 of about 9500 contracts, look at what we find for that same period for the Swap Dealers (which is where we believe that predatory banks like Goldman Sachs primarily report their positions). 

Now hear this!:  As silver rose $2.22 the ounce from June 3 to July 1, the traders the CFTC classes as Swap Dealers reported going from 10,691 contracts NET LONG to a stunning 22,155 contracts NET SHORT – a giant and unprecedented swing of a whopping 32,846 contracts to the short side.  Catch that? 

First, for the purists out there, here is the actual data,  to be confirmed via the CFTC web site here.   

Table SD futures data.

And, here’s the Swap Dealer graph for a “visual” on what we are calling a silver short seller ‘goal line stand.’   This is the equivalent of Dennis Gartman’s often repeated scenario of a trader “averaging down” a losing position, is it not?  In this case it is Swap Dealers selling short in grotesque amounts in  order to hold back the tide of a silver rally.  At least it has that appearance here.  See if you agree. 

Graph SD Net silver.

What we are looking at is evidence that from June 3 to July 1, the already pretty short Swap Dealers sold, and sold, and sold some more into the nascent rally for silver.  Just in new short contracts the Swap Dealers put on a staggering 23,290 new shorts, reporting from 31,683 up to 54,973 contracts short silver futures – a record high number of Swap Dealer shorts for the DCOT dataset (data back to 2006).  Here are just the Swap Dealer gross shorts graphically. 

Graph:  Swap Dealer Gross Shorts Silver. 

What we may be looking at looks a lot like a desperate attempt to hold silver back, even though it is clearly being bought heavily by multiple parties. 

Is that because these parties sense that silver is an uncommonly good value now, with a $21 handle?  Is it because those silver buying parties can read a COT report and can see that the mercenary Swap Dealers have way over-sold it to the point of becoming vulnerable to a short squeeze?  Or is it just that the parties that want to accumulate silver sense that time is of the essence in this price range? 

Perhaps it is an amalgam of all three, but whatever the case,  take a good long look at those graphs.  If one was short silver futures in a big way, having used considerable capital, both monetary for margin and mental – trying to move a market with it moving against you … if one was short silver futures and could see just how vulnerable the Swap Dealers have become (by having a way too large a short position in a rising price environment) … well, wouldn’t the better part of valor be to exit quietly to the sidelines, to cut short losses and live to fight another day? 

Just asking. 

That is all.