COMEX Silver Traders in Commitments of Traders (COT) Mexican Standoff, Short Squeeze Remains Likely

On the other side of the margin-line killing fields are the hedge funds, commodity trading advisors (CTAs) and other large traders who trade futures for clients (not for their own book), traders the CFTC classes as Managed Money. Managed Money traders have apparently taken a notion that the downtrend that defined the price action for silver from February to June is not only over, but it is clear they feel that a new and potentially important new uptrend has taken its place (almost certainly). Nothing else explains the confident, aggressive pace of buying pressure and short covering Managed Money has taken in recent weeks (which we will detail in a moment).

There are three other classes of large (and small) traders, but the largest of them, the Producer/Merchants are primarily hedgers, well within a normal scope and range of futures positioning and realistically the other two classes (Other Reportable’s and Non Reportable’s) size and recent actions make them ancillary to the main show. The war between silver futures titans belongs to the Swap Dealers and Managed Money in this version of the silver futures battle.

Like sharks circling, waiting for one of their own to become wounded and vulnerable, the other COMEX traders are biding their time, watching, vigilant, always at the ready for an easy meal...

Who Will Flinch First?

We have some definite conclusions to share about this week’s commitments of traders report changes and what the current positioning of the primary combatants probably means, but before we get to the conclusion, let’s look at this week’s changes and positioning for both the mercenary Swap Dealers and Managed Money ‘special forces.’ By the way, for more coverage of how they have gotten to “here” so far one can catch last week’s offerings.

Beginning with the commercial traders who have piled onto their short position to extreme, near record highs – the Swap Dealer commercials (highest in seven years as we detailed in previous coverage), as silver traded precisely sideways from COT reporting Tues/Tues (from $21.01 July 1 to $21.02 July 8) way, way short Swap Dealers didn’t blink or retreat – yet. In fact they actually added a smallish 3,090 contracts to their already near-record net short stance, from 22,155 to 25,245 contracts net short, as shown in the chart and data table just below – Swap Dealers at another near DCOT record high net short stance.

Graph, Swap Dealer net position. COT data from CFTC, price data Cash Market. GGR.

Data table, Swap Dealers net positioning.

Notice in the chart above how fast the Swap Dealers went from net long to record net short? That is another reason we have singled them out as a primary combatant. They have a price point of view and were willing to sell heavily to defend it. They will likely hold that view until they are broken of it.

As we said, the Swap Dealers held their ground as of the Tuesday cutoff, but that was before the significant breakout attempt Thursday the 10^th, shown in the hourly view below courtesy of Finviz.com.

Price graph hourly, Finviz.com.

While studying the aggressive Swap Dealer short sellers, take a look at the enormous, record high shorts they have built up – a bunch of it coming just recently as shown in the tracking graph below. Talk about being very aggressive and EXPOSED on the short side! And, notice that as silver traded sideways the aggressive Swap Dealers actually added another 3,408 shorts, up to a new DCOT record high 58,381 gross shorts of silver futures. - Swap Dealers remain record short silver futures.

Swap Dealers gross shorts, now a record high 58,381 lots. (Extremely out of balance in our view and vulnerable to the predatory instincts of the opposing traders.)

Here’s the actual recent data for reference.

Managed Money Just as Determined from the Opposite Side

Moving to the other side of the battlefield it is clear to us that the Managed Money (MM) traders are every bit as determined from the long side. In fact, they also added to their collective net long position, by 7,749 to a quite high 43,951 contracts worth of net long positioning as shown in the tracking graph and data table below.

MM net position for silver futures. 43,951 lots net long.

MM net positioning data from CFTC.

That’s the highest MM net long position since October 5, 2010, when the Managed Money traders held 47,823 contracts net long with silver then $22.83. For the record, that huge high number of net long contracts in 2010 was definitely not a sign of a top for silver. By December 28 (just two months later) it had advanced to beyond $30 or more than 32% higher for example. And silver wasn’t done rising then either.

Looking at the graph above, clearly Managed Money also did not blink or retreat by the Tuesday COT cutoff. At least as of Tuesday the dramatic Mexican Standoff was fully and completely in charge of the silver price. However, we get the clear sense that may have changed with the MM's mortal enemies, the Swap Dealers, in the Thursday rally attempt… Indeed our sense is that a gap, a weak spot may have opened in the short selling Swap Dealer offensive line on Thursday, albeit not yet one that proves we have begun a sure-enough short squeeze. Not yet. (Sure is promising though, don’t you think?)

Now let’s turn to the Managed Money gross short positioning where we are quickly reminded of just how aggressive the Managed Money traders were in clearing out or covering their formerly record high gross short position (a huge 42,804 shorts June 3). As shown in the graph and table below, Managed Money has blown out (covered) all but 11,588 shorts since June 3 as silver rose $2.22 the ounce. - Managed Money confidently and aggressively covering shorts and adding longs, similar to 2010.

Graph MM gross shorts.

MM data table, shorts only.

Trench Warfare?

We are reminded – at least as of last Tuesday – of WWI style trench warfare, with the battling armies lobbing hand grenades and potato mashers at each other from close in trenches – neither side willing (so far) to budge – neither showing a definite superior advantage yet either.

But like we said, all that may have changed – we just possibly saw the first sign of a flinch by the short selling Swap Dealers on Thursday in the silver breakout and rally attempt.

That just might have been a warning shot – ahead of the coming short squeeze. If so, silver is poised and positioned such that it could really surprise in its upside intensity…

Silver, daily.

A sure-enough short squeeze, should one develop just ahead, could easily add $2.50 to $5.00 to the silver price in a relative blink of an eye - for starters. We can look back to the last great silver short squeeze for a sense of what might be possible if all the stars and planets align just "right."

It would not be the first time we have seen it unfold with huge imbalances in the COT positioning of the larger paper futures traders. Recall in 2010 that it was the Producer/Merchants then with more than 62,000 contracts net short and silver then threatening a breakout at $20.46 the ounce. Managed Money was the other combatant then too, with a really high number of net longs, well above 40,000 contracts then.

We all know the end of that story. Silver (and gold) broke out that September and never looked back on the strength of major short covering by the Producer/Merchants, with Managed Money gently giving back to the market a relative few of their long contracts each week as the silver price doggedly rose and rose and rose, on its way to eventually test $49 the following April. – A controlled short squeeze can be a thing of beauty, when the action favors your own positioning…

Silver, Monthly

To close this offering on an up note, we believe we saw one side flinch in Thursday's rally attempt for gold and silver. That almost certainly was the short side doing the flinching too, because the price of silver rose, not the opposite.

Was that only a warning shot, with a sure-enough short squeeze about to unfold again?

I guess that will depend, once again, on the Managed Money trader's macho-factor - whether or not the already way, way too short paper chunking mercenary Swap Dealer banks are able to throw enough paper at the Managed Money veterans to actually spook them (instead of feed them additional ammo as the Swap Dealers apparently have been doing for the past four COT reporting weeks).

To be fair, this scenario is not yet over and we suppose it could still play out either way. However it unfolds, it will almost certainly be worth keeping on at least one trading screen to watch in real time just ahead.

For the time being the message remains "Short Silver at One's Peril."

That is all.

Gene Arensberg for Got Gold Report