While it is impossible to know what direction any commodity is heading in the near-intermediate future, there are, however, various market signals which provide important insights regarding market sentiment. One influential signal is the actions of the largest commercial traders. Although I have discussed this ad nauseam, the importance of such vast structural changes in the silver market can’t be stressed enough. While many understand the game of cat and mouse the large commercial traders have been playing for several decades, it is for the most part, known by very few. While I have discussed the manipulation in the futures market for silver numerous times in the past, I will again discuss the importance of the structural changes in this small market, which have been on-going for approximately nine months.
It is well understood by the top commercial traders that they have dug themselves into quite a large hole , which they are scrambling to get out of, illustrated through a year over year comparison of the COT (Commitment of Traders Report). 261.84 million ounces were held net short by 33 various commercial traders, this time one year ago. But the more telling aspect of this is the concentration levels of the top 4 and 8 largest commercial traders (i.e JPM, HSBC, Etc). 252.8 million And 321.8 million ounces were held short by the 4 and 8 largest. To put this into perspective the top 4 had a net short position equal to 25.28% of total above ground bullion inventories, while the top 8 had an astounding 32.18% held net short relative to total above ground inventories. Why is this important? If futures traders started taking delivery of the physical metal, the commercial traders would be responsible for delivering it. But with each marginal ounce that is delivered, the cost of the next ounce will be higher and so on. In other words, should their entire net short positions be redeemed by the longs, there would be a high probability of either the inability to deliver all the silver and/or a default which puts bankruptcy into play. As much as I wish banks such as JPM and HSBC would crash and burn, they are obviously too smart to let that happen. Though it is inevitable they will suffer substantial losses in the future, they have done an excellent job trying to stop the bleeding as they have been covering for the last six to nine months.
As seen in the second chart the net short position of 40 commercial traders has decreased dramatically to 167.26 million ounces or 16.726% of total world bullion inventory. Just as, or even more telling are the top 4 and 8 commercials concentrations levels held short. 172.995m ounces are currently held net short by the top 4 or 17.299%, dramatically less than they year ago period. As for the largest 8, they also dramatically reduced their downside exposure to silver should the price of silver rise, currently short 209.15m ounces or 20.915% of total world bullion inventories. This trend has long been intact and continues to improve with each passing week, one of the most bullish signs of not only demand outstripping supply (due to more industrial applications and investment demand increasing at an accelerating rate) but also the realization that the commercials can no longer control the price at will as the physical market has dominated the futures market in true market price discovery.
It is in my own humble opinion, now is the time to jump into the silver (and gold markets) with both feet as this will ultimately prove the opportunity of a lifetime. Of course 99% of investors who read this article will likely presume the author is a nut-case, but the question to ask yourself is whether or not a great investment (no matter how esoteric) are often embraced by these same nuts.
