THE SILVER SETUP
To me, there has rarely been a better time to buy and hold silver because the sharp price decline has created an undervaluation that I never expected. Usually, there are many factors that determine prices for world commodities; but not silver. As always, the documented explanation exists in the weekly Commitments of Traders Report (COT) from the CFTC. But what makes the evidence special this time is just how specific it has become.
Since the end of February, two specific categories of traders on the COMEX, one buying and one selling, have exchanged ownership of 30,000 silver futures contracts, the equivalent of 150 million ounces. I am not talking about day trading volume or phony HFT spoofing and trading, I am talking about 150 million equivalent ounces of silver being sold by one category of trader and being bought by another set of traders. 150 million ounces is 75% of the silver mined over these past three months and more than all the silver available for investment annually.
The category of traders that sold the 150 million ounces I refer to as the technical funds (computer driven hedge funds). There are no more than 30 of them. The category of traders that bought the 150 million ounces I refer to as the raptors. They are the smaller commercials (brokerages, banks and trading companies) separate from the 8 largest COMEX short traders (big banks). The raptors are my own special category of traders. In last week’s COT report, the raptors held 48,800 silver contracts net long, up from 19,600 contracts on March 4. There appear to be about 30 raptors in all, so they number about the same as technical fund traders.
The technical funds sold short the equivalent of 150 million ounces of silver, the raptors bought equivalent long contracts. Both positions are newly opened as opposed to being closed out positions. Both are at the highest level in COMEX history. In a nutshell, the 150 million ounces (30,000 contracts) of technical fund short selling caused the price to drop $3. There is no other plausible explanation. The only question is what motivated the technical funds to sell such a quantity of silver futures contracts? The answer is clear, progressively lower prices.
The raptors who are long have the technical funds who are short over a barrel. It’s only a matter of time until the raptors decide to ring the cash register by orchestrating higher silver prices. This will cause the technical funds to buy back their silver short position. Because the technical funds hold a record silver short position, this makes the current setup the best in history. Make no mistake, the technical funds must buy back, rather than deliver metal to close out their short position. As a result, there is now the largest amount of potential buying power in history. Silver should surprise to the upside at some point soon.
It seems wise to be fully committed to silver at this time. The evidence is over-weighted for a pronounced price rally. About the only thing to avoid is holding on margin, but that is always the case. The setup is so pronounced that I’ve stopped thinking about what type of news could set off the coming silver rally. There is no news necessary for prices to rise – just prices high enough (say over $19.50) to induce technical fund buying. This could cause a rapid increase in price so try to get in before the fireworks start.
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