In Ted Butler's Archive


Data recently published in the Commitments of Traders (COT) reports indicates the emergence of a big managed money trader on the short side. This entity appears to be holding a net short position of roughly 10,000 contracts (50 million ounces) in COMEX silver futures. There’s no way of knowing whether this big managed money short will be able to buy back the current large short position on lower prices, but we will come to learn that in future COT reports. It doesn’t bother me in the least that this big managed money short exists, for the reason that at some point – with silver prices lower or higher – this trader will buy back its large short position. I consider the existence of this short position as positive for the direction of future silver prices. Even if this trader buys back lower, the buying will be a supportive influence for the price of silver. If this trader is forced to buy back on higher prices, that will only enhance the buying frenzy I see ahead in my Code Red market emergency.

There is also evidence of the emergence of a new big silver long in COMEX futures and that is, potentially, much more exciting. The evidence lies in the increase in the concentrated long position of the 4 largest traders in COMEX silver from 20,253 contracts on July 3 to 30,702 contracts as of July 25. I estimate the big new concentrated long position, as being around 10,000 contracts (50 million ounces).

I further believe that the big managed money short that is holding a 10,000-contract short and the trader in the other large reporting category holding a nearly identical large long position to be completely unrelated and coincidental. Aside from that, I consider the large long position to be potentially much more significant and would like to explore my reasons for thinking that way.

Please know upfront, that there is no way I can predict what this new large silver long will do in the future. That will only be learned as time progresses and the actual data is reported in future COT reports. At the same time, however, if I suspect something important is afoot in silver, I don’t see what is to be gained by keeping it to myself and not reporting on something that could be profoundly important.

The 10,000-contract long position involves a derivatives position equal to 50 million ounces at an average cost of around $24.50. If the big new long chickens out and sells on a three-dollar selloff, the loss would come to $150 million. Conversely, if the new big long gets “lucky” and bails out after a three-dollar increase in the price of silver, the gain would also be $150 million, or $50 million per each dollar move in the price of silver. And on an initial margin of roughly $125 million, that’s plenty of leverage for the biggest short-term trader.

Such a large position in silver could only be established by a steady accumulation of COMEX silver futures contracts over the last four weeks. No one could buy the equivalent of 50 million ounces in any other venue. In other words, the magic and promise of this new long position is that it was established with minimal impact on price and that gives me hope that it is more than just a short-term speculation (I believe the big managed money short position is nothing more than a short-term speculation). Moreover, this new long position was established at the most critical and promising time in the history of the silver market. That’s because of the deepening and increasingly undeniable physical silver shortage and the current Code Red market emergency in COMEX silver. There’s just never been a better time for a knowledgeable and well-informed trader to come into silver big.

The new big silver long is in a remarkably unique position and should this position be held for the long-term and not as a short-term speculation allow me to offer this trader some (free) advice, since it’s possible the big long may have run across my writings and that may have played a role in acquiring the position. My first advice would be to not increase the position beyond the 10,000-contract level. The only reason the regulators at the CFTC and CME Group have not already ordered a reduction in the position is that the concentrated short positions of a few traders is at or around the same 10,000-contract level.

I don’t know what the new big silver long will or won’t do – but the possibilities are exciting. Superimposed on what I claim is an existing market emergency in the COMEX silver market, this new long only intensifies the emergency – not because the position is too large, but because the concentrated short positions (including that of the big managed money short) are too large.

On another subject, over the last ten years the price of silver has been unable to penetrate the $30 level, whereas gold and every other commodity have exceeded their price of 10 years ago. An observer might ask why, considering that the supply/demand fundamentals in silver have become exceptionally bullish. The inability of silver to decisively penetrate the $30 level for an entire decade establishes a price line in the sand that once penetrated, will likely set off a buying binge of epic proportions. When silver does penetrate the $30 mark decisively, it will still be 40% below the price peak of 43 years ago. The next time gold achieves new price highs, it will be three times higher than the price highs in 1980. Silver’s coming break of the $30 price mark seems much more consequential.

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