Speculators Throw the Towel

Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver’s turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held their first net short position in 14 years (!) with silver trading at $16.43. This is highly unusual.  Here is a short term chart of the net positions of hedgers and large speculators:

 

The net speculative and net hedger positions in silver futures have undergone huge swings lately – while prices moved only very little. Consider the much smaller net speculative position at the market top near $50 in April 2011 compared to the peaks seen since early 2016 and especially last year. We suspect that there must have been huge inflows into CTAs given how much larger reportable speculative positions in many commodity futures have become in recent years. Note that the trading strategies employed by such funds rely almost exclusively on technical signals and most of them are trend-followers (a few systems with mean-reversion overlays exist as well). Often there is no longer any human intercession, instead computer algorithms decide what and when to buy and sell. Of course such computerized trading systems are still programmed by humans – they are merely more likely to strictly stick to the rules of whatever trading strategy is implemented (humans are known for frequently second-guessing their own trading rules). As a result of this, herding effects are very likely actually magnified.

 

This is really quite remarkable, particularly when considering the price range that was the backdrop to these huge swings in net positions. Below is a continuous contract chart that shows the price action a bit more clearly (note: because of the nature of this chart, prices are diverging somewhat from the spot prices we mention in the text; but the divergences are small and the general shape of the chart is the same).

 

A continuous contract chart of the active silver futures contract over the past 1 ½ years. We have no idea what actually motivates the recent speculative position, particularly in view of the fact that other industrial and precious metals (silver is both) are generally getting a lot more love.

 

A Highly Unusual Situation

We bring this up for the following reasons: 1. precious metals stocks – regardless of whether they predominantly mine gold or silver – have shown far stronger correlation with silver prices than with gold prices over the past two years (see the chart at the end of this post); 2. whenever the speculative net position has reached an extreme over the past 20 years, the market soon went into the opposite direction, sometimes quite forcefully.

The last time speculators were net short silver was 14 years ago in early April 2003, with silver trading at $4.43 – before that, we can find several small net short positions two years earlier in 2001 – at prices ranging from $4.26 to $4.72. These occasions are rather memorable, because they marked the beginning of the biggest bull market in silver since the blow-off move of 1979 – 1980.

As an aside, the biggest ever speculative net short position in silver futures (of more than 10,000 contracts) was recorded in late July 1997 – with silver trading at $4.43, then the low of the year. Silver prices nearly doubled over the next two months. In other words, timing is apparently the strongest suit of this group of traders, in the sense that they usually just chase the trend. Collectively they have never correctly anticipated a turning point, at least not fully.

To their credit, there is a noteworthy exception to the rule: they did become increasingly skeptical along the way of the blow-off move that topped in 2011, but still held a net long position of 25,000 contracts at the peak (the timing of their sales still left a lot to be desired though, since they missed quite a large portion of the move in this case; we do give some credit to the sellers for at least side-stepping the crash). Here is a long term chart showing the situation since 2000:

 

Silver since mid 2000 – large speculators holding net short positions is an exceedingly rare event. When it happens, it usually indicates that sentiment has become much too bearish and that one should begin to anticipate a turning point – that is at least what the historical data indicate.

 

Conclusion

This was such an unusual and unexpected development that we felt we had to mention it in these pages (note: as of last week the speculative position has returned to net long 6,186 contracts, which is still very subdued exposure for this group of traders). We want to close with a caveat: precisely because the character of these markets has changed – this is to say, we more and more often see very large changes in trader positioning amid very little price volatility in commodity futures – one should probably not be too hasty to come to conclusions.

Speculative futures market positioning doesn’t trigger price moves by itself – but extremes in positioning can often exacerbate unexpected moves once they get underway. The notion that positioning extremes harbor potential once they reach certain levels rings true in the historical context, but one has to keep in mind that this context may no longer be as relevant as it once was – at least in terms of the specific boundaries that were established in the past.

In short, one shouldn’t mortgage the farm and buy silver on the basis of this signal. We do see it as a heads-up though – at the very least it is telling us that it is time to pay close attention to this market and markets related to it. As mentioned above, in terms of recent correlations the performance of silver seems particularly important for precious metals stocks. Here is a chart illustrating this development – a performance comparison between gold, silver and the HUI Index over the past 18 months:

 

While the HUI has recently begun to even underperform rather noticeably against silver as well, it is generally more closely aligned with silver than with gold. As an aside, fundamentally this steadily growing performance gap makes very little sense. Most gold mining companies have new managers who have generally gotten a very good grip on costs and managed to greatly boost margins and cash flows even before the gold price recovery started in late 2015. Debt has been cut quite a bit at the major producers as well. It seems these stocks are simply “out of fashion” at the moment; alternatively the market expects metal prices to fall – but if that is the case, then it is an expectation that has been consistently wrong for quite a long time by now and it is not quite clear why it should become any less wrong going forward.

 

Charts by: SentimenTrader, StockCharts

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Despondency in Silver-Land”

  • Hans:

    I have never placed must faith in tracking future contracts,
    as a reliable indicator. I prefer the HUI and CBR indexes, as
    a source for investment decisions.

    $AG, reached a low just under five bucks, with the rest of
    the silver stocks trading near record lows. Much the same
    for gold miners as well.

    It maybe an excellent time to take a minor position, however,
    if the markets tank – they shall provide no safe harbor.

    Posters preferreds – $AG, $GG, $NEM, $MUX

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist