Gold & precious metals, commodities, deep value
Summary
- Large speculators held a record number of short contracts on COMEX silver.
- Short interest in certain silver stocks are still low compared to last year's December bottom.
- Gold could drag down silver even more if gold cannot hold its support zone.
- Historically, October is usually a poor month for silver.
By Ivan Y.
The most recent Commitments of Traders report was released on Friday and it showed that the Non-Commercial traders (i.e. large speculators such as hedge funds and managed futures funds) held a record amount of COMEX short positions. 52,104 contracts (or 260.5 million ounces) were held short as of September 30th. This was more than a 5,000 contract increase from the previous week. Prior to this week's record, the previous record was 49,012 contracts, which occurred right around the time when silver bottomed this June. As it turned out, this was not the ultimate bottom, but silver did rally nearly 15% from that point.
Historically, silver (NYSEARCA:SLV) has found a bottom when short interest by the large speculators has peaked. This was true this June and also during the two silver bottoms last year in June and December.
In all my years of following silver, I have discovered that the COT report is one of the most useful tools in detecting market tops and bottoms. The short interest can certainly go higher, which would push silver even lower, but the shorters are really pushing the limits here. The 260.5 million ounces that are held short is more than the 181.9 million ounces of silver inventory in the COMEX vaults. And out of that amount at COMEX, only about one-third of it is eligible for delivery.
Short Interest in Silver Stocks
While short interest on the COMEX would indicate that silver is close to a bottom, short interest in certain silver stocks is still relatively low, which would indicate to me that perhaps there isn't enough pessimism yet in some of these silver stocks to indicate a bottom for silver and the silver stocks. For example, as of September 15th, short interest in Pan American Silver (NASDAQ:PAAS) was a little over 1.4 million shares. This is significantly lower than the 4-plus million shares that were short last December when silver bottomed. Silver Wheaton (NYSE:SLW) is another good example. Short interest was last reported to be a little over 2.8 million shares, but it was nearly 6 million last December. The same condition also applies to the short interest for Endeavour (NYSE:EXK).
Ideally, a higher short interest in these silver stocks would be a better indicator that silver has bottomed.
Conclusion & Final Thoughts
I would like to see even more short selling at the COMEX and in the silver stocks before I would feel confident that silver has found a bottom in this cycle. Also, gold's precarious position on the charts is another concern. Gold is testing a support zone in the $1180-1200 range right now. Gold double-bottomed in this range last year. If gold's support zone breaks, it could drag silver even lower. It wouldn't shock me at all if gold fell to $1000. I'm not betting on it, but I recognize that it could happen.
Finally, for anyone interested in the seasonality of silver, here is the data of how silver has performed historically during the month of October. Take it for whatever you think it's worth. It could be meaningless or it might be useful.
