Data is is reported on Friday for the prior Tuesday.
Large speculators are typically hedge funds, and small speculators are individual traders or tiny funds trading a small number of contracts. The commercials are the producers of gold plus the market makers who take the other side of trades.
Silver COT Chart
The silver COT chart (SI) shows large speculators are net short 1,508 contracts, while the commercial traders are net short 14,463. Short specs are long 15,971 contracts, making up the difference.
Normally the action in the gold and silver futures markets tends to be pretty similar, since the same general forces affect both precious metals. When inflation or some other source of anxiety is ascendant, both metals rise, and vice versa.
But lately – perhaps in a sign of how confused the world is becoming – gold and silver traders have diverged. Taking gold first, the speculators – who tend to be wrong at major inflection points – remain extremely bullish. Commercial traders, meanwhile – who tend to be right when speculators are wrong – are extremely bearish, with short positions more than double their longs. Historically that’s been a setup for a big drop in gold’s price.
But now check out silver. Where gold futures speculators’ long positions are three times their short bets, silver speculators are actually more short than long. In other words, the people who are usually wrong are bearish. The commercials, meanwhile, are almost in balance, which is usually bullish for silver’s subsequent action.
What does this mean? One possible explanation is that silver has gotten too cheap relative to gold and needs to be revalued. That could happen in several ways, with both metals rising but silver rising more, or both falling but silver falling less. Or with gold dropping while silver rises, as improbable as that seems.
As the chart below illustrates, gold has recently been rising relative to silver (or silver has been falling relative to gold) with the gold/silver ratio now close to 80, meaning that it takes 80 ounces of silver to buy one ounce of gold. It’s been there two other times in the past decade and both times gold subsequently rose while silver rose a lot more.
Based on this (admittedly short) bit of recent history, an interesting trade might be to short gold and go long silver on the assumption that silver bullion will outperform gold bullion going forward. Or just stack more silver than usual for a while.
Silver Looking Better?
Fundamentally, I prefer gold. Silver is predominantly an industrial metal, while gold is predominantly money.
Silver is consumed, but nearly every ounce of gold ever mined is still around somewhere.
Note Rubino's interesting comment regarding the gold/silver ratio: "It’s been near 80 two other times in the past decade, and both times gold subsequently rose while silver rose a lot more."
Here is practical advice, assuming you like his analysis: "Just stack more silver than usual for a while."
Will it play out again that way? I don't know. Everyone is guessing about everything.
Word About COTs
One frequently hears things like "the commercials increased their shorts".
That's false. Commercials take the other side of the trade. Commercials, except for the producers who sell what they produce, are hedged, while the speculators aren't.
The market makers, counting hedges, are actually net neutral.
The second thing one hears is that the large short positions are proof of manipulation. Since the commercials are hedged, such allegations are ridiculous.
There is collusion and fixing, as has been admitted, but size alone has nothing to do with it.
If the commercials were not hedged, they would have blown up long ago.
He posts links to articles from numerous sources including Doug Casey, Chris Martenson, Davis Stockman, Wolf Street and me.
Mike "Mish" Shedlock