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Silver fall ready to reverse?

From July 29 to Sept. 2, managed money traders (which include large hedge funds, commodity pool operators, commodity trading advisors and similar companies) decreased their net long position in COMEX silver contracts from 14,063 to 6,542. Since each contract represents 5,000 ounces of silver, that means they decreased their net long position by about 37.6 million ounces in just five weeks. This change was accomplished by increasing their gross short positions by over 135 million ounces while the increase in gross long contracts by less than 98 million ounces.

This shift represents roughly 4 percent of global worldwide silver mining production. Had this shift occurred among “strong hands” traders, the decline in the price of silver would almost certainly have been greater than the $1.42 (6.9 percent) drop from $20.57 on July 29 to $19.15 on Sept. 2.

However, traders in this category are traditionally “weak hands.” They typically buy and sell positions for short-term results. The offset to their reduction in their net position (remember that there is always a short and a long position for each COMEX contract) has been bought largely by “strong hands” investors, those who will hold on to their position for much longer than the managed money traders.

Indeed, from July 29 to Sept.  2, the net COMEX silver long position held by companies listed in the “Other Reportables” category increased from 8,461 to 12,034 contracts (just under 18 million ounces).  This category includes very large traders who are trading for their own accounts rather than executing orders for clients.

It seems obvious to me that if short- term traders have been decreasing their net long position, they have a high likelihood of soon turning around to aggressively add to their net holdings. This also seems to be the expectation of large traders placing trades on their own behalf.

Do these two trends indicate that silver prices will end September higher than at the beginning? We will find out in three weeks.

In the meantime, recent lower silver prices have brought a minor flurry of buying of bullion-priced physical silver coins and bars. The U.S. Mint reported higher sales of silver Eagles in August than in July.  While there are no shortages of physical silver on the market yet, those purchasing large quantities will probably have to wait a few more days for delivery than they did in late July.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects.  Past newsletter issues can be viewed at http://www.libertycoinservice.com.  Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).  

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