Dan Norcini: Looks like a commercial signal failure in silver

By Dan Norcini
JSMineset.com
Saturday, March 1, 2008

These charts detail the commitment of traders report through Tuesday of this week:

http://www.jsmineset.com/cwsimages/Miscfiles/5830_Charts_for_2-29-2008_C...

I have included a chart of silver since there is a development there that bears comment. Please refer to that chart where I have included some of the following comments and have marked the area on the chart that demonstrate what is taking place:

"Notice that the commercial short category sharply reduced the number of outright short positions (-9,297). This occurred from Tuesday of last week through Tuesday of this week. Over that time the price of silver rallied $1.22. If you look at the chart carefully, you will observe that this is the first time this has occurred in which the funds have not been reducing their net long position.

In other words, this appears to be the start of a commercial signal failure. Normally the commercial perma-shorts in silver have used fund long liquidation to cover their shorts as the market moved lower. Not this time; they are buying on the way up!"

Also, while I did not note this on the chart, it is also noteworthy that someone obviously had to take the other side of that trade and sell silver futures. We might normally expect to see some of that selling occurring among the fund longs that could use some of that forced buying to book a few profits and sweep some of their paper earnings off the table to realize them. Amazingly enough, this has not been the case. The funds continue to buy.

Guess who is doing the selling: the small specs!

Apparently some of the public is trying to pick a top in the silver market. They have built up the largest outright short position in two years.

Talk about a bullish signal. The most undercapitalized traders on the planet are adding silver shorts as the market breaks into a 28-year high. No wonder open interest continued to shrink on Wednesday and Thursday this week.

I would venture that a large portion of the new shorts by the small specs, which are deeply under water, are also coming off as the market stops them out. Forced buying by the commercials as they cover a good portion of their outright shorts and buy stops being set off among the public are powering this market higher as the funds squeeze them out.

This is going to be worth watching next week to see if it continues or if things take a breather. Remember, it is a new calendar month on Monday, and that often means new allocations of fund money to the markets. If that occurs, the silver shorts are in serious trouble, as the longs will show them no mercy. Blood in the water draws sharks, and the silver shorts are not only bleeding, they are hemorrhaging massively.

Stay tuned for this one.

Concerning gold and its commitment of traders:

Unlike silver, the commercial shorts in gold did not cover a substantial amount of their outright shorts over the past week's reporting period. The reduction was a mere 848 shorts, a drop in the water compared to their massive position of 356,374 shorts.

Some might be tempted to extrapolate that the commercials are getting squeezed in the gold market as well and that we also have a commercial signal failure occurring in there. That is not the case, at least not yet, as can be seen by looking at the gold chart from Tuesday of last week through Tuesday of this week.

Last week April Comex gold hit a high price of $958.40 on Friday. But on Monday and Tuesday of this week, it dropped $30 all the way down to $928.90. It was during that brief two-day drop that the commercials covered some of their shorts as some of the funds were liquidating their longs (-1,447) and adding new shorts (1,449 to be exact).

It is quite unusual to see the funds basically canceling each other out in the gold market. By Wednesday the brief price retreat was over and gold powered north again.

We do not have the data to cover Wednesday through Friday of this week but open interest records basically held steady.

In other words, as far as I can tell, there is yet no evidence to indicate that the commercials have thrown in the towel in the gold market. On the contrary, the price action from my perspective indicates continued selling resistance by the same entities that have fought the rise in the gold price since this bull market began back in 2001. We will get a clearer picture of al this next Friday, which can seem like an eternity when prices are moving the way they are.

I have also included a chart of the COT data for Minneapolis wheat so that you can see what a commercial signal failure looks like when the shorts are caught on the wrong side of a runaway bull market. The area marked within the ellipse delineates the short squeeze. Keep in mind that this began back in November. Prices tripled, from $8 all the way to $25.

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