Earlier in the week, several online sources that I follow were convinced that silver and gold were about to implode based on a supposedly bearish Commitment of Traders Report from the CFTC. To a certain subset of gold and silver followers, these reports are taken as gospel proof of a concentrated short side manipulation being undertaken by the Commercial Banks. Leaving aside the issue of whether or not I like the paper precious metals game played at the COMEX (which I don’t), I think it can be dangerous to one’s wealth to read so much into these COT reports. You might have better luck with tarot cards.
The dominant discussion I heard this week was that the increase in the Commercial short position meant that gold and silver were destined to drop, and drop hard. What many of these analysts failed to recognize was that there has been a strong increase in speculator long positions. It is these speculators who are often the ones who drive gold and silver prices higher on the futures exchanges, and it was these speculators who did in fact play a dominant role in the price surge from 2003 to 2011 in silver, as opposed to commercial short covering– even as there was some of that as well toward the end of silver’s cyclical bull move in 2011.
I feel that the silver market is still suffering from the after effects of a brutal three year bear market. Sentiment is still not great; many former bulls in this space have been shocked and stunned into silence. Many theories about dollar collapses or the end of the COMEX were overstated; the prophets of doom and gloom have seemingly been silenced by a stock market that has blown through prior records and made all time high after all time high.
But, and this is the important point, when a market is as oversold, underloved, and underfollowed as silver, you should actually be expecting some big moves to the upside. Recoveries from the kind of oversold positions we have seen with the white metal are normally vertical in nature– and yes I know everyone is tired of the bullish case, but that is precisely my point. At the exact same time that everyone thinks the bears can’t be beaten, the market turns decidedly bullish. Put differently, when a trade or an investment thesis feels easy it is wrong, and when it is difficult or hard to believe, you should back up the truck.