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Why I'm Done With Silver -- For Now

By Jay KaeppelCommoditiesMay 10, 2016 11:36AM ET
www.investing.com/analysis/where-not-to-invest-right-now-(part-1)-200128957
Why I'm Done With Silver -- For Now
By Jay Kaeppel   |  May 10, 2016 11:36AM ET
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I have certainly enjoyed silver's run up so far this year. But for reasons that I will explain, I'll be “adjusting my attitude” soon – at least for a little while. Granted, betting against precious metals when they are in the midst of a strong advance is one of the easiest ways to make yourself look foolish. But the truth is that I have been down that road so many times over the years that i've learned not to worry.

IMPORTANT NOTE: Please note that the title says “Where NOT to Invest Right Now”. I am not attempting to “call the top”, nor am I suggesting that anyone play the short side of silver. I am just saying that I personally will not be buying silver anytime soon. Nothing more, nothing less.

Why? I thought you’d never ask.

“Dumb Money / Smart Money”

In the futures market it is sort of accepted wisdom that “non-commercial speculators” (the typical “I'd better pile into this investment before it's too late” kind of guy or gal) are the “dumb money” and that “commercial hedgers” (i.e., those who actually use a particular commodity in their business) are the “smart” money. My experience is that this is not always true, however, it is noteworthy when the two are at opposite extremes -- like now.

As you can see in Figure 1 (chart courtesy of J. Lyons Fund Management, Inc.), “small speculators” have responded to the recent rally in silver by getting wildly bullish (as small speculators will do) while commercial hedgers have responded by selling short a record number of silver futures contracts.

Extreme Silver positions
Extreme Silver positions

Source: J. Lyons Fund Management

Figure 1 – Small speculators wildly bullish; Commercial hedgers extremely cautious

Does this mean that “the top is in” for silver, or even that prices are poised to immediately sell off? Not necessarily. But here is the question to ask based on the data shown in Figure 1: Who is most likely to be right in this situation?

An Unfavorable Seasonal Trend

Figure 2 below displays the net result that a trader would have “achieved” since 1982 by holding long one silver futures contract every year between:

*The end of May Trading Day #9 and;

*The end of June Trading Day #19

Long Silver Futures: 1982-2015
Long Silver Futures: 1982-2015

Figure 2 – Long 1 silver futures contract from May Trading Day 9 through June Trading Day 19

For the record:

*This period has seen silver advance in price 8 times (24% of the time)

*This period has seen silver decline in price 26 times (76% of the time)

Again, none of this means that silver will absolutely, positively decline between the close on May 12th, 2016 (May Trading Day #9) and the close on June 25, 2016 (June Trading Day #16)? Not at all. Still, if you had to choose between buying silver now or not buying it now….

Summary

When the metals market gets going, it is typically best to not stand in its way as it is capable of ignoring a lot of sentiment and fundamental negatives, soaring far beyond were many people think it deserves to be.

One Last Time

*I am not attempting to “call the top” in silver (although in the interest of full disclosure, if silver did happen to top out exactly on May 12, chances are I will take credit for doing so anyway – sorry, it’s just my nature)

*I am not presently advocating a short position in silver

I am simply stating that I won’t be adding any bullish positions in silver to my portfolio in the near future. This is based on the fact that the traditional dumb money is extremely bullish, the traditional smart money is extremely bearish and the seasonal headwinds may be about to blow.

Why I'm Done With Silver -- For Now
 
Why I'm Done With Silver -- For Now

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May 10, 2016 10:57PM ET
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Thank you for being honest in your opinion I have been extremely stressed with financial institutions and sometimes I'm very critical of posts and silver analysis ! Please excuse me if you trade and I attacked you and smart money dumb money I get it it is less experienced money and wise money
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Casey Poole
CaseybPoole May 10, 2016 9:44PM ET
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The Metals Market is nothing if not "Going". Highly Demanded and Improving Supply = Higher Hi's, probably for a few years IMO. GOLD and COPPER included. Miners are on fire, value priced and oh so fruitful YTD.
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Laust Jensen
Laust Jensen May 10, 2016 5:00PM ET
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From 2004 to 2006, a period where the net short position was almost as extreme as now the silver price went from 5 to 10 USD and the next two years it went up to 20 USD.
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lasvegas Brad
lasvegasbrad May 10, 2016 2:02PM ET
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Of course PM's are manipulated. The entire silver market is a blip on the equities market.
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bill garrett
bill garrett May 10, 2016 1:33PM ET
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The previous record high short position of the "smart money" was when, mid 2005? Silver more than doubled in the following 2 years. Excuse me if I don't follow the "smart money".
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Branden Espinoza
Branden Espinoza May 10, 2016 1:33PM ET
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Preach!
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Boinky Rasputin
CoffeeChihuahua May 10, 2016 1:10PM ET
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Go with SLVO then.
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