Commercial Traders Abandon Silver at Record Pace

Commercial traders have dropped their silver exposure to the lowest level in years, according to the latest commitment of traders report.

Many commercial traders use futures to hedge existing exposure to silver. The reason many commercial traders have existing exposure is simply because they are ‘in the business’ of mining or buying/selling silver (unfortunately banks also fall into this category).

Many commercial traders could be considered insiders, and thus the ‘smart money.’

Smart investors often follow the smart money.

The chart below shows what the smart is money doing.

It was originally published in the May 25 Profit Radar Report, and plots the price of silver against the net short position of commercial traders (hedgers are generally short to hedge their existing long position).

The smart money is holding a record 62,485 contracts, the highest in years.

The dashed red lines show what effect similar short exposure had on silver prices in the past. It wasn’t good.

The last time silver was able to shrug off the same degree of short bets was early 2011, when the silver bull market was alive and well.

If silver can rally despite this extreme, it may be an indication that the bear market is over.

 

However, seasonality suggests lower prices (full silver seasonaliy chart is available to Profit Radar Report subscribers).

Sentiment and seasonality are two major driving forces. Technicals is the third. The short-term chart actually looks constructive, and would allow for higher prices.

However, if trade breaks down, sentiment and seasonality suggest (much?) further down side.

Continued analysis of the three major driving forces (technicals, sentiment & seasonality) for silver and other asset classes is available via the Profit Radar Report.

The iShares Silver Trust (NYSEArca: SLV) is the easiest way to gain silver exposure. The ProShares UltraShort Silver ETF (NYSEArca: ZSL) is one way to bet on lower silver prices.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Silver ETF Still Lacks Classic Signs of a Major Low

Precious metals will enter the history books as worst performing sector of 2013. Silver prices are down 60% from their 2011 high. Surprisingly, silver investors seem to be equipped with a cast iron stomach … which may be needed until a bottom is found.

The iShares Silver Trust ETF (NYSEArca: SLV) chart is about as ugly as it gets.

From 2011 to present, silver prices have tumbled some 60%. That’s already more than the S&P 500 (NYSEArca: SPY) lost during the ‘Great Recession.’

The UltraShort Silver ProShares ETF (NYSEArca: ZSL), a leveraged short silver ETF, has doubled since the beginning of the year.

There’s light at the end of the tunnel, but silver investors do not appear to have thrown in the towel yet. Typical markets don’t bottom until the last towel is thrown in, trampled and abandoned.

The chart below plots the price of silver against the tons of silver held by the SLV silver ETF (based on iShares’s data) and SLV trading volume.

Silver investors must have a cast iron stomach. The amount of silver held by SLV seems nearly immune to the bear market.

The 10-day average of SLV trading volume lacks any hint of panic selling.

A sustainable low remains an illusion as long as weak hands continue to hold silver.

Weak hands are ‘on the fence’ investors, unconvinced about silver’s up side, scared of the down side, and on the fence for now. Once the weak hands have capitulated, silver can break free of its bearish shackles.

As subscribers to my Profit Radar Report know, my down side silver target has been below 20 for well over six months.

The down side target is comprised of various support levels, creating a dense support cluster and probably a good buying opportunity (once we get there). Forgive me for keeping the actual target price exclusive to subscribers of the Profit Radar Report.

How about silver’s precious cousin, gold?

A similar analysis of the SPDR Gold Trust gold ETF (NYSEArca: GLD) actually provides more ‘noise’ (in a good way) and texture for a better analysis. The GLD analysis is available here: Tell Tale Sign of a Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Gold and Silver Plummet – Why and How Much Lower?

Gold and silver are the de facto “flight to safety” trade. Concerns about inflation (QE4) or the fiscal cliff were supposed to drive precious metal prices higher. This didn’t happen, here’s why:

It’s been a terrible week for gold and silver. Fundamentally precious metals should have rallied following the Fed’s announcement of QE4 (What is QE4?). Here’s the fundamental rationale.

The Fed’s plan to spend an additional $45 billion of freshly printed money (QE Tally – How Much Money is the Fed REALLY Spending?) is supposed to create inflation. In theory, gold and silver are “default inflation hedges”.

Investors trust this theory and put their money where their mouth is. How do we know this? Assets in the most popular gold ETFsSPDR Gold Shares (GLD) and iShares Gold Trust (IAU) – soared to an all-time high.

However, a theory (in this case the theory that QE will lead to higher gold and silver prices) remains only a theory until proven correct.

What Caused the Gold/Silver Mini Meltdown?

Contrary to this theory, the December 16, Profit Radar Report noted that:

“Holdings in gold-backed exchange-traded products reached a record 2,629.3 metric tons. However, all this gold buying hasn’t done much for gold prices. In fact, with so many buyers already committed, there are now fewer buyers out there. Despite seasonal tailwinds, the sentiment picture suggests at least a shakeout sell off.”

For those interested in trading gold, here’s the trade recommendation provided by the same update: “Unfortunately our UltraShort Gold ProShares (GLL) order wasn’t triggered last week. Now aggressive traders may go short gold with a move below 1,690 (around 163.80 for GLD). An approximate buy trigger for GLL (a 2x inverse gold ETF) would be 61.50.”

The corresponding trade setup for silver was as follows (updated chart shown below): “The dashed gray trend lines illustrate past instances where break downs and break outs resulted in low risk entry points. The green support line just below current prices (@32.30 – around 31.20 for SLV) may provide a low-risk entry to go short for aggressive traders. The only available short silver ETF is the 2x inverse UltraShort Silver ProShares (ZSL).” ZSL jumped from 45 to 52.

How Low Will Gold/Silver Fall

I honestly don’t know how much farther gold and silver will fall. However, the two charts below show that both metals reached respective support levels.

No one has ever gone broke taking profits and more often than not, it pays not to get too greedy.

Gold provided a nice 50-point drop and silver declined more than 10% in less than 3 days (nearly 20% for ZSL). We locked in all of our silver profits and half of our gold profits. The remaining half of short gold positions is equipped with a stop-loss that guarantees profits.

Semi-weekly updates and trade setups for gold, silver, the S&P 500, and other asset classes are provided via the Profit Radar Report.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.