Commercial traders accumulated their most bullish position in more than a year early this June.
Silver subsequently climbed nearly $2.50 over the next month. However, an interesting development was taking place within the market. As the market climbed, not only did commercial traders lay off their accumulated position, they began initiating new sales at a breakneck pace. Therefore, after building their most bullish position in over a year, they immediately reversed course by selling nearly 50,000 contracts over the last seven weeks. You can see the chart setup along with our July 3 commentary, here. These actions made it clear that the recent climb in silver would be short lived.
Markets 101
This was a classic example of the accumulation and distribution process that powers the market’s ebb and flow. Commercial hedgers are typically the first trader group to step in and cap a rally or, support a bottom. Their actions are tied to their collective sense of value. Thus, any hedge initiated at prices beyond their projected price envelope goes straight to the profitability of their firm.
The base or cap, which they established then draws in speculators as support or resistance develops and allows speculators to determine risk levels. Speculators’ actions then power the next leg of the market’s move. As the speculators begin to take their positions, commercial traders begin to lay theirs off. This is why we typically see speculative positions begin to grow at exactly the time the commercial traders are scaling back.
Smart Money
Currently, commercial traders in the silver market are their most bearish since October of 2010. This should be viewed as a strong warning sign to those still carrying long positions. What do they know that we don’t? I’m not sure but I’m not going to fight them, either.
