As you may have noticed, we’ve been writing about our expectations of precious metals to head lower. While clearly, that hasn’t worked out for us the past week or so, there are two important points to consider. First, there’s always another move. Never let the fear of missing a trade force you into a position you’re uncomfortable with. You’ll screw it up, eventually. It’s simply the law of the markets. They find a trader’s weak points and expose them in the light. Secondly, as long as we’re witnessing RECORD setting behavior in the silver market, that’s where we’ll continue to write about the most interesting, ongoing development in the commodity futures markets.
Rather than beating ourselves up for not catching last week’s silver rally, we’ll take the glass half full approach and be thankful we never sold the metals’ markets last week. The preservation of capital allows us to focus on a specific set of parameters that allows us to take advantage of reversals. We’re swing traders who look to exploit the commercial traders’ purchasing power to minimize risk in our value hunting trading premise. The premise is obviously, the more out of balance a market becomes between the commodity hedgers and the commodity speculators, the more we want to side with the commodity hedgers. They’re negative feedback, value trading proposition shows up through more short sales (forward hedging of future production) the higher a market moves beyond their anticipated top side value projection and conversely, places them on the buy side (long hedging of a commodity) as prices decline and their input costs of doing business fall proportionately. Silver miners’ short sales, their hedging of forward production, has reached RECORD levels. Therefore, we’ll continue to watch for short selling opportunities because the record imbalance of positions could cause a swift and deep reversal lower.
Before moving to the chart, feel free to examine last week’s piece, “Strong Argument: Precious Metals Headed Lower. Today’s included chart makes a few key points that I want to hit just briefly.
1) Commercial selling is increasing much faster than large speculator buying. The commercial position has grown by more than 50% since January 2nd and the pace of its growth continues to accelerate.
2) Large speculators typically carry their largest position at the worst possible moment. The large speculator position is currently the LARGEST on record.
3) Commercial traders are net short more than 85,000 contracts. This has happened only three other times. (10/1994, 4/2004, 12/2005). Each of these cases brought a major reversal, cancelling out all of the gains from the previous rally within one month.
4) The markets can remain irrational longer than a trader can hold a position against it.
While we readily admit to sounding like a broken record on this trade, we’ll continue bide our time and await our opportunity. If you’d like to be notified when the Cot sell signal actually triggers, please sign up for our free trial at CotSignals.com.