CFTC Report: Silver Net Short Position Reaches New High for the Move

As highlighted last month, short positioning in gold was at the highest level since April 2019. This laid the seeds for a potential short squeeze. While a squeeze did unfold, it was brief. Sellers have regained control of the market and are driving the price back down.

Please note: the COTs report was published 9/2/2022 for the period ending 8/30/2022. “Managed Money” and “Hedge Funds” are used interchangeably.

Gold – Current Trends

Figure: 1 Net Notional Position

Managed Money continues to have complete control over the gold price. The chart below shows the price moving in lock-step with Managed Money positioning since mid-2021.

Figure: 2 Managed Money Net Notional Position

Weak Hands at Work

Managed Money is very speculative in nature, jumping in and out of the market very quickly. That being said, the current trend has been in place since March 8. Over the past 4 months, Managed Money has been selling gold consistently. There have been a few rebounds, but they are brief.

Figure: 3 Silver 50/200 DMA

The table below has detailed positioning information. A few things to highlight:

• • Managed Money Gross Longs were stable over the month
    • • The Shorts have covered since last month, decreasing from -111k to -80K
      • Compare this to one year ago when gross shorts were at -55k
      • Over the year, Longs have fallen by 33% while Shorts have increased by 45%
  • Other has been far more stable on the short side, holding between -34k and -39k for three years
    • • On the long side, Other is down from last year, but still up over three years

Producers and Swap generally sit on the other side of Managed Money and Other.

Figure: 4 Gold Summary Table

Despite the large moves, the net positioning continues to fall. Total net positioning represents the combined exposure of the groups once hedging positions are removed. It shows the size of net positions divided by total open interest. As can be seen below, this has fallen off a cliff in 2022. In April it stood at 50% and has dropped to 28%.

Figure: 5 Net Positioning

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below (values are in dollar/notional amounts, not contracts). After coming close to $100B twice, the market has retreated to $65B, which is the lowest amount since May 2019.

Figure: 6 Gross Open Interest

The chart below looks at net notional positioning against price on a longer time frame. The lack of interest in gold is very visible from this chart as positions have plummeted in recent months. The good news is that the last time OI positioning was this low was back in 2019 when gold was $400 lower.

Figure: 7 Net Notional Position

Finally, the CFTC also provides Options data. The chart below further reveals the collapse in activity. After getting above a gross value of $26B, the market has fallen to almost $4B! The majority of this collapse has come from the Producer side, with gross longs falling to the lowest level since 2009 in May. Managed Money has also reduced its long positions but now sits above Producer Long ($1.93B vs $1.26B).

Figure: 8 Options Positions

Silver Current Trends

The moves in silver are even more extreme than the moves in gold. Managed Money has absolutely hammered silver lower while Swap has been on the other side, building a long position over the last three months.

Figure: 9 Net Notional Position

While gold was able to get back to net long, the short covering in silver never got back to positive and has also hit a new low for this move.

Figure: 10 Managed Money Net Notional Position

The chart below shows the same relentless selling. Net longs have not increased for more than 2 weeks in a row at any time since back in March.

Figure: 11 Net Change in Positioning

The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:

• • Managed Money activity was driven more by the long side over the previous month
    • • Gross longs dropped 15% or 5k
      • Gross shorts actually fell 4.3% or 2.4k contracts
      • Over a year, gross longs are down 36% vs gross shorts increasing 42%. This has led to a change in net positioning of -271%!
  • Swaps increased their net long position by 24.6% in the last month. This was driven equally on the long and short side
    • • Over the year, Swap Gross Longs have increased 34%
      • Over 3 years, Swap Gross Shorts are down 58% from 77k to 33k

Figure: 12 Silver Summary Table

Net positioning as a percent of total open interest has also dropped. It hit a multi-year low in June and has since turned up. The recent increase is being driven by the shorts.

Figure: 13 Net Positioning

Historical Perspective

Looking over the full history of the COTs data by month produces the chart below. Unlike gold, the “Other” category has remained surprisingly stable over this time.

Ignoring the Covid sell-off, gross longs are now at their lowest level since Nov 2018. This shows a general waning interest.

Figure: 14 Gross Open Interest

Looking at historical net positioning shows how far stretched managed money has become to the short side. Only in 2018-2019 has silver seen such a large net short position from Managed Money.

One thing to note is that Managed Money does not typically stay short for long. Since 2006, the longest streak of consecutive short months was for 5 months in 2018.

Figure: 15 Net Notional Position

The Option market is significantly smaller than gold and has continued to get smaller. Gross positioning is below $200M after getting close to $1.4B in 2020.

Figure: 16 Options Positions

Conclusion

Managed Money continues to dominate control over the market. Looking at the correlation table below shows gold at .92 and silver at an incredible .97. In gold, this is the highest correlation since 2019, and in silver, it is the highest in at least 6 years. The dominance in the market is striking!

Figure: 17 Correlation Table

Last month, the shorts looked a bit oversold and ready for a squeeze. The short covering provided a decent bounce that has now been fully reversed in silver and mostly reversed in gold. With the Fed still taking a very hawkish stance, sentiment in the precious metals market is extremely negative. While this is typically a sign of bottoming, it might be some time before precious metals get their momentum back.

Despite the massive selling and negative sentiment, the price has held up okay. The last time sentiment was this bad, in 2018, the silver price was $4 lower and gold was almost $450 lower. Perhaps this is due to the underlying strength in the physical market where Registered silver has fallen below 50m ounces and combined gold inventory is down more than 20% since May.

The speculative moves of Managed Money is unrelated to the physical market as they try to position for maximum leverage and paper profits. Eventually, these two markets will converge. While spec money is selling paper metal, smart money is taking advantage of low prices to buy physical and take it out of the Comex vault. Spec money is weak hands while physical ownership is strong hands. There should be no doubt which party will win out even if the spec money controls the short-term price movement. Long-term investors who want to protect themselves should follow the moves of the smart money and get hands on physical metal.

Data Source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

Data Updated: Every Friday at 3:30 PM as of Tuesday

Last Updated: Aug 30, 2022

Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/