Special Got Gold Report - August Silver Swoon Again

By Gene Arensberg
06 Aug 2008 at 08:25 AM GMT-04:00

The Got Gold Report takes a look at silver’s August swoon this year compared to last year.

HOUSTON (ResourceInvestor.com) --In the first two weeks of last August (2007) silver sold off strongly. So far this August the metal seems to be following the same script. Just as last year at this time, there are signs that silver is closer to a bottom than a top, but the signs are not exactly the same. At least not yet.

Just as last year silver has broken through technical support levels, tripping sell stops, crashing through long trailing stops and forcing technically minded traders to sell or take defensive action. Just as last year a goodly number of market commentators have heralded “the end of the commodities boom.” Right on cue, mining shares have answered in waterfall plunges measured in high percentages, and that was from already depressed levels for many of the smaller, less liquid companies that mine for silver.

Using data provided by Stockcharts.com, from its interim pinnacle set Monday, March 17, of $21.44, as of Tuesday, August 5, silver has sold off $4.99 or 23.3% to close at $16.45. In last year’s play, silver topped on Tuesday, February 27 at $14.89 and bottomed Thursday, August 16, at $11.06, a drop of $3.83 the ounce or 25.7%. So the fall in silver this year is already within a few percentage points of the peak to trough fall for silver in 2007.

From a technical point of view, just as last year, a long-period high-consolidation has apparently broken down to the delight of those who are bearish on silver metal. Emboldened silver bears can now trumpet the technical breakdown and no doubt we will hear their new predictions of silver back in the single digits the ounce before long. Just as we did in 2007.

bearish talking heads on televised financial media who predicted that silver would return to the single digits the ounce were wrong in 2007. Silver nearly doubled in the seven months right after that, but will they be wrong this time if they show up with those same predictions this year? We can’t know for certain, in advance, but we can look back at 2007 for some of the signs to look for.

Selling Crescendo in 2007

By the third week of August in 2007, (Thursday, August 16), silver selling pressure had reached a first stage panic selling crescendo. The white metal began that morning by careening a heart-stopping $1.27 or 10.3% lower from the previous day’s close of $12.33. Imagine a one-day drop of $1.60 or $1.70 the ounce today to understand how harsh that move was.

Then, at its intra-day low of $11.06, very heavy multi-dealer buying pressure showed and by the close that day silver had recovered $0.43 to close the day at $11.49. It was still a big 8.4% loss in one day, but the wash-out bounce was the overriding feature of that ugly trading day.

The mood for silver then was about as grim as it gets. Similar to the mood for silver investors today. However, the August 16, 2007 technical breakdown and the low of $11.06 turned out to be an interim bottom. Try as they might, those intent on selling silver lower did not prevail and the following week consistently showed higher lows, none under $11.60.

It would not be surprising to see a similar selling crescendo at the bottom this year.

COMEX Commercials Covered Short Positions Big in 2007

The largest of the largest traders in silver futures, the COMEX traders classed as commercial by the Commodities Futures Trading Commission (CFTC), evidently recognized that period as an interim bottom because over the next two weeks the commercial traders unwound (covered or offset) a very large percentage of their net short silver futures positions. Indeed in the two following weekly reporting periods for the CFTC Commitments of Traders (COT) reports, (August 21 and 28), the commercials net short positioning in silver futures (LCNS) plummeted 41.9% from 46,432 to just 26,982 contracts net short.

The 2007 commercial short covering shows up nicely in the graph below. Look for the big down spike of the blue line in 2007. As silver tested $11.00 and then traded sideways around $12.00 they were getting the heck out of their net short positions in a very big way last August. COMEX commercials strongly covering their net short positions is something to look for very, uh, “shortly,” if one believes we are very close to a bottom for silver in 2008.

We have already seen some reduction in the silver LCNS, but so far nothing like last year. As silver fell $0.58 Tuesday to Tuesday last week, to $17.37 on July 28, COMEX commercials covered or offset 9,184 contracts or 13.3% of their current net short positioning, going from 69,041 to 59,857 contracts net short. So the COMEX commercial net short “coverage” may already be underway. We’ll see if that continued or accelerated this week in Friday’s COT report which covers up to the period through Tuesday’s $16.45 close.

If the COMEX commercials believe that silver is close to a bottom, look for their net short positioning to plummet similar to 2007 in the next few reporting periods.

Two indicators that are already similar to last year are the continued buying pressure in the U.S. silver exchange traded fund and consistently very high premiums for physical silver in the popular silver market.

Buying Pressure for SLV

It won’t come as a shock for readers to learn that in the midst of the silver swoon last August, as silver was falling from the $14s to nearly $11.00, buying pressure continued to overwhelm selling pressure for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF.

This was the graph for SLV silver holdings which appeared in the August 26, 2007 Got Gold Report:

Note please, that even as silver was pulling back there was no material reduction in the amount of silver metal held by the custodian for the trust. To the contrary. Then as now, buying pressure for the silver exchange traded fund has continued to outstrip selling pressure even though the metal is declining in price. Below is today’s version of the same graph:

Authorized market participants for SLV add silver and increase the trading float when buying pressure is significantly stronger than selling pressure and vice versa. When the amount of silver being held is rising it is indicative of more buying pressure than selling pressure.

The amount of silver being held for SLV is not only holding its own, it is once again strongly rising into a silver decline. That is evidence of investor dip buying. For the month of July, SLV added another 274.45 metric tonnes of average 1,000 ounce silver bars to its holdings, up to 6,276.86 tonnes total (201.7 million ounces). Buying pressure was strong enough for the trust to add 138.41 tonnes last week alone.

High Premiums for Physical Silver

In addition to the strong demand for SLV on the street in the U.S. there is a continued scarcity of just about all silver metal products with spot silver trading in the $16 to $17 neighborhood. In a quick check of electronic silver bourses on Tuesday, August 05, 2008, all bar silver products were BID at least $0.60 the ounce over the cash market close dealer to dealer. Even the very large average 1,000 ounce heavies were bid about $0.50 the ounce over spot and there were very few offers at any price.

Bar silver is currently commanding high premiums, but customers that want to add popular coin silver have an even bigger shock coming. As of Tuesday, the best offers showing for U.S. silver eagles in quantity were close to $2.00 over spot. When even dealers are offering significantly higher than normal premiums in order to buy the metal, it means that the metal has become scarcer than usual.

If anything, the premiums for physical silver this August are considerably higher for the same metal than they were last August. High premiums are already here and they are one reason that SLV is continuing to see such strong demand in this August’s silver swoon.