gene arensberg had a lot to say about silver in the new "got gold" report. he is optimistic about silver, natural gas, and junior mining shares. it appears the commercials no longer wanted to short it at $12/oz:

Silver COT bullish

Next, the gold COT report was not all that much of a change from the last report, but the changes in silver are worth mentioning this weekend.

In the Friday CFTC commitments of traders report, we find that as silver rose 46 cents, or 3.8%, Tuesday to Tuesday the large, well-funded and presumably well-informed traders classed by the CFTC as commercial added a large 2,289 contracts (9.1%) to their net short positioning, to show a collective 27,460 COMEX 5,000-ounce contracts net short (LCNS). This, as the total number of contracts open FELL a big 5,590 to just 90,687 contracts open.

The total open interest has fallen a bit more since Tuesday, to under 90,000 contracts, suggesting, at least on the surface, a quick speculative “get-out.” Curiously, I think it is interesting that such a large number of contracts disappeared as First Notice Day arrived for the May contract, yet the price of silver really didn’t cut any new ground to the downside as the open interest fell so much.

Silver has since tested as low as $12.05 on Friday morning (about where it was the previous COT Tuesday) before a bit of a late (short covering?) rally and a Friday last print of $12.50 on the cash market. Here’s the silver LCNS nominal graph:

Comparing the LCNS to the total open interest (LCNS:TO), we find that the COMEX commercial traders’ collective net short positioning now represents 30.3% of all the open contracts.

That is up about four percentage points from last week, but still near the LCNS:TO basement historically speaking. Please consider that for a long time now the LCNS:TO has ventured below the 30% level only very rarely and only just prior to significant and extended moves higher for silver metal as the graph below plainly shows.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

“Heads up?”

To highlight the two previous recent examples of the LCNS:TO moving below 30%, it did so in the August 28, 2007, COT report with silver then at $11.83. The LCNS:TO continued lower one reporting week, ultimately bottoming with the September 4 report at 23% with silver at $12.09. As can be seen on the graph above, that action preceded the move higher for silver, which peaked the following March, a little over five months later, near $21, an advance of 70%-plus trough to peak for silver.

The more recent example occurred during the height of the sell-anything-with-a-bid panic last year. The LCNS:TO first edged into the sub-30% region with the September 30, 2008, COT report. With silver plunging through $12.01 the ounce, the ratio had fallen to 27.7% that last day of September, but the ratio would not bottom for another three weeks.

The bottom for the LCNS:TO finally showed on October 21, when the collective net short positioning of commercial traders showed just 22,268 out of 95,873 contracts open, or a very, very low 23.2%. That was with silver closing at $9.19 after testing as low as $8.38 on the cash market.

What the 23.2% LCNS:TO reading was screaming to us was that there was very little appetite on the collective part of all commercial traders to take the short side of silver futures with silver then showing a $9 handle.

Silver then ground its way in a volatile sideways-to-slightly higher “sausage grinder” for another six weeks, finally setting course decidedly higher in December on its way to a February pinnacle in the $14.60s, some 70%-plus higher than the October/November lows.

Thus, both of the above noted examples, the only two examples of the LCNS:TO moving below 30% since at least 2005, occurred just prior to major, high-percentage (more than 70%) advances for silver metal as priced in U.S. dollars.

Notice, please, that the LCNS:TO arrived below 30% this time with silver about $3 the ounce higher than it did the last time ($12.02 last week versus $9.19 in October). Notice also, and this may be equally or even more important, the LCNS:TO arrived at sub-30% levels almost precisely, within a couple dimes, of where it did in 2007 ($11.83 in 2007 versus $12.02 last week). That is close enough on both to call it $12 for our purposes.

Can we conclude, then, that the largest and best-informed futures traders have become collectively more uncomfortable taking on short positions as silver metal reaches the $12 neighborhood, and that the collapse to $9.00 or lower last October was a panic-inspired anomaly?

In other words, now that we have seen the LCNS:TO plunge to less than 30% (which is historically extraordinarily bullish for silver) near $12 in 2007, near $9 in 2008 and, now again near $12, can we conclude that near $12 is where silver now finds it more difficult to fall than to rise? Will the $12 - $9 - $12 LCNS:TO below 30% condition end up being a kind of wide reverse head and shoulders bottom indication?

In truth we humans cannot know for certain in advance. It is certainly possible that the LCNS:TO could move even lower than it has already. It is certainly possible that silver could be on its way harshly and dramatically lower. That’s possible, of course, but if, as Dennis Gartman is wont to say, the “past is prologue to the future,” then this most important of all the indicators we follow has already reached the point where bullish, buy-on-weakness flags are raised, as we did in this report three weeks ago.

We know from previous work shared with all of you that nearly all of the commercial net short positioning for silver is held by just two big U.S. banks. Now we hear from Adrian Douglas that two big U.S. banks are “hedging” those short positions via inexpensive, out-of-the-money calls in the options market.

This comes at a time when the inventory of silver metal listed in COMEX warehouses has come down sharply in recent weeks.

It also comes at a time when COMEX silver futures still reflect a very tight, near flat contango, with the difference between the near-active July contract and the December 09 contract now a tiny 3.9 cents. The list below is courtesy of Barcharts.com.

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