COMEX Silver Rally Context

Since late February, the prices of both COMEX gold and COMEX silver have seen a nice rally. With each move up, we always see changes in the positioning of market participants, and this latest move is no different.

This week we'll again discuss the most recent Commitment of Traders reports from the U.S. CFTC. These reports are surveyed at the COMEX close every Tuesday and then released three days later—sometimes longer if there's a U.S. government holiday in between. Because of the delay in reporting, Commitment of Traders (CoT) data cannot generally be used for trading purposes. Instead, if you know historical CoT trends you can use the data to help you find price trends, and that's what we'll try to do today.

As recently as late February, the CoT setup in COMEX silver had become quite favorable for a rally. Why? Because the bullion bank trading desks (noted on the report as "Swap Dealers") had collectively moved from their predominant net short position to the rarely-seen net long. Accordingly, the hedge funds that trade COMEX silver had flipped their usual net long position into a net short. This is unusual, and it caught the attention of many analysts, including yours truly.

Below is a screenshot of the "disaggregated" Commitment of Traders report for COMEX silver dated Friday, March 1. Again, this survey was taken at the COMEX close on Tuesday, February 27.

The price of COMEX silver closed that day at $22.76 per ounce. As you can see above, the Swap Dealing Banks were actually net long 1,937 contracts while the Managed Money speculators had found themselves 4,083 contracts net short. Again, it's very unusual to see The Banks net long with The Funds net short. Historically when this has occurred, price tends to rally—and that's what happened next.

In fact, over the next three weeks, price rallied $2.41 to $25.13 per ounce at the COMEX close on Tuesday, March 19. That's about 10.6% in just fifteen trading days. We'll take it!

And what was the driving force for this rally? Initially it was Hedge Fund short-covering, but as the rally continued, the Hedge Funds started adding to their long positions too. The result is what you see below in the most recent CoT survey, taken on Tuesday, March 19.

Notice that in just three weeks the position of The Banks had flipped to 25,949 net short and The Funds has moved to 37,122 net long! Yes, price had rallied 10.6%, but at what cost? That's over 41,000 contracts of net buying by the hedge funds, and all we got was a $2.41 gain?

Or look at it this way and see the chart below. That's a nice rally, but it took a large shift in Hedge Fund positioning to get it done.

Now, do you remember where we mentioned that CoT data is really only useful for historical comparisons? To that end, when was the last time the Hedge Funds were this heavily net long while The Banks were net short to the same degree? Your answer: early March of 2022, at about the time of the Russian invasion of Ukraine. And where was the COMEX silver price back then? Very near where it is now at around $26/ounce. (You might also notice that COMEX silver has approached $26 on several occasions since and has been repeatedly reversed lower.)

So here's the thing: If you take the CoT data and combine it with the price chart, you can quickly discern that unless the Hedge Funds are interested in adding another 40,000 contracts net long, the COMEX silver price is unlikely to head to $28 in the short term—much less the $35 or $45 predictions I've seen bandied about as of late.

Instead, history has taught us that COMEX bull markets unfold in phases that often play out in a pattern of two-steps-forward-and-one-step-back. Typically, the Hedge Funds rush in on the long side, The Banks take to the short side, and price moves forward. But soon the Hedge Fund buying is exhausted and price begins to roll over as the Funds book profits by selling some of their longs and The Banks use that selling to cover some of their shorts. Only once this "CoT washing" is completed is the price of COMEX silver ready to move higher again.

To that end, it's logical to expect a short-term price pullback here. CoT history has taught us as much. Perhaps the Hedge Fund net long position gets trimmed by 50-60% while price trades down to $24? From there, a new rally based upon resumed Hedge Fund buying could finally take price through $26 and toward $27-28, which is what we expected to happen sometime this year when we wrote our annual macrocast back in early January.

In summary, let's watch to see what happens next in COMEX silver, but keep an eye on future Commitment of Traders reports to see if and when conditions become more favorable for another extension of price to the upside.