U.S. Banks Laying Low: Silver Price Analysis

It has been a wild few months for the silver price, and there are many calls for a top with proclamations that silver is in a "bubble". While anything can happen in the short term, the latest CFTC positioning data shows that the rally is definitely not a speculative blowoff.

Let's start this week with a chart. Below is Mar26 COMEX silver from September 1 to present. As you can see, price has rallied from $38 to $94. An incredible gain of 147%! Note, too, that since a tap of the 50-day moving average on November 21, price has consistently followed a trend line higher, finding support at each pullback.

Silver Price - Daily Candlestick Chart

Examining CFTC Data for COMEX Silver Positions

Most "analysts" and "Xperts" stop there, deducing that this sort of rally must be driven by speculative excess and, as such, has created a bubble that's certain to pop. A move of nearly 150% in less than six months is clearly a sign that every Uber driver and Walmart greeter is now discussing silver and buying silver futures! But is that actually true?

For answers, let's look at the CFTC data from start to finish on that chart. The CFTC surveys market participants at the COMEX close each Tuesday. The results are released the following Friday in a report called the Commitment of Traders. From the first Tuesday of each month, there's a second report generated called the Bank Participation Report, and this summary produces an aggregate total of positioning among U.S.-based banks and non-U.S. banks.

Let's start with the Commitment of Traders report from the survey of August 2, when price was $38. On the table below, note the cumulative positions of the "Swap Dealers", which are primarily bullion bank trading desks and "Managed Money", which is primarily hedge and CTA funds.

•           The Swap Dealers were NET short 43,397 COMEX silver contracts.

•           Managed Money was NET long 29,823 contracts.

•           Total contract open interest was 161,262 contracts.

Now look at last week's report that was surveyed on January 13 with price at $86.

•           The Swap Dealers are now NET short 29,871 COMEX silver contracts.

•           Managed Money is now NET long 13,772 contracts.

•           And total contract open interest is 151,513 contracts.

So, while price had rallied from $38 to $86, the Swap-Dealing Banks had actually reduced their NET short position by 31% while the hedge funds had reduced their NET longs by 54%! This while total contract open interest has fallen by over 10,000 contracts. Does this sound like a massive "speculative bubble" to you? It sure doesn't seem like it to me!

U.S. Banks Shift From Net Short to Net Long

Next, let's look deeper within the Swap Dealer category by reviewing the once-monthly Bank Participation Report. Below are reports surveyed on August 2 and January 6. Again, price was closed at $38 on August 2 and $81 on January 6 for a move of 113%. What jumps out at you?

Note the shift in the cumulative U.S. bank position. Like the non-U.S. banks, the U.S. banks have almost always been NET short. In fact, I can't recall a time when they weren't. However, while price rose from August to January, the U.S. banks moved from their usual 25,916 NET short to a current 1,047 NET LONG!

And this is part of the reason why the COMEX silver price continues to rally. Instead of supplying additional contracts (rising open interest) and selling into price rallies, the U.S. banks are standing down. They COVERED over 17,000 shorts and ADDED nearly 10,000 longs over the past five months. The impact of this is dynamic, and you've seen it often during COMEX hours.

What This Means for Silver Prices Going Forward

Instead of diluting the float of contracts by adding new shorts and open interest, the U.S. banks are on the sidelines. As such, instead of being met with additional supply each day, any new long-side demand must seek out sellers of EXISTING contracts. This is why and how we've seen multiple days of 5-7% price gains since early December.

Now, can this revert to the way it’s always been? Of course! Perhaps the U.S.-based banks are just biding time and waiting for a pullback that they can aggressively short. But for now, it's clear that the U.S. banks have decided to avoid getting in front of the freight train that silver has become.

In summary, don't fall for the usual clickbait of the silver "bubble" that's "ready to pop". From a COMEX standpoint at least, that point of view is demonstrably untrue. On balance, it's the U.S.-based Banks that have been buying while big money Speculators have been selling. What a turn of events with wide-ranging implications! Keep an eye on this space and we'll discuss those implications in the weeks ahead.