SHORT COVERING, NOT SPECULATIVE BUYING, LED TO SILVER’S PARABOLIC RISE

By Jordan Roy-Byrne, CMT

Most mainstream pundits and reporters have assumed that it was speculative buying that caused Silver to go parabolic. After all, its always the dumb money or the public that gets in at the very end. However, in futures markets, parabolic moves are often the result of short squeezes. This is exactly what happened in Silver.

Credit the great work of sentimentrader.com, which is a fantastic service. The chart is below.

As you can see, both open interest and the speculative long position had been trending down. Both continued to decline during the parabolic move. When open interest falls but price rises, its a short squeeze. The same thing happened with Cotton just a few months earlier. I don’t place much time or emphasis on speculating about market manipulation or intervention but the COT tells us that the commercial traders (which includes JP Morgan) were covering. Typically, the commercials buy into weakness and sell/short into strength.

The low speculative long position is one reason why Silver looks healthy in terms of sentiment. Going forward Silver needs to define and establish support and then build a base before working its way higher. For more insights, analysis and guidance on Silver and Gold, consider a free 14-day trial to our service.

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

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  • InvestorX

    A very good one. I was happy to be long silver from $31 on the premise that it is a short squeeze and managed to sell close to the top. I thought that the top was not coincidently on a Sunday, as JPM got pissed by the sqeeze and retaliated. So I sold very soon after that at around $45. This trade seemed easy to me, hope to be able to make more such ones in the future.

  • prescient11

    I am more interested in what caused silver’s parabolic collapse.

    This market is the most manipulated out there.

    But I’m sure it was just a bubble, and that is all. lol.

  • Joseph

    I don’t think that’s a correct interpretation. It could simply just be long liquidation. To show your point you would have to show that large speculator short positions declined, which they didn’t really.

    When margin requirements are raised they affect both the long and the short side of the trade. Seeing that the price collapsed quickly, it’s pretty clear that the longs were less well capitalized. That is to say, they were smaller players, maybe even retail. If you look at the COT for silver compared to other commodities you’ll notice that silver has a higher proportion of small speculators. This is particularly interesting given the almost cult like communities that have formed to promote it.

  • http://www.maxkeiser.com/ Anonymous

    I’m A Crazy Silver Bug…Why Aren’t You?!!
    http://www.roadtoroota.com/public/597.cfm

    The Silver Bullet And The Silver Shield
    http://dont-tread-on.me/the-silver-bullet-and-the-silver-shield/

    Crash JP Morgan – Buy Silver (Episode 96, Keiser Report)
    http://www.youtube.com/watch?v=wN0rcNJXFfI

    India investors have switched from gold to silver. Chinese investors will follow suit, once gold becomes to expensive. The world will follow suit… The central banks will be FINISHED.

  • Midas10k

    From the FT_blog posting:

    midas10k | May 20 2:53pm | Permalink

    This Pragmatic Capitalist guy is moron. I don’t understand why he gets ANY media attention. But then again, having your work posted on Clusterstock.com is like being published in the National Enquirer.

    PG-guy wouldn’t understand monetary theory and precious metals if Von MIses whispered the facts in his ear whilst mounting him from behind.

  • InvestorX

    So you are quoting yourself, how great!

    And what exactly would Von Mises whisper to his year?

  • Michael Hullevad

    JPM got annoyed by the shortsqeese and comitted a “drive by attack” on silver. It were a deliberate manipulation no doubt! It should not be allowed to have so big a number of contracts.

  • CP

    Short covering? No way.

    If short covering caused the rise, then what caused the fall? Sudden re-establishment of shorts? I think not.

    There was a gradual increase in speculative long positions. Then the sudden rise in margin shook them out and the rest is …. unfolding history.

  • prescient11

    Exactly. Always look to who has the strong hands, and it almost always is JPM. I just didn’t think they could drive it down so hard and so fast on such absolutely thin volume and then stamp on it. But the coordinated efforts of the margin calls and the big boys did a good job.

    The better question one should be asking is exactly how has it maintained its strength to stay well above $30??? With all that pressure.

    Non-margined money might be calling the “boys” out on this play.

    Interesting times ahead.

  • Mike C

    Discussion of speculative buying? And NOT one word on money flows into the SLV ETF???

    It would be very interesting to see inflows into SLV for the months of February, March, and April relative to say the average inflows over the past 2-3 years.

    We discussed this elsewhere but given the size of SLV, inflows and outflows to SLV could create a negative feedback loop where substantial buying of the ETF could lead to upward pressure on the actual physical price leading to more buying by momentum chasers. Exact opposite with sell-offs. And then you get parabolic spikes and crashes.

  • Ben W

    I don’t think the resolution on that chart is good enough to support the author’s conclusions. It looks much more like the open interest had a sharp drop-off *after* the parabolic rise, not during it.

    The author draws a declining trendline in open interest from late 2010 to now.. and at first, yeah, it looks true, because you can that the August 2010 peak was higher than the May 2011 peak. But really – a ~5% difference in peaks defines a trendline? And very obviously, the open interest grew during the last phase of the parabolic rise.. look at the last peak.

    Meh. Those charts are Rorschach blots.

  • prescient11

    Wow, just look at my last comment and now we have a real “author” to back up my thoughts.

    A counter to the “bubble” spotters everywhere: http://www.zerohedge.com/article/usd-short-covering-eur-capitulation-ending-silver-spec-longs-two-year-lows

    Here’s all you need to know, last sentence of the piece:

    “The new base is now being rebuilt based on much firmer hands.”

  • http://aol kelhdriver

    I don’t know all about shorts and longs too much but I do know that the collecting of any silver US coins is now killing me!

  • http://www.investorzblog.com Investorz’ Blog

    Whenever commodities are in a bull market, they always have a major correction. You don’t need to know why this occured, just that this was a corrrection, and not the end of the bull market.

  • http://www.investorzblog.com Investorz’ Blog

    I think this post is wrong. Do you think the JP Morgan traders are retarded enough to start covering when the price started increasing a lot? They must have already covered, for they know that silver is in a bull market.

  • http://blogspot.thesaneinvestor.com The Sane Investor
  • http://www.goldcompany.com.au Michael

    very interesting way to look at the situation http://www.youtube.com/watch?v=u9LcKcXpCDE&feature=share

  • prepare

    I have read so much about the metal trades, charts, manipulation, supply, etc. The reasons for the rise is very simple. The rule books of finance have been shredded decades ago.
    The bankers are using every trick they can muster to try to keep their fiat as the main player. It is not nice to usurp their monopoly money for tangables. A ponzi scheme ALWAYS needs more money and more players. We are in the point of history where both are collapsing.

    Chart that and it will be very clear to see. Press the reset button…END THE FED

  • fallingman

    Yes, indeed. End the Fed!