by Ted Butler, Silver Seek:
A recent development in COMEX silver futures positioning has been unusual enough that I didn’t detect it at first, because it has been somewhat gradual. Over the past five reporting weeks, from the COT report as of Dec 19, 2023 to the most recent report as of January 23, 2024, the number of long traders in the Other Large Reporting Traders category has increased by 29 traders, from 49 to 78 traders – which I believe is both the largest increase and largest number of long traders in this category ever.
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I didn’t pick up immediately on what is a rather radical development because the sharp increase in the number long traders in the Other Large Reporting Traders category was gradual, increasing by around 6 traders each week for the past 5 reporting weeks. The total number of gross longs in this category added over the past five reporting weeks was close to 6000 contracts (30 million oz) and looking at the data every which way, indicates to me that the average holding per each new trader is quite close to 200 contracts each or a nice round one million oz silver equivalent.
Let me provide some background explanation before getting into any speculation about what all this may mean. The Commitments of Traders (COT) report is constructed around the Large Trader Reporting Program in place just about forever. The CFTC has set the level of contracts held (either long or short or held by commercial or non-commercial traders) in every market at and above which determines whether one is a large reporting trader. In COMEX silver futures, the reporting level is 150 contracts and any trader holding that number of contracts or more is considered a large reporting trader and must report any changes in his or her position daily, until the number of contracts held falls below 150 contracts.
In addition to the continual reporting of changes in contract holdings as long as a trader remains above contract reporting levels, when a trader first enters into the ranks of being a large trader, a rather extensive personal disclosure form must be submitted and any intentional misstatement of ownership of this or any related account or trading authority can and will result in civil or criminal penalties. This is designed to protect against any attempt to hide the identity of anyone attempting to deal in multiple accounts that share common ownership. By the way, the CFTC has proven to be quite proficient in uncovering misrepresentations of ownership and control of large reporting trader accounts. After all, what’s the purpose of having a large trader reporting program if lying is tolerated in large trader representations?
I mention this because if the 29 or so new long silver traders in the Other Large Reporting Trader’s category are actually just one or two large traders masquerading as many separate traders, that is a ruse that could and should be quickly uncovered and punished. It’s hard for me to imagine anyone being so reckless to attempt this and I’m inclined to believe these 29 new reporting traders are separate and legitimate entities, and not some attempt by one or two large traders to hide their identity and involvement in the new reporting traders
Let me make this clear, while not for everyone – the idea of buying 200 COMEX silver contracts for those qualified to do so may make all the sense in the world. While I would never recommend anyone buy silver on a leveraged basis, if anyone did decide to do so, COMEX futures contracts would seem to make sense. Here’s perhaps the best way of holding the equivalent of 1 million oz of silver, worth roughly $23 million on a highly leveraged basis in which only roughly $2 million is required for an initial margin requirement. Of course, such deep leverage cuts both ways and every dollar lower from what looks like an average cost of around $23, would require an additional $1 million in maintenance margin.
Then again, every dollar higher equals $1 million in unrealized profit and it appears certain to me that silver is likely to climb much more sharply than it may fall over time. And there are other costs to a long, such as rollover costs as nearby contracts come up for delivery and must be rolled into more expensive deferred contract months, which at current levels of interest rates can run close to $40,000 per month on 200 contracts. Still, all things considered, being long one million oz of silver is much more appealing than being short a million oz.
Upon first discovering, a few days ago, the sharp increase of 60% in the number of new traders (29) over the past five reporting weeks, I thought the new traders were actually brand new to futures trading, in the sense they all just happened to open new commodity accounts over the past five weeks and each decide to buy around 200 contracts per trader. But the practicality and logic of that explanation began to quickly wear thin, as for one thing, such an occurrence most likely would involve some type of collusion.
