The Silver COT argues that Silver is much closer to its bottom than Gold. The net long spec position is now only 6%. However, it remains above the 2.9% low of a year ago.

Sticking with Silver, here are the gross short positions in nominal form and as a percentage of open interest. Nominal gross short positions reached a new all time high last week at 58K contracts. That figure surged this week well past 60K contracts. The second chart shows that gross shorts as a percentage of open interest are just a hair short of the December high, which we think was an all time high.

Circling back to Gold, here are the gross short positions as a percentage of open interest. Shorting has increased strongly in the past few weeks but remains well below the highs from a year ago.

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Silver is getting more interesting. The net speculative position (long) is less than 10%. As of Tuesday, before most of the dumping this week, the net spec position was about 14K contracts. The previous lows were less than 3% and ~6K contracts.

As of last week gross short positions in Silver were very close to an all time high as Tiho Brkan’s chart shows. Today’s data now shows gross short positions at 58K contracts, which I believe is a new all time high! Judging from the above chart, that means there are a few more longs then usual that need to be flushed out. And they very well could have been flushed out over the last two days.

Finally, here is a look at the short positions as a percentage of open interest. Not quite at a potential all-time high but certainly getting very close.

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Gold…

Silver….

Moving along, here is a breakdown by short and long positioning for Gold…

Here is the breakdown by long and short positioning in Silver….

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During my flight home I read Mining Weekly’s cover story (the publication given to every attendee) which further exhibits the mild, cautious optimism pervading the industry. The various assertions and comments included: “Road to recovery will be bumpy,” “Most juniors will fail,” “Control costs in an era of lower metal prices,” and “Metals prices have reached a plateau.” Also, there was a mention of strong deflationary forces and deflation, not inflation as the risk. Furthermore, industry titan Rick Rule was quoted in the story and in the Financial Post as saying juniors still need to capitulate. This is simply not the kind of talk that precedes a market decline or prolonged under-performance.

Moreover, some of these comments are divorced from a new reality. The chart below shows the CCI (commodities), CDNX and GDXJ. Commodities have broken out from a three year downtrend and advanced above the 400-day moving average for the first time in two and a half years. Canada’s Venture (CDNX) which consists of mostly commodity exploration companies declined 65% from top to bottom but is now currently trading above its 200-day moving average and at a 10-month high. It was last above that moving average in spring 2011. Meanwhile, GDXJ is holding strong after declining 82% over a more than two and a half year bear market.

The breakout in commodities and end of the downtrend suggests that inflation and not deflation will be the next concern. It also suggests a potential future tailwind for metals prices. The road to operational recovery may be bumpy but that doesn’t mean it will be for the related capital markets. The CDNX is at a 10-month high and GDXJ has rebounded 50% in two months. Meanwhile, I’m surprised by Rick Rule’s bizarre comment about capitulation considering GDXJ just endured an 82% bear market. (Major kudos to Rick for his market skepticism in 2011 and 2012). Capitulation occurred in spring 2013 and a final wave came in December 2013. Since then, most quality juniors have rebounded 100% or more.

Ironically, the time we should be most optimistic is at a market bottom. That is the best time to buy because it has the lowest risk and is when the biggest gains are made. However, the recent bear market remains fresh in the mind of the majority of market participants and company executives. They worry about making another mistake or misleading people so they hedge their views. The toughest time to buy is where we are now, a few months following a major bottom. Prices are materially higher yet sentiment has not shifted enough to displace the bad memories from the preceding bear market. Essentially, there are two reasons (instead of the usual one) not to buy.

It is incredibly difficult to buy at this juncture but, as we noted in our last editorial, the evidence favors doing so. Pullbacks, until we see much larger gains should be brief and should be used as an opportunity. ETFs such as GDX, GDXJ, and GLDX have spent the last 11 days consolidating and digesting gains. This is not rocket science. Do your due diligence and take advantage of opportunities when there. Don’t overthink it. Be long, sit tight and have an exit strategy (to limit losses) in case things play out differently. If you’d be interested in learning about the companies poised to outperform the sector, then we invite you to learn more about our service.

 Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

The first chart shows the speculative position (for Gold & Silver combined) as a percentage of open interest. The black is a price index comprised of Gold and Silver. At the June low speculators were only 4.6% long as a percentage of open interest. That marked a 12 year low. It is currently 11% and was as high as 52.8% in 2012.

Before Christmas, public opinion on Silver was near 20% bulls. That was in the bottom 3% of all readings in the past 20 years. At the same time, the speculative position in Silver was in the bottom 8% of all readings in the past 20 years. (Source: SentimenTrader.com)  

This chart from Tiho Brkan, shows the Central Fund of Canada and its premium or discount to NAV. At the June low the discount was 7%. Shortly thereafter, the discount surpassed 8% though CEF did not make a low in price. That was the highest discount to NAV in 12 years! The current discount is 5%.

Assets in the Rydex Precious Metals Fund have evaporated from $370M to $58M. I don’t have the history handy but I believe this is near a ten year low. Even more striking is the decline in assets as a percentage of all sectors. That is down to 4.7% which is well below the 2008-2012 lows.

Sticking with precious metals stocks we see that short interest is very high in GDX. This isn’t necessarily bullish. The shorts have been correct for more than a year. However, short interest surged in November and December and the stocks failed to make new lows in December. If short interest remains high in January and the market continues to firm then its bullish.  (Source: Schaeffers Research).  

Just like history, sentiment does not pick or ensure a bottom. The best recipe is to wait for a combination of extreme negative sentiment and very strong technical support. We were hoping the precious metals complex would plunge further to that very strong technical support noted in recent editorials. It could still happen. However, we have to listen to the market and its price action. The gold and silver stocks failed to make new lows in December. Last week Gold and Silver tried to make new lows and failed.

If precious metals fail to make new lows when sentiment indicators are at decade extremes then how could they make new lows in the near future? There are some speculative longs in the market (11% of open interest) who could drive it lower temporarily if metals don’t rally soon. As we’ve said, any selloff is likely to be final and would produce a strong rebound. If that doesn’t happen then the market could continue a slow, grinding saucer type of bottom. The longer this drags out then the more likely that is. The age and depth of this bear, extreme negative sentiment, lack of new lows and recent relative strength in the shares lead us to err on the bullish side. If you’d be interested in learning about the companies poised to rocket out of this bottom then we invite you to learn more about our service.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

Source: FinViz (edited by Short Side of Long)

Source: Why Aren’t Gold Traders More Scared?

The cyclical bear market in Silver is serving its purpose. Its correcting and digesting the 6-fold advance that took place in less than two and a half years. A similar correction took place in the mid 1970s that led to the parabolic move to $50. Amazingly, if you line up Silver’s performance from its 1971 low to 1980 high with Silver’s performance since its 2008 bottom, you’ll notice strong parallels.

(Note that the blue prices are rescaled). The initial bull run was stronger, lasted a few more months and that could be why the current correction is slightly deeper. Nevertheless, look at how similar the two are!

Its important to note that huge moves require long periods of digestion and correction. Commodities typically encounter near vertical moves that are sprung from deeply oversold conditions or multi-year consolidations. The two initial advances on the chart are quite similar and that is a reason why the ensuing corrections are similar.

Moving along, Silver is at an interesting juncture as it continues to hang above multi-year support at $26 amid persistent extreme bearish sentiment. This chart from Tiho Brkan shows that gross speculative short positions are at their highest levels in decades. The short positions are potential fuel for a sharp rebound.

Furthermore, last week public opinion (an amalgamation of a handful of surveys courtesy of sentimentrader.com) reached the lowest level since at least 2004.

Following its run in the early 1970s, it took Silver three and a half years to begin its next run and five years to make its next high. It has been about two years since Silver’s last peak. Huge advances require quarters and years of digestion. This is how markets work. It’s not manipulation or a fake market as some say.

The good news is the short-term outlook is favorable. Precious metals markets have yet to put in a bottom but each new day brings us closer. While Silver won’t touch $50 anytime soon (or even $40), a rebound to $35 would be quite substantial in percentage terms. Most Silver stocks would rise well over 50%.

The long-term trend and fundamentals remain intact for both Silver and Gold. Day traders and reporters will tell you there is no sovereign debt bubble or threat of inflation but, as Kyle Bass recently pointed out that can change very quickly. Remember the financial crisis? Look at the charts of financial stocks. They were fine for many years and then fell off a cliff within a year. There were people who, in the middle of 2008 thought we weren’t even going to have a recession! Most never learn.

I suspect the major catalyst will occur when governments lose control of their own bond markets. They have to continue to print money for years and it will be a major catalyst for Gold & Silver when bond markets go the other way. This could be the catalyst for Silver eventually breaking $50 and reaching triple digits. Currently, quality gold and silver miners (mostly not in GDX or GDX) are trading well off their highs and at their lowest valuations in quite a while. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains in the next few years then we invite you to learn more about our service.  

Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com