Silver Bulls Turn Bearish

London (Sept 8)  There are many phrases for capitulation. Very few have happy endings. I specialize in the analysis of the Commodity Futures Trading Commission's weekly Commitments of Traders report. This report separates the traders into three primary categories: commercial, large speculators, and small speculators. Big silver bugs, pools and funds fall into the large speculator category. Throughout the history of this report, the large speculators have maintained a net long position. This April, they shifted to net short for the first time in history, and they're threatening new records as you read. Let's see what this means.

The battle between the large speculators and the commercial traders typically climaxes in significant turning points. Furthermore, these battles are usually won by the commercial traders' understanding of the fundamental activity of the market in which they make their living. There are two primary reasons for this. First, commercial traders are hedging their anticipated business needs. Their actions are relative to their anticipated business plan and the commodity's price. Silver miners' hedging of forward production has caused their net position to remain negative throughout the history of this report. This dynamic has reversed due to the declining price of silver and record commercial purchases due to the business prospects of processors and end users. The second reason the market climaxes through these conflicts is due to the herd mentality of the speculative traders. Their trend following positions grows in size as the market moves in their anticipated direction. Pyramiding positions always invert spectacularly.

Let's look at a weekly chart and illustrate periods of commercial buying and selling. Commercial traders are negative feedback traders. The farther a market moves from their value area, the more they will buy or sell according to their business plan. These are raw material hedges. Historically, the silver market has been controlled by miner selling on rallies as they attempt to lock in favorable delivery prices in the future. Currently, commercial users of silver believe that they will not be able to purchase silver at the delivery time as cheaply as they can now. They are stating this collectively in record fashion.

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