Silver and short covering – a theory | FT Alphaville

Silver and short covering – a theory

John Kemp at Reuters has already written about how it wasn’t necessarily the froth in the market that caused the parabolic rise in silver over April:

Now, on Friday, Pragmatic Capitalism has a post explaining why the CFTC’s committment of traders report possibly proves it was indeed short covering which was responsible for the rise, rather than an influx of new ‘weak’ money into the commodity.

It all comes down to open interest and positions held by large speculators.

As Jordan Roy-Byrne from the Daily Gold explains on the site — citing the adjacent chart:

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, it’s 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.

Meanwhile, in anecdotal evidence of short covering, the borrow score of SLV, the iShares Silver Trust, rose ahead of the April run-up indicating the stock was also harder to borrow — as the following chart from Data-Explorers shows:

Though it’s worth reminding that borrow-rates are fairly opaque, and relatively compartmentalised.

Related links:
It wasn’t the ‘froth’ that caused the commodities rout – FT Alphaville
ETF investors mistimed the commodity correction (again) – FT Alphaville
SLV Is Now “Hard To Borrow” At Goldman – Zerohedge