Bizarre Silver Open Interest (chart update)

Thu, Jan 26, 2012 - 4:34pm

I wasn't planning on making a new post this afternoon and time is short but I feel that we must discuss the completely bizarre and somewhat unprecedented open interest numbers in silver.

Yesterday, at about this time, I gave you this:

"Lastly, just a word about the latest OI numbers which were again rather eye-opening. As you surely recall, gold was down almost $14 yesterday. It appears to be a mass long-liquidation. HAHAHAHAHA! Suckers! The OI in the Feb12 fell by 18,000 contracts but only 9,000 rolled into April. The rest of them simply capitulated. Dweebs. They shoulda been reading more Turd! Clearly today's rally is primarily due to those same "traders" rushing right back in. I expect a pretty healthy bounce in OI when the numbers are reported tomorrow. Probably something like 7000 new contracts.
In silver, the OI situation remains stable and this is a very good thing. Yesterday, price fell by 30 cents but OI only declined by 5 contracts. A battle is being waged between resolute longs and the EE, which, as The Wicked Witch told you yesterday, is intent upon only allowing silver to move up slowly. Well, their plan sure failed today. Let's look for another, healthy 2000-3000 OI bump when today's numbers are released tomorrow."

Well, the gold picture is almost exactly as I'd projected. The same old longs who got flushed out on Tuesday came rushing right back in yesterday as the total gold OI rose by about 7,600 contracts, from 427,408 to 434,997. Though this was predictable, total OI is still about 3,000 contracts below where it was a week ago when gold was $40 cheaper. This shows us that, though new longs are entering and exiting the gold pit on a daily basis, much of this last week's rally has been on the back of short-covering, by both The Cartel and the spec shorts.

Silver, on the other hand, is totally f'd up. I don't even know where to begin! As you'll recall, I had thought that the big rally last Friday would be proven to be primarily EE short-covering. Instead, the OI numbers showed an increase of over 2,300 contracts. Short-covering was prevalent on Monday as silver rose 60 cents but OI fell by 1,400 contracts. Tuesday, as you know, was a push as OI and price were basically unchanged. Yesterday, as we all saw, silver exploded along with gold after the FOMC minutes were released. With a Comex session gain of $1.15, I thought we'd see another 2000+ gain in OI. Instead, we saw a 500 contract decrease! Since there was almost certainly some new buyers hitting the pit, how many shorts did the EE cover yesterday? 2000? 3000? Who knows?!? What is for certain are a couple of things:

  • Over the past week alone, silver has rallied almost $3 while total open interest has fallen by 300 contracts.
  • Shorts are scared right now (physical supply squeeze?) and rapidly moving to cover positions.
  • Margins are so disproportionately high that new money is barely flowing into the pit. No doubt that the MFingGlobal disaster has scared off quite a few specs, too.
  • This lack of liquidity will lead to increased volatility. Yes, most of the volatility will be to the UPside due to the aforementioned physical supply squeeze and other bullish factors but we must all be prepared for some pretty violent takedowns, as well.

Below are some closing charts for today. Not much new to report from this morning. The metals have been pressured on the Globex due to a little pop in the POSX. Not really a big deal as they are due for some profit-taking anyway. (If you bought on the FUBM yesterday morning pre-FOMC, you probably gave it through the day today to see how much farther things would go. When you saw The Pig begin to perk up, you rang the cash register and sold this afternoon. Don't worry. Those folks will be back.)

The main action now is tomorrow. Gold must close above $1705 and silver must close above $33. Failure to do so would likely postpone a further rally for a few days. Watch prices very closely overnight and keep your fingers crossed. Be on the lookout, too, for headlines that might breathe some life into The Pig. After a 3% drop this week, you can expect TPTB to try to prop it up at some point.

More tomorrow. TF

10:20 am EST UPDATE:

A very interesting battle is setting up today. There seems to be an effort afoot to keep gold under 1730 and silver under 33.80 but more likely 34. Which side will win? The smart money would have to be on The Cartel and the EE but we'll see. In the end, the primary battle for today is not in beating those levels. We mainly just need to hang on to the gains of this week and not give them back. IF we can, the weekly charts will begin to look quite favorable. An improving technical picture will inspire some fresh WOPR and hedgie cash to flow into the pits next week. Given the utter lack of volume and participants in silver, new money can have a rather dramatic effect, as we saw last Friday.

The key levels to watch are on the charts below. It would be fantastic if gold could close above 1720 but 1705 will do. A silver close near or above 34 would be extraordinarily great but, really, anything over 33 will be fine. We just don't want to lose too much momentum as we head into next week.

Have a great day and keep your fingers crossed. TF

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