Silver searching for support

That which has been shaping up as the most significant bearish tilt in the commodities space since almost two years ago was underscored by yet another shrinkage in the pile of bets on the bullish side visible among speculators in recent trading days. The most recently available CFTC position tracking data revealed that fund participants have slashed their cumulative net-long contract holdings by about $17 billion in value terms or by more than 13% in the period that ended on May 10.

This developing trend prompted on analyst at Citi Futures Perspective, Mr. Tim Evans, to remark that he would "view this as a bearish situation. We have a confirmed flow of selling with substantial remaining net long positions that can fuel an ongoing flow of that selling." The loss of long gold contracts for example was on the order of 20,000 (or about 10%) while the advent of a paradigm in which only 19,000 contracts were long in silver matches a market profile that has not been present since early 2010.

If there was any “good news” to report in the trader positioning statistics, it would be that ETF holdings of platinum witnessed a modest increase last week and finished the reporting period at cumulative balances that were only slightly off from the year’s high water mark of 1,296 million ounces (at 1,292 million ounces) for the noble metal. However, the holdings of long positions in palladium fell rather dramatically, losing 256,000 ounces and scoring their second largest decline of the year.

Now, to be fair, one might also want to look at the position debacle in crude oil last week; the niche lost open interest on the order of 9.1% last week. Crude oil had led the marathon race in commodities this winter and early spring, following the developments in the MENA region and before silver took the lead from it, in what basically shaped up as a large spherical object of speculation in the entire niche. Commodity prices rose to levels that have begun to hurt the on-going economic recovery process and are now threatening to actually slow growth in 2011.

The results of the speculation in “stuff” became fairly obvious in a relatively short time; demand destruction once again resurfaced in black gold and in other sectors in the wake of sky-high valuations brought about by wildly intense speculative activity. Certainly, the ”Gaddafi excuse” –as applicable to oil for instance – became just plain silly after a while, and the obviousness of the pure gambling in the niche became the main focus for many (including regulators).

Expectations that the Fed might not raise interest rates in the US remained the primary impact factor in the market niche as players availed themselves of the oodles of nearly cost-free money and hurled sizeable piles of it at the relatively small markets in discussion here, often spiking their daily trading volumes to levels higher than many a “conventional” sector (say, the S&P). Such expectations continued to fuel the feeding frenzy in commodities despite the fast-approaching expiration of the Fed’s QE2 program at the end of June, and despite the trend towards a higher interest rate environment already on display in the policies of other central banks.

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