Is Copper About To Pull Silver Higher?

Contrary to what we  thought a year ago, when we wrote Dr. Copper Flashing Red Alert, copper has held up very well at a major support zone. We warned our readers to closely follow copper as it was ready to fall through the critical $3 level. If that would have happened, the world economy would have been in big trouble. Although we still believe that trouble is ahead, it seems not the case in the very near term.

The following chart highlights two metals: silver is drawn with the grey line and copper in brown. The chart clearly shows the correlation between both metals. The obvious conclusion is that silver has closely tracked the base metals complex since the great financial crisis.

The most interesting chart observation is the major support line for both metals, which we marked in dark blue. It comes at $3 for copper and $19 for silver. Note how the support zone goes back 4 years, making its importance even bigger. Especially the support line in silver is old resistance (look back at 2010).



silver and copper price chart from 2009 till 2014


The chart shows that, for now, both metals have found support. Whether it holds is anyone’s guess, as the metals have been in a downtrend since 2011.

So let’s look for some other indicators to get an idea of market strength or weakness. In particular, the futures market plays a key role in price setting (whether we like this fact or not is another discussion). Ted Butler, analyst of market structures in the gold and silver futures market, analyzes in great detail the weekly futures positions, available to his premium subscribers at Butler Research. Specifically in the silver market, Butler notes that technical funds increased their gross short position considerably last week. He notes that “this is unabashed good news as it puts the technical fund gross short position over 30,000 contracts and close to the historical high water mark.”

From Ted Butler’s premium newsletter:

In the current disaggregated COT report, the technical funds’ gross short position in silver is actually slightly larger than these funds’ gross short positions in gold; something that I believe has not occurred previously. It’s not so much that the gross short position of the tech funds is slightly larger in silver than it is in gold, but more the fact that COMEX gold is two and a half times or more the size of the COMEX silver market in contract terms. For silver to be larger in any category compared to gold must be considered highly unusual.

What this means to me is that silver is locked and loaded to the upside. Yes, the commercial crooks on the COMEX can always rig prices lower temporarily, but there is a limit to how far and how long. That limit is defined by me as the maximum number of contracts the commercials can lure the technical funds into selling. When we get to historical extremes in technical fund short sales in silver, as we are now, it is reasonable to conclude that we are full up or as close to that as is reasonably practical.

Both recently and in the more distant past I have explained why technical fund short covering is the nitroglycerine of buying. That’s because as prices rise losses accrue to shorts and those losses can’t be fully calculated because there is no limit as to how high prices could rise (as opposed to how far prices could fall). One might hold off on buying new long positions if prices are running higher at a fast clip in the hopes of buying lower; but there is a different mindset with a short position running higher. The mindset is more akin to get me the heck out of this short position now to prevent even larger losses.

Another interesting observation in the futures market comes from Dan Norcini, professional trader. Given the significant correlation between copper and silver, it is worth looking at the copper futures market to get an idea of the future direction. In one of his latest commentaries, Norcini notes that hedge funds have moved from the short side to the long side in copper.

As a matter of fact, the only category of traders that has held the net long interest in the copper market has been the Swap Dealer category. Every other group, the Commercials, the Hedge Funds, the Other Large Reportables and the General Public or Small Spec trader have all been net short. That changed this past week for the hedge funds. They are, as of Tuesday, now net long in copper. The movement has been consisting primarily of short covering but now new longs are joining in.

Note how the hedge fund positioning at the beginning of this year started out as big net longs only to see them move to the short side of the market in February. They were briefly long again for a week in late February only to quickly establish a larger short position.

What does it mean for silver’s prospects? The combination of long term chart support (if it can hold of course) in both copper and silver, extreme silver short positions by technical funds, and relaxing of extreme copper short positions, could be a healthy mix for silver going forward. It is worth to following this up closely, but for now we consider this a positive for both metals.

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