As we anticipated earlier this year, commercial shorts including JPM are finally within grasping reach of covering their positions and transitioning to net long. For more than a decade, the large commercial trading banks have been trapped with an enormous short position in silver as the price has risen from its lows near $3 to its May high of nearly $50. Most analysts expected the commercial shorts to be broken in a short squeeze, likely launching silver above $100. However, this short squeeze will not occur.
In September 2010 these traders began to aggressively cover their short positions. Since then, commercial net short positions in silver have been reduced from over 65,000 contracts to 24,262 as of September 27, 2011 - and falling from 40,708 just one week earlier.
The large September take down from the $40 price level to the $30 price level has completely wiped out the small leveraged speculators, which saw their net long positions crash from 18,170 the previous week to 8,837. Meanwhile, open interest is threatening to break below the 100,000 level - indicating that speculative money has abandoned silver and sentiment is extremely low amongst investors. The combinational one-two punch of the May takedown and September takedown served to transition contracts from speculators to the commercial shorts at a much lower average price than most analysts ever expected.
The bullish trend line in silver that began in 2009 remains intact. However commercial shorts are now within a few weeks of trading their way out of an impossibly large short position to go net long. We expect the remaining positions to be covered within the $26 to $32 price range under the guise of bearish speculator sentiment.
This is extremely bullish for silver's long term trend, as the commercial banks will capture more profits from the bull market in precious metals than any other trading group. Once the commercial banks have a net long position their financial incentive will reverse from using takedowns to take-ups. This will likely coincide with the next round of monetary intervention by the Federal Reserve and the beginning of the third phase in the silver bull market - in which waves of retail investors push silver to its destined triple digit price level.
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