The “smart money” is buying silver.
Commercial traders are the “smart money.” They’re the merchants, miners, explorers, and bankers in the precious metals market. And they use futures contracts to hedge their exposure to the metals and protect themselves against adverse downside moves.
For example, if a major silver producer wants to lock in a guaranteed price on its silver production, then it’ll short silver in the futures market – thereby hedging its bet.
Each week, the CFTC Commitment of Traders (COT) report shows the positions (long and short) of the largest commercial silver traders.
The net-short position (long contracts minus short contracts) is almost always a negative number – meaning commercial traders are usually short silver futures contracts.
That makes sense since most commercial short positions are used to hedge actual, physical silver holdings.
When the price of silver is high and the commercial traders want to lock in those prices, they’ll sell a large number of silver futures contracts. So, the net-short position becomes a large negative number.
When the price of silver is low and the commercial traders are not too concerned with it falling further, they’ll sell fewer silver futures contracts. Then, the net-short position is a small negative number.
In nearly four decades of trading the financial markets, I can’t recall ever seeing the commercial traders having a net-long position in silver futures contracts – until now.
Last Friday’s CFTC report showed that the “smart money” was long 59,815 silver futures contracts, and short 55,505 contracts – for a net-long position of 4,310 silver futures contracts.
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Understand what this means…
The folks who use the futures market to hedge their physical holdings of silver are no longer hedging. They’re betting on a rise in the price of silver.
In a sense, they’re doubling down on their business.
This would be like the wheat farmer who would normally sell wheat futures contracts to lock in a guaranteed price for their crop. Instead, the farmer is now buying wheat futures, thereby increasing exposure to the price of wheat.
You don’t do this if you’re concerned the price will fall. You only do it when you’re confident the price is headed higher.
The smart money is betting on a silver rally. So traders should follow their lead.
Best regards and good trading,
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Jeff Clark
Reader Mailbag
Will you be buying silver in the coming weeks? Or will you go against the “smart money” move?
Let us know your thoughts – and any questions you have – at [email protected].