We've discussed at length over the last two weeks that commercial producers in most of the commodity markets have come out in force to unload their future production on the first quarter commodity rally. Fore example, we've noted that gold producers haven't been this bearish since 2013 and that the crude oil glut would take more than a year to work through. See, "Gold, Oil, Grains - Was that It?" for the background we discussed last week. Last night's tragedy in Brussels has added a bit of a boost to the precious metals as expected. If this boost is insufficient to force short covering or, attract new buyers, it's over until prices decline.
While I hate to mix business and tragic events, it is necessary due to their direct effects on each other. Therefore, we are currently viewing the flight to quality in the precious metals as a last gasp effort to rally. People like to own precious metals as they feel it is a tangible store of value. What is dear is what we hold close in times of turmoil. That being said, based on the commercial traders' actions and the negative technical outlook, we feel the latecomers to the buy side will be left holding the bag.
Silver miners have been more than anxious to sell their forward production. Note that how their selling increased once the market rose above $14.50. We noted earlier that gold miners haven't been this bearish since 2013. Well, silver miners haven't been this short since 2008! This is a position we're seeing more and more across the commodity spectrum as the mindset shifts from a growing US economy, raising interest rates and leading the world out of a global slowdown to the notion that, maybe the massive inflation everyone has been waiting for isn't here quite yet. Successful trading requires the right idea at the right time.
This is an area where mechanical trading programs excel as their quantitative nature is unbowed by news reports, however tragic they may be. We trade the same premise on both a discretionary and mechanical basis and these programs have generated sell signals across the metal sector - gold, platinum, silver and even copper. Commercial selling in copper further confirms the deflationary notion of a global economic slowdown. The point is the broad confirmation across several market sectors should play out as the stronger hand, even in the face of last night's tragic events. Understandably cautious traders may wish to wait for a reversal lower as confirmation. We do believe that the fall could be quite rapid given that the majority of the long positions in the silver futures market are speculative and therefore, subject market washouts.
You can see our last year's worth of our commercial short silver program on the chart below. Be sure to register for full access to all 36 markets and portfolio building tool.
