Silver has regained quite a bit of luster since January 28th, rallying more than 8% from 26.80 to 29.12 at the close Friday. We believe the month-long correction in precious metals is ending, and gold and silver should trade to new highs in the coming weeks.
While we endured a 1.5% loss in January due to the pullback, our accounts are already back to positive for the year, showing a 3.4% gain for 2011. Since we added to silver and gold positions on the way down, we were able to build on our 67% return in 2010.
As we stated in the past, Managed Money long participation was necessary for silver to start rallying again, and Managed Money returned to the silver market with force this week. This week's CFTC report shows that in the week between January 25 and February 1, Managed Money increased their net long exposure by 4,879 contracts. This marks a 25% increase in Managed Money long participation in the market. When viewing silver from this light, the large rally is no surprise.
click to enlarge
The chart above shows silver price in gray, Managed Money net longs in green and Producer net shorts in blue.
As can be seen, we are still more than 24,000 contracts away from the high in Managed Money net longs, so this leaves plenty of room for silver to rally to new highs. It is also interesting that Producers slightly increased their short positions, indicating that the current rally was not due to short covering, but rather longs reentering the market.
We believe that, over time, the Producer shorts will be forced to continue covering and Managed Money will increase their longs, causing silver prices to rally past the highs of 31 seen in early January. We recommend long positions in silver and SLW to profit from this developing situation.
Disclosure: I am long SLW and long silver futures