The conversation this week around the silver trade was abuzz with the prospect that the massive rally we saw at the end of April was caused by a short-squeeze, rather than a frenzy of speculators and late-to-the-party money going long.
The article that got that all started and attracted the attention of the Wall Street Journal proposed that the decrease in the large speculator net position and aggregate open interest was evidence of a squeeze caused by large traders exiting their short positions in the face of climbing silver and increased margins. This, the article indicates, prompted silver to go parabolic.
I took the liberty of drawing red marker lines for where this short-squeeze supposedly took place. Upon closer inspection, the aggregate open interest and large speculator net position trends the article identifies seem to disappear. In fact, they appear to be increasing as silver rises, rather than decreasing as the article proposes.
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If we look to trading in the iShares SIlver Trust (SLV) we see a similar trend of daily volume increasing during the rally, almost reaching 200 million right around $46 per ounce.
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The movements in SLV were not completely unrelated either, as the arbitrage mechnaism of this ETF meant that spot silver was being bought and sold to reduce premiums and discounts to net asset value (NAV).
Don't Rationalize It
The short-squeeze story is incredibly appealing to those long silver, since it would suggest the fundamentals are still well and good and that this was not just a speculative bubble.
Unfortunately, as we've seen above, this story does not hold up. Based on the increasing, rather than decreasing volume and open interest we see, this was an overbought speculative bubble that popped.
Disclosure: I am long ZSL.