If you are interested in silver and silver-related stocks it would be in your best interest to take notice of the current extremes that have moved into the silver market and understand what it means for the future of silver. Bears beware!
Every week, the Commodity Futures Trading Commission (CFTC) releases telling data to the trading public. The data provides a breakdown of long and short positions of three groups of traders - commercial traders, large speculators and small speculators. The report is known as the Commitments of Traders (CoT).
The data provided by the CFTC provides some of the best intermediate to long-term directional indicators available, particularly when an extreme is hit.
Currently, all three groups are in an extreme. This is a rare event and one that should be taken seriously as it is highly accurate in predicting the future trend in the market.
Below is a silver chart and three CoT charts provided by Jason Goepfert of SentimenTrader.com, one of the best sites I know for providing accurate sentiment and seasonal data.
Click to enlarge:
As you can see, all three groups have moved into extremes: Commercial traders are extremely bullish, whereas both large and small speculators are extremely bearish. In the past when this has occurred silver has rallied over the intermediate to long-term.
In fact, it is the first time all three have moved into extreme territory since late 2009. In the below chart you can see how well silver performed the last time all the groups hit an extreme. The performance was staggering, to say the least, as silver rallied from below $10 an ounce to over $40 an ounce over the subsequent 30 months.
If that wasn't enough, silver is also moving into one of the best seasonal periods during the year, as evidenced by the below chart from Sentimentrader.com.
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September has by far been the best performing month for the precious metal, with average gains of 4% over the sample period above. But what is most impressive is the percent of time positive. Over 90%, or 30 out of 34 years, silver has had a positive return in September. That is a staggering statistic and one that should not be ignored.
So, if the seasonal winds live up to their historical billing we could see a slight pullback in August, which could afford the next big buying opportunity for silver.
This could also mean buying opportunities in the silver miners, including Mag Silver (AMEX: MVG), Great Panther Silver (AMEX: GPL), or Silvercorp Metals (NYSE: SVM).
If you are not comfortable with the volatility that is inherent in junior silver miners then I would suggest buying the iShares Silver Trust (NYSE: SLV).
There you have it. There is no doubt that the current price action in silver is bullish and the sentiment indicators are overwhelmingly supportive of a bullish move. I would expect to see a short-term decline in silver, but in my opinion this would only fuel a buying opportunity that investors should take advantage of.