According to the weekly disclosure of CFTC reports, it is reasonable to believe that the market is at its most pessimistic sentiment towards silver, since the weekly report available to the public in its current format in June 2007. As investments always swing from one extreme to another, it is just a matter of time before the sentiment in silver improves again.

By Samson Li

According to the CFTC reports disclosing positions of managed money on 3rd April, silver has been net short for the eighth consecutive week, the second longest streak in the last decade. The following is how the data stacked up:

Date              Silver Price          Managed Net Tonnes equivalent

13/02/2018     $16.61                                - 1,234

20/02/2018     $16.57                                - 1,622

27/02/2018     $16.61                                - 2,581

06/03/2018     $16.62                                 - 1,685

13/03/2018     $16.51                                 - 2,518

20/03/2018     $16.25                                 - 5,470

27/03/2018     $16.64                                 - 5,265

03/04/2018     $16.52                                 - 6,159

The longest streak of silver net short so far is nine weeks, in 2014:

Date              Silver Price              Managed Net Tonnes equivalent

16/09/2014       $18.75                                  - 709

23/09/2014       $17.92                                  - 761

30/09/2014       $17.11                                   - 944

07/10/2014       $17.36                                  - 1,100

14/10/2014        $17.50                                 - 1,413

21/10/2014        $17.36                                 - 1,343

28/10/2014        $17.18                                 - 1,605

04/11/2014        $16.12                                 - 958

11/11/2014        $15.57                                 - 308

Silver sentiment worst in a decade

While as of writing the current streak is still one week shy from the historical high, if one examines the tonnage of managed net positions, it is not difficult to realise that the difference between the short and long positions are at much wider margins in 2018 than in 2014 (larger net short positions). Indeed, at net short of 6,159 tonnes equivalent (as at 3rd April 2018) it is already the largest net short position reported so far since 2007. Therefore, it is not an overstatement to claim that currently the market sentiment on silver is at its worst in the last decade, for whatever reason.

On the other hand, the continuous increase of the gold to silver ratio, particularly since mid-2016, signals that silver has underperformed gold, or the market favours the latter. Indeed, the gold to silver ratio has recently breached above 80, the levels that last seen during the 2008s, when the global markets were crushed by the Global Financial Crisis (GFC). Even during that period, managed positions still remained in net long, suggesting how pessimistic that the current market sentiment has been on silver.

Chart: Gold to Silver ratio back to 2008 levels

During the 2014 streak, silver price fell from $18.75/oz to $15.57/oz in nine weeks. Naturally, net long positions climbed up steadily in the following months once the period of consecutive net shorts ended, and silver was trading between $15 and $18 in the next three months. Even as the silver price later drifting downwards again and eventually breaking below $15/oz in July 2015 (when another streak of seven consecutive weeks of net shorts began from 23rd June 2015 to 4th August 2015), this case still presented that profitable trading opportunities exist when market sentiment was at its extremes.

Of course, history rarely repeats itself in an exact fashion. For example, during this current streak, the silver price was fairly stable, dropping from $16.61/oz on the 13th February, to $16.52/oz on the 3rd April. This may suggest that, despite the pessimistic sentiment, silver is already towards its nadir, and in the longer run, in line with our fundamental analysis the primary direction will be up, as positions of either side will always be covered gradually. While there is no way to tell how long this current streak of net shorts will last (will most likely breaking the historical longest record in 2014 though), it does look as if a bottom may be forming. Short covering rallies in silver can be violent but, as discussed above the trading range while these latest shorts have developed has been relatively narrow. On an intraday basis the range has been just $16.10 to $16.63. So the next improvement in silver may be less dramatic than some, but it does look as if a bank of support is building between $16.00 and $16.65. We forecast silver to average $18.80 this year, building towards a target of just over $20.