XAU and You
With all the recent talk about silver and the XAU (Amex Gold and Silver Index), I thought it would be an appropriate time to show how traders are positioned in silver futures.
The chart below shows the XAU (top, in black), small speculators' net positions (in red), large speculators' net positions (in blue) and commercial hedgers' net positions (bottom, in green). Just like in every other futures contract monitored by the CFTC, commercial hedgers are large traders engaged in the futures markets for the specific purpose of hedging their day-to-day operations. Large speculators are just that (holding at least 150 contracts), and small speculators are what's left - those traders speculating in the metal and holding less than 150 contracts at reporting time.
As with most commodities, there is a contrary nature to extremes in speculators' positions. This means that as small and large speculators become extremely net long or extremely net short, the metal tends to turn tail and head the other way - which almost always "happens" to be the direction benefiting commercial hedgers. This isn't always the case, and this is not a perfect indicator, but there is a very distinct relationship between these traders' positions and future movements in the stocks which make up the XAU. As of the most recent report, commercial traders were close to a record net short position, large speculators were close to record net longs, and small specs were also extremely net long. I'll let those with more knowledge of the fundamentals of the metals debate why the usual pattern will or will not hold going forward.
About the only comparable time to now that I could find was October 1994, after which the XAU declined 22% over the next few months. Unfortunately, the most recent data we have here is from 04/12/04, and the XAU has already declined nearly 14% from that date. Perhaps most of the decline is out of the way, but those interested should pay close attention to the next CFTC report due out on Friday afternoon to see how these traders reacted to the decline (through Tuesday, anyway, which is what the report covers).
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