Is The COT Report Still Valid?

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by Ted Butler, Silver Seek:

There can be little question that there has been a literal explosion in awareness and public commentary focusing on the Commitments of Traders (COT) Report and the analysis of silver and gold (and other markets) in accordance with futures market positioning. No doubt the interest has been generated by the reliability of the COT market structure approach over the long term, but also by the recent extreme and unprecedented massive size of the short positions of the managed money traders in gold and, particularly, in silver. The managed money short position in COMEX silver futures is now nearly 50% larger than it was at the previous record peak in April.

Coincident with the explosion in COT commentary and the unprecedented managed money short positions, there have been a number of questions related to the current efficacy and accuracy of the report. Some have raised questions whether the report is still a valid barometer of past and prospective price change, as well as if the report accurately reflects actual positioning by traders or whether there is deliberate misreporting.  These are significant concerns worthy of analysis. After all, if the COT report is no longer valid or trader positions are being misreported, the growing commentary is especially misplaced.

Behind the question of whether the COT report is still valid seems to be the reality that positioning has reached extremes never witnessed in the face of prices yet to reverse. This raises the alarm to some that something has gone haywire and the premise behind market structure analysis no longer works. While understandable, nothing could be further from the truth. Yes, the managed money short positions in silver and gold have reached extremes never before witnessed, but the positioning extremes are completely in synch with price performance.

To be clear, I’m not claiming that the record extreme short positioning by the managed money traders has resulted in the lowest prices ever recorded for silver and gold, as that would clearly be untrue. What I am claiming is that the record short positioning by the managed money traders has resulted in an equally unprecedented pattern of price – there has never been a consecutive weekly decline in the price of silver extending to 14 weeks in history. In other words, the positioning matches the price pattern perfectly; which is exactly what it is supposed to do.  Just because no one (certainly including me) predicted we would have record and unprecedented managed money shorting starting on June 12 does it mean the COT report is no longer valid.  Many things are beyond prediction.

In fact, the nearly identical pattern of positioning and price change is the clearest proof to date of the validity of the market structure approach based upon the COT report.  Far from questioning whether the market structure approach is still valid, there should instead be heightened awareness that the unprecedented short selling by the managed money traders is the sole cause of the unprecedented string of consecutive weeks of lower prices.

I think I understand why some may be questioning if the COT report is still valid, namely, we have yet to rally from what is the most bullish market set up in history. Instead the market structure has continued to get more extremely bullish, as the managed money traders have continued to sell and sell short in COMEX silver futures, while the commercials, particularly JPMorgan, have continued to buy. But the COT report was never about the precise timing of reversals of positions, just that the reversals would come from extreme positions.

Certainly, the current positioning has taken much longer to reverse than anytime previously, but that is little reason to assume a rally of significant proportions will not occur. Besides, I’ve already laid out the case for the market structure approach not working – the managed money technical funds collectively buying back their extreme short positions at a profit. The fact that they continue to add new short positions just delays and accentuates the eventual certain resolution that the short positions must be bought back at some point, so let’s not get impatient. Look, I’m sure we’re all ready for the resolution, but it isn’t up to us; it’s up to the nitwit technical funds and the very crooked JPMorgan.

On Saturday, I mentioned how I thought it was nearly impossible that JPMorgan had managed to buy back its entire silver short position on the COMEX. I’d like to amend that a bit. Over the years, whenever JPMorgan had reduced its silver short position dramatically, I would always get inquiries from readers asking if I thought if JPMorgan could reduce its short position completely and even get net long. While I never explicitly ruled out such an occurrence, I was always very careful to point out that in order for JPMorgan to buy back its short position completely, it would require the managed money traders to then sell and sell short a further prodigious quantity of contracts, something that never occurred. For example, back in April, when the managed money traders sold a then-record 74,000 silver contracts short, the lowest JPMorgan could reduce its short position was down to around 20,000 contracts.

On the current silver price rig job down that began around June 12, the managed money traders have sold short more than 104,000 silver contracts, fully 30,000 contracts more than their previous record in April. While there was no way (that I’m aware of) to predict this outcome in advance, there is also no question that the “extra” 30,000 new managed money shorts is precisely what enabled JPMorgan to buy back its short position completely and get slightly net long for the first time ever. My point is that while not predictable in advance, the explanation for how JPMorgan managed to accomplish the “impossible’ was laid out in advance.

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