It’s been a wild couple of weeks for the financial markets, and the silver (SLV) bulls certainly haven’t had a week worth writing home about. While many of the investors in silver likely thought they had a perfect sanctuary from the storm based on the metal’s supposed safe-haven status, that sanctuary just saw a hurricane tear through it. The metal dropped nearly 15% to start the week, is now down almost 30% year-to-date, and this was finally the destruction we needed to send the small speculators running for the hills. In the past ten trading days alone, small speculators have nearly halved their long positions in the metal, and we’ve finally seen sentiment get beaten to a pulp as well. Unfortunately, while this would typically be a buying opportunity, we’ve also seen a multi-year low for silver, and tons of technical damage pile up. Based on this, I continue to favor gold and am avoiding silver for the time being.
(Source: Author’s Chart, CFTC.com)
If we take a look at the above chart for small speculator positioning, we can see that we saw a plunge in long contracts from the late February peak, from 77,900 contracts down to 44,900 contracts, a drop of more than 40%. This is a significant improvement as it suggests that we finally have some of the die-hard bulls throwing in the towel on this long trade. As the saying goes, “When everyone is already bullish, there is no one left to buy.” While this drop to 44,900 contracts is undoubtedly a positive sign, we now have silver trading at 1-year lows, but long exposure remains well above May levels. Therefore, while this is an improvement, it would be ideal if we could see long exposure drop closer to or into negative territory, to suggest that we have complete capitulation here. Thus far, while this is a significant improvement, we haven’t seen the silver bulls slaughtered yet, and this is often needed to complete a sustainable bottom.