Silver Below $55 as COMEX Shorts Outpace New Longs

Silver kicks off the trading week on Monday with a smaller managed money net long and an industrial backdrop that deserves a little more discrimination upon analysis rather than a simple broad-growth story.

The CFTC’s October 23 publication showed 16,180 managed longs and 12,675 shorts in standard COMEX silver futures as of October 20. The calculated net long was 3,505 contracts, down from 5,619 a week earlier. The composition of positioning is informative, as reported net longs increased by 378 contracts but shorts increased by 2,492, producing the smaller net-long calculation overall.

The chart below reconstructs the October 13 levels from the reported weekly changes and compares both sets of numbers. It suggests that additional short exposure outweighed new longs within the silver market. Silver seems to have a lot less directional support from COMEX and speculators than the preceding snapshot suggested.

That being said, a smaller net long is not automatically a bearish forecast. Gross positions can be adjusted very quickly, and a change in monetary conditions could alter the balance. The reporting lag in the CFTC report also does not capture the previous week, as it lags by an entire trading week.

Chinese Production and Silver

China’s September production figures provide a little bit different perspective. In the October 20 release, manufacturing value added rose 6% year-over-year. Electrical machinery and apparatus increased 8.1%. Computers, communications, and other electronics also increased, but this time by 16.4%.

Physical solar cell output fell 5.1% year-over-year in September and 13.5% over the period between January and September. It does show a bit of variation across relative industrial activities. The distinction between output and metal consumption is very important for silver. Solar cell production does not necessarily reveal silver loadings per cell, purchasing schedules, or inventory held by fabricators. The value added by electronics is also a broad activity measure, not tons of silver actually consumed. It can help with a broader demand assessment, but it does not pinpoint figures.

The Monetary Backdrop Offers a Bit of a Counterweight at the Moment

The Treasury’s 5-year real par yield was 2.34% on Friday, below the 2.52% reading on October 16, although slightly above the Thursday reading at 2.33%. Lower real returns can ease the opportunity costs of holding precious metals, but silver’s industrial exposure means a growth scare can complicate the entire situation.

Fed Meeting on Wednesday

The first major policy checkpoint for silver is going to be the Wednesday Fed announcement at 2 p.m. Eastern, followed by the 2:30 p.m. press conference. Any message about the persistence of inflation or the cost of restraining demand could influence the monetary side of the silver market. The movement in real yields after that would help assess the market’s direction when it comes to holding silver.

Thursday’s 8:30 a.m. Eastern releases combine advance third-quarter GDP with September personal income and outlays, including PCE inflation. Friday’s Employment Cost Index adds a quarterly measure of compensation pressure. These can provide checks on the balance between demand resilience and operating costs.

The Technical Setup

The overall outlook for silver right now is going to be somewhat cautious and very conditional. The technical analysis suggests that the reduced speculation is something to watch, and the fact that we are below the $55 level only adds more credence to that. The $55 level was the bottom of a major consolidation range and demand zone. If the market were to break down below the Friday candlestick, it is possible that we may see a surge in downward pressure.