Speculators Throw the Towel

Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver’s turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held their first net short position in 14 years (!) with silver trading at $16.43. This is highly unusual.Here is a short term chart of the net positions of hedgers and large speculators:

The net speculative and net hedger positions in silver futures have undergone huge swings lately – while prices moved only very little. Consider the much smaller net speculative position at the market top near $50 in April 2011 compared to the peaks seen since early 2016 and especially last year. We suspect that there must have been huge inflows into CTAs given how much larger reportable speculative positions in many commodity futures have become in recent years. Note that the trading strategies employed by such funds rely almost exclusively on technical signals and most of them are trend-followers (a few systems with mean-reversion overlays exist as well). Often there is no longer any human intercession, instead computer algorithms decide what and when to buy and sell. Of course such computerized trading systems are still programmed by humans – they are merely more likely to strictly stick to the rules of whatever trading strategy is implemented (humans are known for frequently second-guessing their own trading rules). As a result of this, herding effects are very likely actually magnified.

This is really quite remarkable, particularly when considering the price range that was the backdrop to these huge swings in net positions. Below is a continuous contract chart that shows the price action a bit more clearly (note: because of the nature of this chart, prices are diverging somewhat from the spot prices we mention in the text; but the divergences are small and the general shape of the chart is the same).