I have certainly enjoyed the run up in silver so far this year. But for reasons that I will explain in a moment, I will be “adjusting my attitude” soon – at least for a little while. Granted, betting against precious metals when they are in the midst of a strong advance is one of the easiest ways to make yourself look foolish. But the truth is that I have been down that road so many times over the years it is not a fear I concern myself with much anymore. Also this….
IMPORTANT NOTE: Please note that the title says “Where NOT to Invest Right Now”. Note also that it DOES NOT say “Occasionally Foolish Looking Blog Writer Calls a Top in Silver” or even “Sell Short Silver Right Now!” I am not attempting to “call the top”, nor am I suggesting that anyone play the short side of silver. I am just saying that I personally will not be buying silver anytime soon. Nothing more, nothing less.
Why? I thought you’d never ask.
“Dumb Money / Smart Money”
In the futures market it is sort of accepted wisdom that “non-commercial speculators” (the typical “I better pile into this investment vehicle that has already been soaring price for some time now before it is too late” kind of guy or gal) are the “dumb money” and that “commercial hedgers” (i.e., those who actual use a particular commodity in their business) are the “smart” money. My experience is that this is not always true, however, it is noteworthy when the two are at opposite extremes. Um, like now.
As you can see in Figure 1 (chart courtesy of J. Lyons Fund Management, Inc.), “small speculators” have responded to the recent rally in silver by getting wildly bullish (as small speculators will do) while commercial hedgers have responded by selling short a record number of silver futures contracts. 
Figure 1 – Small speculators wildly bullish; Commercial hedgers extremely cautious (Source: J. Lyons Fund Management, Inc.)
Does this mean that “the top is in” for silver, or even that prices are poised to immediately sell off? Not necessarily. But here is the question to ask based on the data shown in Figure 1: Who is most likely to be right in this situation?
An Unfavorable Seasonal Trend
Figure 2 below displays the net result that a trader would have “achieved” since 1982 by holding long one silver futures contract every year between:
*The end of May Trading Day #9 and;
*The end of June Trading Day #19
Figure 2 – Long 1 silver futures contract from May Trading Day 9 through June Trading Day 19 (1982-2015)
For the record:
*This period has seen silver advance in price 8 times (24% of the time)
*This period has seen silver decline in price 26 times (76% of the time)
Again, none of this means that silver will absolutely, positively decline between the close on May 12th, 2016 (May Trading Day #9) and the close on June 25th, 2016 (June Trading Day #16)? Not at all. Still, if you had to choose between buying silver now or not buying silver now….
Summary
When the metals markets get going it is typically best to not stand in their way. They are capable of ignoring a lot of sentiment and fundamental negatives and soar far beyond were many people think they can or should.
Still – one last time:
*I am not attempting to “call the top” in silver (although in the interest of full disclosure, if silver did happen to top out exactly on May 12th chances are I will take credit for doing so anyway – sorry, it’s just my nature)
*I am not presently advocating a short position in silver
I am simply stating that I won’t be adding any bullish positions in silver to my portfolio in the near future. This is based on the fact that the traditional dumb money is extremely bullish, the traditional smart money is extremely bearish and the seasonal headwinds may be about to blow.
Jay Kaeppel
