Silver Price History -Helicopter Ben and the Silver COT

Sadly, when it comes to precious metals investing, no entity seems as important as the Federal Reserve. The Federal Reserve sets U.S. monetary policy, which has a direct impact on the purchasing power of the U.S. Dollar.

This central bank has virtually complete control over inflation in the United States, and hence it can strongly influence the future price of your metals.

Ben’s Great Depression Philosophy: To Print or Not to Print?

Of all the big-government Keynesians who have chaired the Federal Reserve, none seem as trigger-happy with monetary policy as the current Fed Chairman Ben Bernanke.

Despite the relatively stable interest rate outcome of this week's FOMC meeting, at some point the Fed will need to do something to keep the debt ridden U.S. financial system going. The central bank literally needs to entice money to flow towards Treasury bonds.

Furthermore, if the market and its investors are kept happy, then the price of all commodities will tend to rise. Nevertheless, silver may well be the poster child that will lead the way to higher prices overall as inflationary pressures increase due to an excessive expansion of the U.S. money supply.

Despite the Fed’s excessive money printing activities of recent years, the ‘favorable’ steady policy announcement by the FOMC this week, which failed to extend the Fed’s low interest rate projection out to 2015 as the market had been expecting, with dovetailed nicely with silver’s convenient initial selloff before the announcement.

Furthermore, thanks to management, silver’s price chart is showing bearish hidden divergence in the 14-day RSI relative to the price. Although the price failed to make a new high, that RSI indicator did make a fresh recent high on July 30th, immediately before the FOMC’s most recent announcement sent the price of silver sharply lower. Such divergence can signal to technical analysts that the resumption of a downward trend is likely.

The Possible Impact on Silver’s Price Given the COT Set Up

Bullion banks have recently been positioning themselves for rising silver prices, and the latest COT report shows that they are net short silver by an unusually low amount.

While these large traders may be tempted to establish new shorts at these levels, especially given the aforementioned RSI-price divergence, it could eventually set up a crowded short situation that will only require a spark to start the long awaited short covering rally in silver rolling.

A short covering rally could erupt on increased speculative buying or perhaps due to managed money panic short covering. Interestingly, the latest COT report also shows that managed money traders — which include hedge funds, CTAs and other futures-trading money managers — have established the highest number of short positions in silver futures seen since 2006.

If such a rally is ultimately seen, the correctively bullish activity might well be followed by new silver longs entering the market to follow the initial upward momentum. With that noted, the ultimate question remains as to whether any short covering rallies in silver will be met with fresh selling from the large commercial banks who are ostensibly selling silver in large amounts on behalf of their customers.

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