Following silver’s explosion to the upside, nearly reaching its high of $50 set back in 1980, silver has undergone a meaningful yet healthy correction, currently sitting between $34-$35/ounces or a 33% retracement. While this is discouraging to the average investor who has the patience and attention span of a five year old, it is very appealing to the few which understand the silver market regarding the supply-demand fundamentals, the very real threat of runaway inflation and the structural changes that have taken place in the physical and futures market over the past year. Given the fact I have covered the supply-demand fundamentals as well as the inflationary factors that will drive silver and other hard assets much high over the course of the decade (In depth analysis – click here) , I will instead focus on the structural changes seen through the commitment of traders report.
The following is the most recent COT data ending 6/21/2011:
Although looking at just these limited data sets, presenting just five weeks of information can’t tell the story of the massive structural changes we have seen in the market. But looking at this over a longer time horizon shows just how significant these changes have been.
- A 20,000 or 100 million ounce reduction in the commercial net short position.
- 4 and 8 largest commercials were able to maintain roughly the same net short percentage in the face of a substantial decrease in the total commercial net position/ declining net open interest.
- Total new position of world bullion approx. (1B ounces) has decreased more than 30% from the year ago period.
Note: This was all in the face of silver appreciating at a furious pace in the last year; even with the recent decline is still up over 100% year over year. In other words, these large commercial traders, which until recently were able to manipulate this market at will, have fallen victim to market forces pushing silver closer to its market clearing price (albeit still nowhere near equilibrium) – (see silver backwardation in 2011).
I look at Silver as the investment of a lifetime or at least the most attractive commodity based on fundamentals, so those who have retained their strong conviction in this metal will be handsomely rewarded. The next approach towards $50/oz (which should come in the next 6-8 months), should hold as the weak hands have be shaken out, possibly scared from re-entering the long side of the market, without a following retracement like that recently witnessed.
