Once again to my surprise, the structural changes in the Commitment Of Traders report continue to change for the better. Despite the increased volatility the past couple of weeks, the four and eight largest commercial traders slowly continue to cover their massive net short positions, paving the way for much higher prices in the future. The total net short position of all commercial traders declined more than 2,000 contracts, including over a 300 contract reduction in the top four commercial traders and over a 1200 contract reduction among the eight largest commercial traders.
While at first glance concentration levels appear to have increased week over week, that isn’t the case once we have adjusted the net open interest position, which remains more or less unchanged (1,000 contract increase over the prior week). After the proper adjustments, the concentration levels for the four largest commercial traders decreased 1.25%, while the eight largest decreased by a rather wide margin (2.62%). Finally, the net position of total world bullion inventories decreased once again by .61% to 25.30%. I contend the continued structural changes coupled with the current backwardation taking place and the supply-demand fundamentals, have set a solid foundation for silver to move higher in the weeks and months ahead in 2011 and beyond.
The following is data compiles from the 2010 CPM silver yearbook. Note: the 2010 projected numbers are markedly higher especially in ETF demand.
Backwardation & Convenience yield:
The first diagram is the convenience yield, which implies that those with inventories will not be willing to lend the commodity to an arbitrageur for a lease rate to compensate for the loss of this yield. If the current supply of a commodity is large relative to its demand, the yield will be low as producers desiring to use the commodity can always access it through the market. If spot supplies are tight relative to demand, the convenience yield is large. The latter is what is currently taking place as the convenience yield is in excess of 12%. The proceeding diagram is the futures curve as of one week ago, which is extremely bullish as those wishing to take delivery of the metal are willing to pay a higher premium now relative to nearly a year into the future (i.e signaling a physical constraint in the market place).
