Bullishness From COT and the Physical Market for Silver

Jan.17.11 | About: Sprott Physical (PSLV)

Despite a relatively stable silver price, The COT structure continues to change for the better. Though the following information ends on 1/11/2011, the bullish structural changes continue to occur, setting the stage for much higher prices in the future. Though I’m not a technician / market timer, the COT report and the supply-demand fundamentals point towards higher prices in the near term. Of course, I may be wrong with this opinion and we could certainly see more downside pressure before the next breakout, but the changes in the futures market, as well as constraints in the physical market continue to make me think the next big move will be to the upside.

Recently, John Embry of Sprott Asset Management was being interviewed on King World News, where he made a very telling comment regarding the tightness in the physical market. In more or less words he described the physical constraint not just as tight, but very tight-- and he would know, as his company began a physical silver trust which is still waiting for all the silver to be delivered to the warehouse over two and a half months later.

Click to enlarge

cot update chart

We can point towards a couple mildly bullish changes in the latest report, most notably the continued decrease in adjusted net open interest, which is indicative of reduced levels of concentration. This trend has been intact for several months now, showing the commercial traders have been unwinding these high levels of net short positions (albeit in a very controlled manner).

We can also see the 4 and 8 largest traders slightly reducing the total net short position outstanding, which we can double check as the net position of world silver bullion inventories has also been showing marginal reductions. The elevated concentration is still of concern but one has to take into account the total open interest has been falling as well.

In conclusion, though prices are slightly down from year end, we are still getting bullish readings from the COT, as well as from those highly involved in the physical market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.