March Silver in Backwardation

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http://www.silverseek.com/article/march-silver-backwardation

March Silver in Backwardation

Keith Weiner
|
January 6, 2012 - 7:02am
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March silver has been flirting with backwardation since the end of 2011, and today it has moved more firmly into backwardated territory. This is extremely bullish for silver, and let me explain why.

Backwardation means (and I am oversimplifying a bit here) that a futures contract is cheaper than buying the physical good in the cash market. To understand the meaning of this, the first question is this. Is it possible to warehouse the good? If not, then the futures market is simply the market's opinion of what the price is likely to be on the contract expiration. I am not going to discuss this case any further, as it is not that interesting and it is not germane to silver.
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Got silver? :silver:
 
It isn't the first time, and it won't be the last. The paper hangers want us to believe the price will truly be lower in March, but I for one am not buying it.

I will not sell my shiny white until TSHTF and it's one of the only things that will buy me anything.
 
i have been sooo tempted to throw the last few grand i have (of paper) at silver.

Im a bit pissed that my £40k silver investment, made back in september, is currently showing £32k but as we all know, ive not lost a single ounce.

I was particularly taken by the desperation that seemed to emanate from everywhere, even from Santa ......

How much lower can sentiment go ?
 
rblong2us said:
How much lower can sentiment go ?
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General market sentiment is pretty high unfortunately... If things play out the way i'm thinking.. you'll want to be done buying all your physical by mid February. I've been trying to scale in whenever we get big swings down but it's really starting to look like that game might not work any longer. Trying to get a perfect buy might result in being left on the sidelines.
 
Watch Dr. Copper. When we demolish a structure, we salvage every gram of aluminum, copper, brass, steel, tin and cast iron. I assure you that prices for all of these metals is in terminal decline. Copper has been especially volatile the last several months. The word I get from Penny over at TMR, is that her asian buyers are only taking exactly what they have been paid deposits for and nothing else. They are telling her that production isslowing across the board in China, Taiwan, Malaysis and Vietnam.

It's going to be a wild first half of the year folks.

Buckle up!
 
Is the sentiment for silver the same as the sentiment for markets in general ?

I still see a lot of caution in comments, with Turd saying it may yet have to touch $25 but other signals, like COT, suggesting its near bottom.

Im not trading and thought it prudent to leave a few digits in the TBTF's pooter but im beginning to see it as less acceptable and possibly better converted into 'stuff'
 
ancona said:
Watch Dr. Copper. When we demolish a structure, we salvage every gram of aluminum, copper, brass, steel, tin and cast iron. I assure you that prices for all of these metals is in terminal decline.
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which i read as a sign of no more money being available for infrastructure projects and commerce anticipating this.

So unless they come up with worldwide QE in even bigger numbers ( and a shorter half-life ) the heavy duty brown stuff finally meets its blade of destiny.

Making PMs decouple from metals not used as a store of value ........
 
This doesn't surprise me at all given sa's watchful eye on the jump in short term lease rates.

The last time silver went into backwardation, it was February 2011:
...
On Friday, February 4, the spot price of silver closed on the COMEX at $29.075. The spot price was higher than almost every future month price all the way through to December 2015! Recently, the spot price of silver had traded higher than contracts up to a year in the future, but this may be the first time that spot silver has traded above future prices going out almost five years!

When the spot market price of silver is higher than future months, a condition called backwardation, this is a sign of a physical supply squeeze. For the spot price of silver to be higher than almost every month of future contracts is a signal of an extreme supply shortage.
...
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http://news.coinupdate.com/silver-poised-to-outperform-gold-0670/

Notice that silver was trading at almost the same price as it is now. It was the beginning of the run to $49 silver.

More backwardation chatter from February 2011:
...
Turk continues:

“If this situation continues, and there is no reason to suspect that it is about to end quietly because the demand for physical silver is not abating, there are only two alternatives:

One, as we discussed on Friday, the silver price has to rise in order to dislodge physical metal from the strong hands that now own it. But why would anyone accept some national currency in exchange for physical silver unless the price is much, much higher?

Two, the shorts declare force majeure and use government force to let them escape from their untenable position. The fall-out from this outcome is very complex because there are so many factors to consider. But I would expect that any default would only strengthen the resolve of the strong hands now owning physical metal. Meaning that the market for physical silver would become even more tight than it is now, even if the price shoots higher as I expect.”

Turk also went on to make the following points:

“Look for a short squeeze in silver already underway as evidenced by the backwardation to intensify as we move toward silver option expiry at the end of this month, and silver delivery on March futures contracts in early March. In a short squeeze, what matters is ownership, not price. When you own physical metal, you are protected from government sanctioned force majeure that bails out the shorts.

As I mentioned Friday, the paper market for silver is losing its significance in the process of price discovery. Everyone who owns physical silver should make their decisions based on what is happening in the physical market, not the paper market.

A basic premise of precious metals is that silver leads gold, which is a point we have discussed before. It will be interesting to see whether the backwardation in silver will lead to a backwardation of gold. If it does, the end game for the US dollar is near. It would mean hyperinflation of the dollar is upon us.”
...
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http://kingworldnews.com/kingworldn...ation_for_Years,_Possible_Hyperinflation.html

Really make you wonder about the speculation that the MF Global scandal might really have been a desperate attempt to stave off stress in the silver and gold futures.

Time to start checking if ScotiaMocatta and Perth Mint sell out of large silver bars like they did in February 2011 (with over 1 month delivery dates). I've already reported that inventories of 100 ozt silver bars at apmex are very low. This bears closer scrutiny to see what is happening more broadly.
 
The "30% premium over spot" headline at zerohedge is misleading. This only refers to PSLV.
 
James Turk made a $ 70 by march call recently. I thought he was out of his mind. Maybe he´s not. :popcorn: :silver:

If anything, the patten has now become stronger because silver is now testing support in the high 20s and looks like it is forming a double bottom. I still think this flag pattern will send silver to $70 in three months, once silver has broken out to the upside. Because it is a descending flag pattern, the breakout pattern has now moved down to $37.50, but $35 is the more important resistance level.
Once theses two levels are taken out, that three month move to $70 begins. So, as I see it, just keep accumulating physical silver here. The fundamentals for silver continue to remain very bullish and only time will tell if silver is the next Apple. I continue to expect that silver will go much higher and reach my $400 per ounce forecast....
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http://kingworldnews.com/kingworldn...d_is_Great,_But_Silver_is_the_Next_Apple.html
 
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Well.. I think i've seen enough.. I know i'm not getting price perfect but i'm going to go get some more ounces today. All in...
 
Right on Derek! I saw you scold Tyler for dropping the ball in the hoop a bit late earlier.

70 dollar silver would be nice indeed, however 688 dollar silver would be quite another thing altogether. I was reading through some of the comments on another site earlier, and some djiblottie was spouting about how silver is a bullshit metal and the government has bought up all the production for decades just to support the price.....when all of a sudden, another guy steps directly on his dick and explodes his head with a bolt of knowledge. It was truly entertaining!

Anyway, he goes on to explain how demand for precious metals is actually way off the charts, and if all paper had to be backed only 50% by real silver the price would have to be 688 per ounce and double that if all contracts had to be deliverable metals on demand.

How 'ya like them apples?
 
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This will probably be the only time I post ahead of those guys on zerohedge. Those guys are really on top of things.
 
And just wait until GOLD goes into backwardation! It rarely has in the past, and that was transitory...

Antal Fekete has written that if we have REAL BACKWARDATION in gold, it's party over. It means that no one will loan out their physical gold for a promise of LESS $ in the future...

Great catch and great quick commenting!
 
I wonder if Sprott is active now buying for his shelf filing. IIRC, he was buying for PSLV back in Feb-Apr 2011 during the last Contango dance.
 
Well.. I just did my part to ensure a shortage of physical.. lol
 
PMBug said:
I suspect the recent rise in lease rates is a corroborating indicator here. "Brilliant" summer coming?
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To early too call. March futures settle in one week. We'll see what happens when contract roll over to the next month. Sometimes the front month just shifts in to backwardation shortly before futures expiry. I have no explanation for that.
The short end of the futures curve (the upcoming months april-july 12 : http://www.cmegroup.com/trading/metals/precious/silver_quotes_globex.html ; look at prior settle to get an accurate picture!) is on the verge of backwardation right now. So something is clearly going on.
It's certainly not bearish, like the natural gas curve which is in deep contango.

:popcorn:
 
PMBug said:
I suspect the recent rise in lease rates is a corroborating indicator here. "Brilliant" summer coming?
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Well.. Recently it has been the case that price has risen to correct this issue. However, I do think there is a question of whether or not delivery of gold/silver will actually be made at settlement, so we might not have people doing the arb for that reason. Why would you sell physical to buy the contract? Gain 3% more paper but risk not getting your metal back?
 
dereksatkinson said:
Well.. Recently it has been the case that price has risen to correct this issue. However, I do think there is a question of whether or not delivery of gold/silver will actually be made at settlement, so we might not have people doing the arb for that reason. Why would you sell physical to buy the contract? Gain 3% more paper but risk not getting your metal back?
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A trader at a tbtfb would do that. The only thing he cares about is his quarterly bonus.
 
swissaustrian said:
A trader at a tbtfb would do that. The only thing he cares about is his quarterly bonus.
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Yeah but would the trader actually have any silver to sell? The main reason why backwardation matters is that the arb has to sell physical and buy paper. That is a losing battle in the long run and seems pretty risky to me.
 
dereksatkinson said:
Yeah but would the trader actually have any silver to sell?
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Most big banks offer unallocated pm accounts for customers which are backed by a fraction of physical. The traders of the banks use the customer assets to gamble, that's an on open secret. In some cases, this is even legal (e.g. in the UK) unless explicitly excluded by individual contract. So I guess this is almost certainly happening.
 
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