Backwardation: Music to our ears…!!!


Dear Investors.


Silver futures are now entering backwardation. This is a real threat for anyone betting on lower silver prices. Backwardation is very rare, this is a reliable indicator that higher prices are on the way each time it has occurred over the past decade.


In the futures market, silver prices generally go up based on how far the delivery month is. The norm is that future price is higher than today’s spot price or cash price.for delivery now. Think of it as the seller builds in the cost of storage to the price, and the buyer of the futures contracts must agree to pay increasingly higher prices the further in the future they wish to take delivery.


The silver market is not functioning normally at the moment, in some cases investors are paying a premium of $10.00 per ounce for some coins, are investors concerned about deliveries in the future.


If investors felt sure the bars and coins would be there, they could simply buy a futures contract for the lower price and stand for delivery. Market participants are evaluating risk of delivery defaults, or cash settlements, more heavily. Many are paying high premiums to get product now for a variety of reasons.


The chart below shows just three periods of a silver backwardation in the past decade as well as the one happening now. In each case, sharply higher prices were needed to resolve the shortage.


Price backwardation is not the only evidence of tightness in the physical silver supply. There is more unusual activity involving the iShares Silver Trust.


The exchange-traded fund reported more than 3,000 tons of bars were added early in the month. Skeptics find it hard to believe the ETF was actually able to find that much metal available for delivery so quickly.


The Trust altered its prospectus on February 3rd, raising concerns about weather the trust actually has the silver it claims to have.!


Comex silver stockpiles are at four year low. They are down 30% from the high in 2007.


If this trend continues, March is the next delivery month which could really pressure the silver market…!!!

Credit: Clint Siegner


The silver market is at a thrilling point…!!!

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