Political Metals

Not too long ago, when gold made an all-time high or when silver made a new multi-decade high, there was much jubilation and noise amongst the gold and silver bugs, especially in cyberspace. Over the last few weeks, this has occurred so frequently that it has almost been taken for granted that gold and silver price records will keep breaking.

Today is one of those days. Gold briefly touched $1,500 and silver touched $44.15  intraday. Silver has gained almost 50% against the USD since January. One of the key drivers (besides the JP Morgan short position) of this rapid rise is the fact that silver is in backwardation since January. A backwardation happens when spot prices are higher than future prices. [Watch the video clip at the bottom of this page for a tutorial on Backwardation & Contango].

Looking at the gold futures chart above, you’ll notice that contracts to deliver gold in more distant years (up to 2016) are progressively higher than the current spot price of just under $1,500. The situation is glaringly different and directly the opposite for the silver futures chart below. 

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Backwardation very seldom arises in money commodities like gold or silver. In the early 1980s, there was a one-day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses. Gold has historically been positive (in Contango) with exception for momentary backwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972.  Wikipedia

The current unprecedented prolonged backwardation lasting months instead of hours or days is a sign of acute supply shortage in the silver physical market, and is a very bullish sign. Too much paper silver (eg. futures contracts, SLV ETFs  & other silver derivatives) are being sold such that when buyers of paper contracts decide to “take delivery” of the metal, the sellers are in a bind to find physical silver for delivery, thereby further pushing up spot prices. This mistrust and exit from paper silver (and gold) gained global attention when the University of Texas Investment Management Co., the second-largest U.S. academic endowment, recently took delivery of almost $1 billion in gold bullion.

If you are in paper gold or silver, consider converting some if not all to physical.  Remember, in a crisis, any paper (or electronic) representation of anything maybe worth only the paper it’s printed on.

For more information, see How to buy & store PMs.

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Tutorial on Backwardation & Contango in Futures Market. By InformedTrades