Best Financial Markets Analysis Article Backwardation in a commodity can be caused for 2 reasons. Either traders want out of the currency (they have no wish to receive US dollars when future contracts expire as they fear those dollars will be worthless) OR they fear that the physical commodity will not be available for delivery when the contract matures. If a lack of confidence in the US dollar was the PRIMARY cause of backwardation in silver, clearly we would see a significant backwardation in the GOLD MARKET AS WELL! The lack of coinciding backwardation in gold indicates that major players are concerned about the SUPPLY OF PHYSICAL SILVER!

This means that the primary reason silver remains in backwardation is due to risk of COMEX SILVER DEFAULT!

Last week we reported that silver backwardation had increased by 36% in the past week. At the time of writing, front month silver was trading at $38.14. Silver was trading in contango from front months through July 2012, and was in backwardation from Sept 2012 on out. Silver is now trading $1.50 higher, closing Wednesday at $39.546 (before moving much higher during the after hours access market). Silver backwardation has increased again, although only slightly over the past week. Silver continues to trade in contango from front months through July 2012, and in backwardation from Sept 2012 on out. The December 2015 contract is now trading at a 0.65 discount to front month silver. (again, for new readers, an overview of contango vs. backwardation can be found here:)

Month	Settle	Estimated Volume	Prior Day Open Interest
Daily Settlements for Silver Futures (PRELIMINARY)Trade Date: 07/20/2011
JLY 11	39.546	108	380
AUG 11	39.549	551	417
SEP 11	39.558	58,320	60,423
DEC 11	39.581	1,939	26,443
JAN 12	39.582	6	133
MAR 12	39.578	99	5,269
MAY 12	39.565	110	1,578
JLY 12	39.552	91	1,759
SEP 12	39.532	9	218
DEC 12	39.480	273	8,004
JAN 13	39.462	-	1
MAR 13	39.423	25	400
MAY 13	39.381	-	-
JLY 13	39.338	44	2,212
DEC 13	39.251	145	6,744
JLY 14	39.191	9	228
DEC 14	39.102	49	1,174
JLY 15	38.981	-	166
DEC 15	38.901	30	450

Compare silver's backwardation with gold, which despite its steady bull run, continues to trade in a normal market condition: contango. Front month gold closed Wednesday's COMEX session at 1596.70. Subsequent month contracts increase in price all the way out, with the December 2015 contract closing at 1730.10! This means that those wishing to purchase gold for delivery in December of 2015 must pay a PREMIUM of $133.40/oz to cover costs such as storage, insurance, etc. This is 8.35% of the cost of the front month contract! I bring this to your attention to contrast the silver market, and to demonstrate just how extraordinary it is that silver remains continually in backwardation to a significant extent, despite price action either up or down.

Backwardation can be caused for 2 reasons. Either traders have a lack of confidence in the currency (they fear that when future contracts expire the currency will be worthless) OR they fear that the physical commodity will not be available when the contract matures. If a lack of confidence in the US dollar was the PRIMARY cause of backwardation in silver, clearly we would see a significant backwardation in the GOLD MARKET AS WELL! The lack of concurrent backwardation in gold indicates that major players are concerned about the SUPPLY OF PHYSICAL SILVER!

This means that the primary reason silver remains in backwardation is due to risk of COMEX SILVER DEFAULT!

Month	Settle	Estimated Volume	Prior Day Open Interest
Daily Settlements for Gold Futures (PRELIMINARY)Trade Date: 07/20/2011
JLY 11	1596.7	6	81
AUG 11	1596.9	135,986	250,826
SEP 11	1597.5	415	8,880
OCT 11	1598.0	1,361	15,618
DEC 11	1599.0	13,380	169,279
FEB 12	1600.4	826	11,459
APR 12	1601.9	160	6,146
JUN 12	1603.6	86	14,424
AUG 12	1605.5	1	5,016
OCT 12	1607.7	1	4,112
DEC 12	1610.2	159	11,711
FEB 13	1612.9	-	1,560
APR 13	1616.1	-	201
JUN 13	1619.8	7	11,065
DEC 13	1634.1	8	12,482
JUN 14	1651.8	-	3,136
DEC 14	1673.9	-	9,270
JUN 15	1700.0	-	3,725
DEC 15	1730.1	-	2,768

SilverDoctors specializes in precious metals news, analysis, and trading, and can be found at http://www.silverdoctors.com/

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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