Silver Backwardation a Result of COMEX DEFAULT RISK

By: SilverDoctors

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:)

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!

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

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