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Silver Price Backwardation, Corrections and Perception Shifts

Commodities / Gold and Silver 2013 Feb 22, 2013 - 06:03 PM GMT

By: Dr_Jeff_Lewis

Commodities

The price of silver futures contracts have been regularly flirting with a state of backwardation ever since the 2008 Financial Crisis, which is a sign of a growing physical silver shortage.

A state of backwardation occurs when the front month silver futures contract commands a price premium to the subsequent months’ contracts.


On one hand, this situation could actually provide larger traders who own the physical silver with an opportunity to simultaneously sell it and purchase futures contracts to recover their metal holdings for a net profit.

Paper and Physical Silver Price Backwardation

A backwardation also tends to indicate that industrial and personal silver consumers need the metal more now, rather than later.

When a backwardation in the silver market is driven by perception on The Street, this phenomenon would actually reveal the true fate of larger traders with insufficient physical silver supplies available to profit from this apparently easy money.

Nevertheless, the silver futures market ceased being a physical market years ago when the overall short position became dominated by just a few bullion banks. Whether these players control 25% or 50% of the net shorts, this concentration influences the paper price.

People Will Pay Whatever it Takes for Silver

The price of silver will ultimately be driven by premiums, which are ultimately determined by demand at the retail level.  As confidence is lost in the futures market and shortages develop at physical metal dealers and scrap flows drop because they have already been panned out, an industrial panic will compete for the large (1000 ounce) silver bar supply.

Following the notable silver rally in 1980, the market saw a divergence in demand flow. One consisted of a reduction in demand for increasingly expensive silverware and silver jewelry, which fell out of favor as wealth declined and cultural preferences shifted.

In contrast, silver production and demand for use in electronics and other industry took off, although governments sold their stockpiles of silver cheap, indirectly debasing their paper currencies along the way.

Silver Price Corrections and Perception Shifts

The recent downward corrections in the price of silver make it look like the market is being pushed off a cliff by the concentrated shorts in order to influence the perception spectrum of retail investors.

Nevertheless, these downward moves do not seem to consist of reality-based corrections, because the price of silver was never too high. The price was just too high for the shorts and so it needed to be muscled lower.

If their large short positions become too deeply underwater, the threat of panic short-covering tends to raise its ugly head. Although the deep-pocketed bullion banks seem unlikely to cover their shorts quickly, a speculative buying panic will move money into each and every physical or derivative form of silver that exists.

Margin raising, coordinated dumping and halting futures trading would not stop the rally in silver once the market’s perception of the metal shifts along the spectrum from fear, disinterest and disdain towards curiosity, interest, action and — finally — greed.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit www.silver-coin-investor.com

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2013 Dr. Jeff Lewis- All Rights Reserved 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.

Dr. Jeff Lewis Archive

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