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Silver Backwardation a Result of COMEX DEFAULT RISK

Commodities / Gold and Silver 2011 Jul 31, 2011 - 02:43 PM GMT

By: SilverDoctors

Commodities

Best Financial Markets Analysis ArticleBackwardation 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:)

Daily Settlements for Silver Futures (PRELIMINARY)Trade Date: 07/20/2011
Month Settle Estimated Volume Prior Day Open Interest
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!

Daily Settlements for Gold Futures (PRELIMINARY)Trade Date: 07/20/2011
Month Settle Estimated Volume Prior Day Open Interest
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/

© 2011 Copyright SilverDoctors - 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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