Silver Bullion Backwardation Suggests Supply Stress

Tyler Durden's picture

From GoldCore

Gold and silver are higher against all currencies (except the Canadian dollar) in the wake of the worse than expected trade deficit number ($40.6 billion). Sterling and euro are particularly weak against gold and the US dollar today.

Silver backwardation continues and while spot silver is at $30.09/oz, the March 2011 contract is at $30.07/oz and April at $30.01/oz. Incredibly, the July 2012 contract is trading at $29.93/oz and the December 2013 contract at $29.91/oz.

Backwardation is when the market quotes a lower price for spot delivery or a more nearby delivery date, and a higher price for a distant delivery date in the futures market. It indicates that buyers are concerned about securing supply in the future and are willing to pay a premium for spot delivery. It suggests that silver bullion in volume is difficult to buy and that the physical market is stressed and becoming less liquid.

Silver in USD – Long Term

Silver in USD – Long Term

Backwardation starts when the difference between the forward price in the futures market and the spot price for physical delivery is less than the cost of carry, or when there can be no delivery arbitrage. This is generally because the asset is not currently available for purchase or is increasingly illiquid.

It can end in default, failure to make delivery, and in sharply higher prices.

Backwardation rarely happens in the gold and silver bullion markets. Since gold futures first started to be traded in 1972 (on the Winnipeg Commodity Exchange), there have only been momentary backwardations of a few short hours.

The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product.

This is not surprising considering the massive increase in demand, especially from Asia and China in recent months. In China alone, demand increased a huge four fold in just the last year to 3,500 tonnes.

net monthly Chinese silver imports Mitsui GoldCore

Table Courtesy of Mitsui

Investment demand for silver both as a store of value and as a hedge against inflation continues to surprise the bears. Many buyers in Asia have experienced stagflation and hyperinflation.

The demand is also very strong on the industrial side where the increasing range of industrial applications is leading to very significant demand that the silver market does not appear to be able to accommodate at these prices.

Solar energy demand has risen massively from a near zero base and Barclays estimates that this equates to more than 800 tonnes of silver being employed in cells in 2009, which translates to about 8% of silver industrial demand and 4% of global silver supply.

Barclays estimates that silver usage in solar panels could more than double and reach 2,000 tonnes by 2012. This would consume 7% of global silver output.

This is just the solar energy sector. There remains a huge range of industrial applications for silver. While demand from the photography sector has declined, demand from the medical, solar energy, water purification and many other sectors continues to rise significantly.

Importantly, this silver is consumer and because tiny filaments are used, most of this silver will not come back into the silver market. A small amount may, but only at dramatically higher prices.

Those with concentrated short positions in the silver market (as identified in the CFTC investigations), such as JP Morgan, will be very nervous about the extent of this demand. Any effort by them to extricate themselves from these substantial short positions may lead to the squeeze that has been anticipated for months.

This means that silver’s nominal high of $50/oz will likely be seen soon rather than later. As we have been saying since 2003, the long term inflation adjusted high of $130/oz remains a viable long term price target.

NEWS

(Bloomberg) -- Gold Futures in New York Rise, Heading for Third Weekly Advance
Gold for April delivery in New York gained 0.1 percent to $1,364.20 an ounce at 10:05 a.m. Melbourne time, heading for a weekly advance. Bullion for immediate delivery fell 10 cents to $1,363.70 an ounce.

(Bloomberg) -- Gold May Gain on Federal Reserve Policy Outlook, Survey Shows
Gold may advance on speculation the Federal Reserve’s plans to maintain near-zero interest rates will spur investment demand, a survey found.

Twelve of 15 traders, investors and analysts surveyed by Bloomberg, or 80 percent, said the metal will rise next week. One predicted lower prices and two were neutral. Gold for April delivery was up 0.9 percent for this week at $1,361.80 an ounce at 11:15 a.m. yesterday on the Comex in New York.

While a lower jobless rate gives “some grounds for optimism,” unemployment will take “several years” to return to a “more normal level,” Federal Reserve Chairman Ben S. Bernanke said on Feb. 9. The U.S. needs faster employment growth for a sufficient time before policy makers can be assured the economic recovery has taken hold, he said last week. The Fed has kept plans to buy $600 billion of Treasuries through June and hold borrowing costs “exceptionally low.”

“The Federal Reserve will continue its quantitative easing of monetary policy as planned, and there are no signs yet that the Fed could raise interest rates any earlier than assumed,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “Both are positive news for gold prices.”

As of last week, futures indicated that traders expected the Fed to begin raising rates in a year’s time.

The weekly gold survey that started six years ago has forecast prices accurately in 198 of 349 weeks, or 57 percent of the time.

This week’s survey results: Bullish: 12 Bearish: 1 Neutral: 2

(Bloomberg BusinessWeek) -- Carlos Slim Beats Out Buffett and Gates
Mexican billionaire Carlos Slim topped Bill Gates and Warren Buffett in the money game for the second straight year. The value of Slim's publicly disclosed holdings, in industries ranging from mining to telecommunications, surged about 37 percent, to $70 billion, in 2010, according to data compiled by Bloomberg. The 22 percent jump in Berkshire Hathaway (BRK.A) shares wasn't enough for Buffett to catch up, and Gates's Microsoft (MSFT) stock fell 8.4 percent, hurting his returns even as he spread his investments to other companies.

Slim's best-performing asset last year was holding company Grupo Carso, which almost doubled in value as it prepared for this year's spinoff of its mining operations amid soaring gold and silver prices.

(Commodity Online) -- Marc Faber: Gold, Silver prices to fall [may fall in the short term]
Legendary investor, economist and commodities analyst Marc Faber says that prices of precious metals, especially gold and silver, could fall, but investors need not worry because the dip in the prices of these commodities will be shot term.

In his February outlook on commodities, Faber who is better known as the editor and publisher of the Gloom Boom and Doom report said that commodities have reached the parabola stage.

Warning that investors should prepare for some downside volatility in commodities, Faber said that long term he is still bullish on the metals.

But Faber said that precious metals, especially gold and silver could fall in the short term with the general market.

Gold could fall to the $1,100-1,200 area, Faber said.

For investors this should not cause any alarm because with the fiscal problems of the US and further monetization, the future for gold is still bright, he said.

Faber would use any decline in precious metals to add to his positions.

Faber is concerned about commodities, as they are currently very overbought by almost any measure. He goes on to say that commodities seem to have reached the parabola stage--going straight up, which is usually the very end of the move. Yes, it could last longer than anyone expects, but at some point prices will collapse again, as they did back in 2008.

This cycle, Faber notes, always occurs as higher prices lead to an increase in supply, which eventually overwhelms the market causing prices to fall. The cycle is longer for industrial commodities compared to agricultural prices as it is harder to build a new copper mine than it is for a farmer to plant more soybeans.

This cycle will play out even with the Fed's money printing. Investors should prepare for some downside volatility in commodity prices.

(FT) -- EU plans to lift import curbs on soaring food commodities
Europe has moved to loosen import restrictions on important agricultural commodities in response to tightening domestic markets and skyrocketing prices.

The European Commission’s agriculture committee proposed suspending import duties on feed wheat and barley – as well as allowing additional sugar imports at lower tariffs than usual. The proposals are only in draft form and will need to be voted on at forthcoming committee meetings, which are held twice a month.

The measure is the clearest acknowledgement yet of the tightness in European agricultural markets.

Cairo (AP) -- Investors Shift Money From Gold to Riskier Assets
Greater confidence in the economy is leading investors to move money out of gold and into riskier assets in search of bigger profits.

Gold prices have fallen 4.2 percent since the beginning of the year as more evidence surfaced that the economy is strengthening.

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TraderMark's picture

Two of the Western world's last remaining hawks kicked to the curb this week.  In Europe, Axel Weber was thought to be shoo in to be next ECB chief.  Suddenly he is resigning.  So he is Kevin Warsh of the US.  Hmmm....

 

http://www.fundmymutualfund.com/2011/02/western-banks-pushing-out-hawks....

jus_lite_reading's picture

The politico shuffling is occuring for a reason, and right before the SHTF...

CD's picture

Backwardation is when the market quotes a lower price for spot delivery or a more nearby delivery date, and a higher price for a distant delivery date in the futures market. It indicates that buyers are concerned about securing supply in the future and are willing to pay a premium for spot delivery.

Doesn't the first sentence contradict the second? Should be "higher price for spot", no?

MarkTwainsMustache's picture

Correct spot>future price = backwardation, spot<future price = contango

terryg999's picture

That's what I was thinking. 

AugmentedFourth's picture

Ha ha ha, I see what happened here!

Funny, this quote is actually lifted straight from the very first sentance of the very first result Google returns when you search for "backwardation"; A Wikipedia entry on normal backwardation which is not the same as backwardation in the precious metals context. 

http://en.wikipedia.org/wiki/Normal_backwardation

That's what you get for lifting things straight from Wikipedia without even reading them. Lazy...

kentfinance's picture

yes. correct. worrying error on their part

Hephasteus's picture

Backwardation = Pay a premium to get it right now with some hope in the seller of replacing it at lower price.

Contango = Price in future is much much lower indicating that there's no faith in getting it in the future. Right now price is all that matters. Implies that something has to crash in value to make the market balance it books.

nontaxpayer's picture

sure, this is what happens when you've actually never worked in the markets, but just blog about it lol...;-)

Hephasteus's picture

What experience can you gain from the market?

Gold is not a consumable commoditity. It's status and behavior as a backwardation or contango participant shouldn't happen.

Silver is a consumable commodity and it will rip the market to shreds.

ColonelCooper's picture

So rather than assume the writer was trying to get a quick textbook definition pasted in and was in too big a rush to read it, you assume the author doesn't know what they're talking about.  The difference between you and them is that the T.D.s are scrambling to bring you a constant flow of real time shit, while all you have to do is make a smart ass comment here and there.

Trifecta Man's picture

Seems to me that you can not trust this Goldcore as a source for anything, which such a blunder like this.

Quinvarius's picture

JPM loves jumping in front of that bus.  LOL.  Worst commodity traders ever.

tmosley's picture

They aren't traders, they are suppliers.  They just have REALLY bad QA/QC.  When they ship a commodity, all that is in the crate when it gets there is a piece of paper that says "silver" on it (ro "cotton", or "rice", or "copper"--whatever the case may be).

Bigger Dickus's picture

If you really beieve that,.... (you know the rest, buddy)

bankrupt JPM buy silver's picture

Part 4 out today touches on this....on a greater note, you can buy Blythe dolls on my blog, comes with kitchen sink accessory kits.  Enjoy.

 

www.silvergoldsilver.blogspot.com

Eternal Student's picture

+1. I'm delighted that the new video will be out today. I enjoy these, and have been looking forward to this next one.

Regarding the Blythe doll, that's cute. Might I suggest an optional Dominatrix outfix with whips and chains? Along with a set of voodoo pins? For those who want to stick it to Blythe. :)

Ancona's picture

When all of the paper holders try to get their hands on physical......get ready for fireworks.

The only reason for SLV anbd GLD to exist is to bleed off demand for the real stuff. If they can book profits without having to worry about those pesky little bars of gold, so much the better. But when they realize they really don't have any gold to deliver......there will be blood.

Kaiser Sousa's picture

until Silver is trading n $50-$100 range on the phony paper exchanges the fake ass spot price is irrelevant...just keep buying with every available debt coupon dollar u possess...

fuck all bankers....

 

 

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Hugh G Rection's picture

+1

Indeed. Fuck ALL the banksters! Especially the Jekyl Island demonspawn cabal of pontificating swine.  If we stand up together we can assure the FED doesn't celebrate a 100years of oppression. 

umop episdn's picture

In an age where central banks openly print money and bankster fraud goes unpunished, the smart thing to do is to dump all the bankster paper and hold something useful and recognised as a store of value for thousands of years. Silver has additional advantages as the banksters do not now have very much of it so manipulating the price is harder for them to do, plus it is an incredibly useful metal. Argentum, FTW!

confimationbias's picture

Max Keiser and King World News links that seem to be new:

 

http://maxkeiser.com/2011/02/11/andrew-maguire-bombshell-information-wit...

 

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/3/30_A...

 

Please comment, as I am not knowledgeable enough....

Snidley Whipsnae's picture

"But Faber said that precious metals, especially gold and silver could fall in the short term with the general market."

Sounds like talking one's book or jawboning for the purpose to adding to a position.

Asian and Mid East buying of gold/silver/commodities are soaring and Fabar sees a correction? Does Fabar see a Fed rate hike coming? If not, he should stfu.

Bay of Pigs's picture

That's what I thought. All commodities are soaring? Not quite Mr Faber. The charts show a correction and are now just turning positive again. Lots of room to run to the upside before we get "overbought".

I think $1500 gold and another 5-6 bucks for silver are very realistic short to mid term.

 

pacu44's picture

That's what I thought. All commodities are soaring?

 

I agree, and in all this soaring, the USD is in the lead while the rest of commodities soar... As long as the USD goes to the moon, I expect at least the metals to follow... Am I wrong?

Throw in the real money aspect and the industrial use of silver... I am scared to think that it is a sure thing... BUT there is nothing holding this rocket to the moon to earth...

dryam's picture

I like Faber a lot, but he makes so many predictions on where the markets are going.  The one thing he's consistent on is his overall bearish attitude, but his short term calls aren't worth much.

Snidley Whipsnae's picture

"but his [Faber's] short term calls aren't worth much"

His short term calls could be worth a great deal...to Faber. We might find out which way Faber bet in hindsight...but probably not.

Blindweb's picture

Is there anything else backwardation can mean?  I like to cover all the angles

nevadan's picture

"The demand is also very strong on the industrial side where the increasing range of industrial applications is leading to very significant demand that the silver market does not appear to be able to accommodate at these prices."

Anecdotal evidence of this.  Tulving is advertising for deliverable bars.  Just send in your dusty old 1000 oz bars and a check for $750 and they will gladly send you 10 brand new 100 oz bars.  What a deal!  Think I'll keep mine instead.

topcallingtroll's picture

Damn you silver! Ok the troll capitulates. I just bought a box of eagles from golddealer.com. this is a sure sign the top is in, but at least i will have some shiny shit to look at. My kids always liked to play with them. Love of silver must be innate. When i offer my kids the dollar equivalent for their silver they refuse. They will spend green stuff but not their silver and they dont even know gresham's law.

DoChenRollingBearing's picture

Good for you buying silver!  Your kids are showing you as well that you made a great decision.

+ $30

Pure Evil's picture

Ok, Yahoo Finance finally confirms it, Hosni has left the building. (snark)

Kaiser Sousa's picture

so Mubarack steps down and somehow all the worlds debt problems r solved and Gold & Silver r "sold off" cause  - "who needs real money anymore?????"....

what a fucking joke....

fuck bankers.........

topcallingtroll's picture

Remember that silver is really the optimists metal and gold is for the pessimists.

GoinFawr's picture

No, because I am optimistic that my pessimism concerning fiat bitz and bytes of paper is justified.

Hephasteus's picture

The question isn't if being pessimistic is the right thing to do. The question is if we are being pessimistic ENOUGH.

Lord Koos's picture

Hope for the best, prepare for the worst.

DoChenRollingBearing's picture

@ top,

Mr Lennon Hendrix suggested recently that platinum is really the PM for optimists (increased car sales, etc.).

Bigger Dickus's picture

To all bullion permabulls:

The interim top in gold is in. Stick a fork in it.

Silver is screwed.

oddjob's picture

$CAD says you are wrong again.

yabyum's picture

On that news, Iam going to add some more!

gwar5's picture

To all Fiat Perma-Printers: stop banging your spoons on your high chairs. Get real.

Lord Koos's picture

Go contrary to the big dick and you'll be fine.

Bigger Dickus's picture

Tyler, stop yping silver or there'll be lots of sobbing lemmings on ZH in a few months.

Kaiser Sousa's picture

yeah, ive been sobbing every since i started accumulating @ $10 per oz....

another genuis roaming the Hedge i suppose.......