A Curious Development in Silver

Monetary Metals's picture

by Keith Weiner


I write frequently about supply and demand in the monetary metals, gold and silver. I’ve argued that one cannot just look at numbers pertaining to “famous” buyers or sellers like India or the People’s Bank of China, while ignoring thousands or millions of anonymous people who are on the other side of the trade. Who has been “right” (from a dollar profit-and-loss perspective) over the past few years, those who sold their gold to China—or China who bought it? The gold price is a lot lower today, and that is a fact.

To do supply and demand analysis, one must look at the basis. The basis is simply the spread between the price of a futures contract and the price of the metal in the spot market. By watching changes in this spread, we can glean information about supply and demand.

If we drill down further into this idea, then we see there are actually two spreads. The basis is the profit one would make to carry metal (i.e. to buy a bar and sell a contract to deliver it in the future). The cobasis is the profit to decarry it (i.e. to sell a bar and buy a contract to get it back in the future). In general, if the basis is high and rising then we know that the marginal demand for metal comes from the warehouseman. If the cobasis is positive and rising then we know that the marginal supply of metal comes from the warehouseman.

The warehouseman does not speculate on whether the price will go up or down. He is an arbitrageur, playing the different between spot and future to make a small but low-risk spread. The basis analysis is based on (no pun intended) an arbitrage theory.

This theory leads us to some insights based on silver market data. Starting in November, the silver basis begins falling and continues falling through Christmas Eve. Let’s look at the July 2014 contract, as it’s far enough out to be beyond the gravity well that sucks the nearer months into temporary

Falling Silver Basis

As we can see in the chart, the basis falls from 0.53% on October 30 to 0.13%, a drop of about 75%. The cobasis should be a near mirror-image of the basis. But, curiously, the increase in the cobasis is small by comparison. In the same period, it rises from -0.83% to -0.61% or about 25%. What could cause the basis to drop so much but the cobasis not to rise proportionally?

The silver price was dropping for most of this period, falling over $3.53 an ounce or 16%. This means we’re looking for a bid being pressed down, rather than an ask being lifted.

Basis = Future(bid) – Spot(ask)
Cobasis = Spot(bid) – Future(ask)

It has to the bid on the future.

If it were the bid on spot, the cobasis would be falling which is not occurring. In fact, the cobasis is rising, though slowly compared to the drop in the basis. How do we parse this in light of a rapidly falling basis, slowly rising cobasis, falling price—and dropping bid on the future?

We can rule out a rising bid on spot for two reasons. First, the price is falling. Second, there’s no way for the bid on spot to rise without the ask on spot rising, which would keep the basis down.

We reluctantly conclude that the ask on the future is rising. What could cause this?

Some speculators are still buying futures. While we’ve been urging caution for quite a while in our free weekly Supply and Demand Report, many commentators are still saying, “silver’s goin’ to da moon.”

This gives us a futures market with widening bid-ask spread. The bid is being pressed by one group of speculators dumping their silver positions due to stop losses and margin calls. The ask is being lifted by another group buying the dips.

Even in a normal market, simultaneous buying and selling of the future could cause the bid-ask spread to widen a bit. Market makers may not be able to hold the spread in as tightly, at least while this pressure is intense. Today, the market is not normal. A number of banks have exited or scaled back their commodities market making activities, or their lending to market makers.

One should regard this as another type of rot in the core of the system. The point of my dissertation is that narrowing spreads is a sign of increasing economic coordination, and widening spreads is a sign of discoordination. And now we have widening spreads in one market for one of the monetary metals.

This is not good.

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Rising Sun's picture

silver is used to make mirrors

StychoKiller's picture

It's also used in high-performance electronics, bandaids, jewelry, and especially in photovoltaic solar array cells.

Lordflin's picture

Another take on this... More paper is being pushed than there are takers to buy it... with a collapsing economy industrial pressure is down making more silver available for investment...

This leaves two potential futures...

Either the economy bounces back (not my personal pick) and industrial demand picks up...

Currency debases and monetary demand increases...

Either way, silver benefits...

On the other hand, I am a cranky old bastard who hates bankers... matter of fact I divorced one...

USA USA's picture

Gotta love equations:

"Basis = Future(bid) – Spot(ask)
Cobasis = Spot(bid) – Future(ask)" = We are Fuked until the TBTF get it in the keister!

El Hosel's picture

"Curious", we have an organized Cabal rigging all the Martkets 24/7.... Very curious indeed, "look Ma" there is no inflation so print Moar. Stocks are up while the Metals and Materials down, thats all the proof you need in Ponziville. The Ponzi is so big its shadow can squash the entire Metals Markets on a moments notice.... Very Curious.

Jesse's picture


I am curious to know what the source of the silver 'spot price' is for these calculations.

If it is Kitco, then I think their spot prices are merely calculations from the front futures month, as some do for the value of the SP 500 fair value calculation.

If it is something else, or if you know exactly how Kitco calculates their spot price, I would like to hear it.

For gold one can use the price fixing in London.  I am not sure if there is one also for silver.  But 'fix' is the right word for that spot price.

Thank you.

SAT 800's picture

It's an article about the futures market; the Comex. or Nymex. spot is the current month contract. It's a good article. The open interest in Dec. 2014 has been increasing while the price is stagnant around the $20 area. The chart looks more like a break to the top than the bottom.

realWhiteNight123129's picture

Interpretation 1:

If you want to smash prices you use the futures market and you smash the bid. So you push down the future bid relative to everything else.

You push the future bid relative to the future ask (future spread widening - cobasis impact)

You push down the future bid relative to the spot ask (contracting basis)


Mr. Weiner, where have you been on service ISM ugly day?


Interpretation 2:

If you want to buy the stuff and trust the market delivery you are indifferent to buying today or buying in the future at a higher price provided you can get some interests buying bills in the meantime.

If you do not trust the system the bid in the future is not really interesting.

The future bid falls in attractiveness versus the current bid regardless of interests. The future ask does not change because you are not concerned about delivery of dollars for your physical, Yellen will make sure there is plenty of dollars to deliver.

As for the spot, there is no such consideration. That being said the interpretation 2 would tend to exist more in a rising market. But it would be interesting to see if this persists regardless of price direction.

For now that leaves interpretation 1. Gov smashing or margin calls for imprudent overlevered Gold. 1

In any event the market is getting disfunctional, agreed.








disabledvet's picture

you can buy all the silver coins you want. when prices move because moon rockets are being launched successfully then i would be very wary at guaranteeing a price. "it takes a lot of heavy metal to create a giga factory." guess someone just found out exactly where to find it. it makes me laugh that "politically correct business" only wants to over charge and under-deliver. XOM tried to wipe California off the map "just in time for the election." As if they're the oil market itself...ridiculous. we'll see if there's some Detroit Revenge coming or not...makes me laugh when "Big Oil" goes after "Big Corn" though.

verbot's picture

Anyhoo...stack on  silver as you can.... it is a great play to hold for next two years.. I wont even look at my safety deposit key unless silver hits 35.... 

el Gallinazo's picture

You got a key to the bank's front door also?

J S Bach's picture

It's not "unless"... it's "until when".

KingdomKum's picture

we few,  we happy few,  we band of silver holders  .  .  .

verbot's picture

The ideas about money are no more.. with some attention to appearance the masses never care where the atm gets the cash and never will.. its the few players who lose and certain academics who play this false game of "legality" or worse "morality" how can a man at the head of a business gettinv billions for free say moral hazard without falling dead from a bolt from heaven? But they do..many here fall prey to the crude ideas about the poor but thats because they themselves are trained to not care..how many excellent bosses are on this site? But they dont boss anymore or not properly.. I get you to hate the poor so you will not help them... sounds like what is going on to me...imho..

Joebloinvestor's picture

Not good for whom?

I expect in a manipulated market (it is) the manipulator(s) make money first.

Up or down.


OT, has anyone noticed that since they started printing money like no tomorrow, the old arguement of there not being enough gold to cover the amount of printed money has evaporated?



verbot's picture

I make money at 15.78 an ounce. Wake me when I start to lose money.. follow copper is my advice to see base of silver.. industry is being idled and we may be in the middle of an un-reported world war of sorts..

the fighting is who sits, and where, in the coming context of climate and resource controls that are/have/will be agreed to by all powers..as evidenced by the odd collusion and global conspiracy type stories abounding in our modern world.

As for money, digital systems and whoissues  credits on those systems is the only game in town so any monetary play on PM isnt going to convert that fact.. its why they stored tons in vaults and moved the gold a few feet to a new locker to satisfy world trade.. talking as is we will use anything but digital is to be missing a point or two...imho..

Play the industrial side of PM and sleep well holding silver platinum palladium..etc.. sorry gold but until folks use you properly to make really expensive technology bits its gonna be harsh as digital seals the "vaults" for the last times and abandon any form of physical as governments will dominate with concepts we have no ability to address or quantify as much commentary proves that point well imho..

NickVegas's picture

Two billion Chinese and Indians may disagree with your analysis.

nope-1004's picture

I buy PM's because the US govvy is intent on smashing them.  Foreign relations and foreign acceptance of US policy is at an all time low.  The US govvy is desperate and in the final stages on life support.  Smashing the metals to keep the USD / Tbill illusion alive is the last kick at the can.  My belief is that the USD will die as reserve currency, the only logical replacement valued against something tangible, fungible, tradable, and proven throughout history.

I will continue to buy the anti-US establishment currency because doing the opposite seals my fate along with the kleptocratic banking sector.

I read the above up to the point where "futures price" was mentioned (2nd paragraph), stopping because there really is no point in analyzing a completely fixed pricing structure.


Spumoni's picture

I completely agree with you Nope. But there's also the other rreason to buy PM's- they are easy on the eye, pleasant to touch, and people make some really cool stuff from them. Unlike my confidence in 'OpenChange, they will also never go to zero. If they did, of course, i would still collect them like seashells, because of the other reasons.

vulcanraven's picture

Agreed, I believe buying gold and silver is the singlemost anti-establishment stance you can take.

If you disagree with the current left/right paradigm and have a general abhorrence to government policy, tell them to fuck off by turning your debt coupons into real money.

My grandpa did it while he was alive, and I continue to do the same. Fuck voting, fuck protesting, fuck writing letters to your congressmen. I will protest silently, with my wallet.

new game's picture

and my dad said the same(voting with the wallet). unfortunatly the polyfucs figured that out too.

he also got a roll of pre-64 silver quarters every friday(payday)and put them away til 25x face...


mickeyman's picture

Trouble is, silver is hard to come by up here (except at inflated prices for special Mint products). The only thing you can usually find are 1976 Olympic coins.

robertsgt40's picture

Yep.  You gotta ask yourself, what will be the price of metal when the dollar's value is zero?  I doubt the next currency to be used will do an even trade out dollar for whatever comes next.

A. Magnus's picture

This article is a fat load of bullshit; it assumes actual working markets, not the rigged fucking casino that everyone with half a brain knows to exist today. The Banker Elite could give a rat fuck about the silver basis or cobasis; all they care about is naked shorting it to suppress the price so the sheep miss the memo about monetary inflation...

jomama's picture

Well at least he's doing his diligence quantifying what is possible to quantify.

NickVegas's picture

Pure poetry my friend. Why would you give a rat fuck about basis, when you can conjure fiat. Conjuring trumps all until the World is a paper illusion, or there are riots, or WWIII, or you are fat and happy in a FEMA camp. Maybe they can stretch it out to beyond my lifetime. I don't think so, greed is an unstoppable force.

eddiebe's picture

Yeah, but that's bullish for stocks and bonds, right?

A. Magnus's picture

Maybe, maybe not; but if you start seeing articles en masse like this you can be sure that the banker shitbags have another naked short raid on PMs waiting in the wings. It's their way of screaming 'free market - we told you so!' after they pull off their insider deals and corrupt bullshit...


CONUS rot,

JP Morgan mold,

Goldman Sachs disease,

Fed fungus,

sonovabitch, it is a miracle that paper investments of any kind are still alive.

Silver is a great anti bacterial treatment in metal form though.


Sparky_ZA's picture

My love of silver extends to antique silver items. Over December I wanted to procure. I went to 10 antique shops. 7 had no silver at all complained it was like hens teeth, 2 had smaller items only saying the rest had been bought on weight and sent to be melted. The last had some but all large items had been bought wholesale for melting with standing orders.

Would have thought that a minng nation like South Africa would have plenty silver?

Being a contrarian I had to buy extra.

My wife thinks I am mad :)

Stuck on Zero's picture

Get on to eBay.  Over 20,000+ silver antique trays, platters, candlestick holders, ornaments, etc.

AllThatGlitters's picture

And how many of those FleaBay items are described as silver or sterling silver, but merely silver-clad when it arrives in the mail?

J S Bach's picture

Shit... it's the same thing with some of the ingots these days.

superflex's picture

Silver bars are easy to detect if not pure silver.

Place a bar in a plastic baggie to minimize deadening by being held in your hand. While holding the baggie and not the bar, tap the bar with a metal object and listen for a pure rining tone.  It should be relatively high pitch (will vary based on bar weight and dimensions) and last for several seconds when held next to the ear.

If it sounds dead, it's fake.

Ever hear the song Silver Bells?  They're made of silver for a reason.

Cast Iron Skillet's picture

thanks for the tip!

I use a small (4mm cube) but very strong neodymium magnet. First, make sure that the bar or coin is non-magnetic by placing the magnet on the object and picking it back up. You should feel no resistance whatsoever. Then hold the bar or coin at an angle and allow the magnet to slide across the face. If the object is pure silver, you will notice that the magnet slides at a distinctly slower rate across the face than a non-magnetic object would. This braking of the magnet as it slides across the silver surface is due to eddy currents that are induced in the silver by the moving magnet. The magnetic field from the eddy currents opposes the movement of the magnet, braking it.

They say that this test only works with very pure silver, but I have to say that I have never tested it with various alloys of silver, so I don't know what degree of impurity makes the effect stop working. I can say that the test fails with a bronze coin (non-magnetic, no braking) or with any coin that contains ferrous metal (the magnet sticks and doesn't slide). With a pure gold coin, the braking effect as the magnet slides is discernible, but much, much weaker than with a silver coin.

Cthonic's picture

Silver is the best conductor.  No external EM field penetrates very deeply into a good conductor; in other words don't depend upon such a test for thick bars.  For more info look into what's referred to as the skin effect.

mickeyman's picture

I tried that with a small medallion which turned out to be silver-plated bronze. It rang nicely (to be fair, the seller didn't know whether or not the medallion was silver). Every other thing I've bought from the guy turned out to be good though.

Fake ingots are usually lead, which won't ring when struck. Bronze in an ingot would be immediately noted as being too light.

disabledvet's picture

see below...that is interesting. Just buy the coins direct from the Government.

Hobbleknee's picture

That's really interesting. Thanks :)