The Curious Widening of the Bid-Ask Spread in Silver

Monetary Metals's picture

by Keith Weiner


Last week, I wrote about a curious development in silver. The bid-ask spread widened in November and December. My article concluded:

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.

I received a lot of email in response to this. Everyone wanted to know what I meant, and if this predicts a rising or a falling silver price. I think the price is likely to fall, though that prediction is not based on the widening spread. It’s based on my supply and demand analysis. My standard caveat is: never naked short a monetary metal. Look at the sharp rise in silver for no reason on Friday, when a disappointing payroll report was released. A 60-cent rise would hit naked shorts in the shorts (if I may be permitted a rude analogy).

If a widening-spread has any impact on price, it won't be in direction but in volatility. Let’s look at the mechanics. When Joe comes to the market to buy, he pays the ask price. When Sue comes to sell, she is paid the bid price. If the bid-ask spread is a penny, then the trace on your screen moves up one cent and then down one cent, first moved by Joe and then by Sue. Supposing the spread widens to 20 cents (it has gotten nowhere near that yet, but just for example), then your screen will show a 20-cent move for one tick. That is a 1% move.

Not only does one more tick increase the move to 2%, but there are many momentum traders watching for a price breakout. With them piling on, and with a 1% move per tick, silver could easily have 10% or 15% moves in a day. How will the market makers respond to this? Most likely by widening the bid-ask spread, to give themselves a safety margin for big price swings. And how will most traders respond to this? They’ll pile onto big moves they see developing, but set tight stop-losses.

Volatility will beget volatility.

Before I explain what I meant by my last comment “this is not good,” I want to say something important. I don’t regard the rising price of gold and silver as good, though I argue that it’s inexorable. I remind everyone that it’s not gold going anywhere, but the dollar going down. The price of the dollar must be measured in gold, though by force of habit we presume to measure gold in dollars. As an analogy, think of having a rubber band in your left hand and a meter stick in your right. Which can be used to measure the length of which?

It currently costs about 25mg of gold or 1.6g of silver to buy one dollar (keep in mind a paperclip is one gram). The price has been lower in recent years, and it will go much lower than that in the not too distant future. Why? Not because of the dollar’s quantity. The problem is its falling quality. The dollar is backed by debt, and as that debt moves closer to default the dollar moves closer to its high-velocity rendezvous with zero.

In the end, it will come to a race between a rapidly rising dollar-denominated price of gold and the onset of permanent gold backwardation. There is no way to predict what the last gold price will be, before gold goes off the board, though I think it will be a highly non-linear process at the end.

It should be obvious why a collapse of the dollar is bad.

Now, on to my parting remark last week. A widening bid-ask spread is evidence of rot in the heart of the system. It’s definitely not good. Why not? I alluded to my dissertation, the theme of which is that narrowing spreads mean increasing coordination and widening spreads mean decreasing coordination.

What does coordination mean in the economy? It means cooperation, the division of labor, specialization, efficient production and distribution, economies of scale, and the extension of credit. It means that you can have confidence that prices and terms won’t change tomorrow, that things are stable, and that everyone realizes it’s better to work productively and trade with others than to become a parasite who lives by attacking others.

What could cause economic coordination to go in reverse? The government can.

The single most important thing in the economy is money. If the government distorts the meaning and value of money, then rot inevitably sets in. Activities that add value, that people demand, that produce wealth, may appear unprofitable as measured in dollars. Other activities, which destroy or consume wealth, may appear to be quite profitable as measured in dollars.

An unstable and distorted dollar, with an unstable and falling interest rate imposes massive perverse incentives. Whether this causes prices, as measured in terms of the defective dollar, to rise is a whole separate question. I answered this question “sometimes, but not necessarily” in my theory of interest and prices.

Whether prices rise, stay flat, or fall, damage is still being done. One way to look at the damage more closely is to look at spreads. This is the approach I take in my supply and demand analysis of gold and silver. I study two spreads between metal in the spot market and the futures market. By seeing whether there is an increasing or a decreasing spread to carry or warehouse metal—to buy physical metal in the spot market and sell it forward in the futures market—we can glean a lot of information about the current state of the markets. If metal is flowing into the warehouse, we know that the marginal demand for metal is to be carried. Sooner or later this will reverse, and this source of demand will disappear to become the marginal source of supply (I plan to publish more about the gold markets, arbitrage and warehousing in the near future).

Another way is to look at the bid-ask spread of something. In my article last week, I noted that the bid-ask spread in silver futures had widened. I discussed why this might be occurring. It is heavy buying at the ask, and at the same time selling on the bid—in a market with fewer and fewer market makers.

Now let’s address why this is bad.

The bid-ask spread is the loss one will take to get into and out of an asset. In the case of a silver future, let’s say the bid is $20.15 and the ask is $20.16. Then you could buy and sell and lose only 1 cent per ounce. On the other hand, if the bid drops to $20.10 and the ask rises to $20.20 then your loss would be 10 cents.

Another way of looking at the bid-ask spread is liquidity. Commodities with narrower spreads are more liquid than those with wider spreads. For example, gold is more liquid than platinum and platinum is more liquid than molybdenum.

The monetary metals became money, as I argue in this article, because they had the narrowest bid-ask spreads. Now we see evidence that silver’s spread is widening. This is tantamount to saying that silver may be losing some of its moneyness. Though it should be emphasized that this is not happening in the spot market for silver, but the futures. I think it may not be silver losing its moneyness, so much as the futures markets becoming less efficient.

Along with too much focus on price, I think too many people look at the futures market in terms of how many ounces are in the warehouses vs. how many ounces are under contract. They expect the market to blow up by a failure to deliver metal when demanded at contract maturity.

A different kind of worry, which is completely off the radar at the moment, is if the futures market seizes up due to lack of liquidity. If the spread were to continue to widen significantly more (this is a big “if”), then we should expect to see falling trading volumes. At some point, the bid-ask spread could widen to the point where either silver stops trading or silver trading is forced into another venue. It’s far too early to make predictions about this.

So who is impacted by wider bid-ask spreads? Producers and consumers are hurt. Wider spreads reduce the profitability of silver miners and recyclers, and any other producers or hedger who must sell future production or inventory on the lower bid. It also reduces the profitability of jewelers, electronics manufacturers and other silver users who must buy future production at the higher ask. It will also hit those who must buy and sell futures to hedge inventory like bullion dealers. They typically sell futures short when they buy inventory, and buy those futures back as the inventory sells through to the consumer.

The only beneficiary is the surviving market maker. Unlike everyone else, who experiences the bid-ask spread as a cost, to him it’s a profit because he buys at the bid and sells at the ask.

Since I wrote A Curious Development in Silver, the silver basis for most contracts has risen about to its level of the third week of November (the March contract is beginning to spiral into the gravity well of temporary backwardation). It seems that the widening bid-ask spread cancer has gone into remission for now, though it bears watching.


Just before I hit send, comes this piece from Bloomberg. It makes an interesting postscript. “The Federal Reserve is planning to release a notice seeking information on ways to curb banks’ ownership and trading of some commodities,” it says. Here’s the money quote, “Senator Sherrod Brown, an Ohio Democrat, has raised concerns that banks may have a conflict of interest when they own and trade both physical commodities and instruments tied to them.” That would seem to target carrying metal—buying spot and selling it forward. Forcing banks out of this business will cause the basis spread to become wider and more volatile.

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bluskyes's picture

I  guess there are still many people, that prefer to be led around with their eyes closed - rather than endure the short pain of opening their eyes in the light. Seeing the market for what it is, and walking in a direction of their own choosing.

strannick's picture

More epically useless and stupid commentary from Weiner. I don't know which of his comments are the dumbest, so I'll just take his last, where he claims "getting banks out of commodity trading " will increase spreads and volatility.Since banks cause bid stack plummets with their not for profit after hours trades, this is obviously stupid. Weiner continues to spout assinine gobbledegook that makes everyone the dumber for having read it. Meanwhile, John Nadler stands behind him patting his shoulder, nodding approvingly. 

Banjo's picture

In the context of widening spreads any commodity including currency loses it's moneyness.


If you had $20 and purchased a $10 meal and the cashier returned $8 thats a widening spread. If you get back $10 thats as narrow as it gets. Think about it and the author is PRO metals too. Go and re-read this piece it's interesting.

Lordflin's picture

Today I watched silver plummet 40 cents in as many seconds... Silver is currently capped at 20.30... Had been capped at 19.80... Market is utterly manipulated despite all of your talk of basis and cobasis... save it for the crowd that is easily impressed...

And for what is worth, Eagles are going for a premium close to twenty percent... Paper appears to be losing it's appeal.

Buy and hold and forget the rest...

Imminent Crucible's picture

“The Federal Reserve is planning to release a notice seeking information on ways to curb banks’ ownership and trading of some commodities,”

Yeah, I wouldn't get too worked up about that.  The Fed has a habit of releasing these notices from time to time to see which way the wind is blowing.  A while back the Fed said "We are seeking help from [the banks that own us] in understanding our own tri-party repo operations."

Now think about that for a second:  "We are running three-way repos with the Treasury's primary dealers, and we don't really know how they work or what the risks are, so we're appealing to the counterparties to help us understand what the hell we're doing."

God help us.  These are the village idiots pushing buttons randomly in a nuclear plant control room.

bardot63's picture

This article is about 1600 words, I judge, of horsefuck.

massbytes's picture

Upvote for the use of the word "horsefuck".  Even in my sixth decade of age I continue to see innovative uses for the word "fuck".

mijev's picture

When I was 14, the school handed out oxford school dictionaries and the preface used the word "fuck" to explain the differences between nouns and verbs etc, mainly for non-english speakers.

f16hoser's picture

I will continue to stack PM's. These prices are meaningless. Dollars Vs. Gold/Silver? Gee, let me think......

robertsgt40's picture

I wonder how this article would have been received in the Weimar republic of the 1920s? If you are buying metals to sell for profit in dollars you are a fool.

J S Bach's picture

"There is no way to predict what the last gold price will be, before gold goes off the board, though I think it will be a highly non-linear process at the end."

This is precisely why you should hold onto the physical.  The counterfeit debt-based paper scheme will eventually hit "zero" and REAL money will again reign supreme.  


People need to realize that precious metals or any other physical assets are their own savings account against usurious criminal monetary policies.

mick_richfield's picture

It is not 'obvious why the collapse of the dollar is bad.'  The dollar is fundamentally a lie.  is the collapse of a lie bad?  Why?  Because people will be hurt?  Does that mean the lie should continue?

Does that mean the the creatures who benefit from the lie should continue to enslave my people?

What is obvious is that you delight in providing links to your dissertation, your articles, your arguments -- but you don't think deeply.

Being impressed with your mental prowess is like being impressed with your physical prowess.  It's something that you need to grow out of.


BuddyEffed's picture

The HFTs should be able to get the bid/ask spread on shitloads of orders within a micro penny without having to trade, if they don't want to.  Anyone notice if the HFT's have seemed a little moody lately?  Maybe some counseling would help.

SAT 800's picture

the basis is quite narrow in the silver back months at present; and the total open interest low; which is bullish for the rest of 2014.

El Hosel's picture

Looking for the truth in phony rigged Ponzi, good luck with that.

Fuh Querada's picture

Jeezus, talk about splitting hairs. You also show a touching faith in your data sources.

Al Huxley's picture

It's like he's giving a course on how best to go about picking up pennies in front of a steamroller - created a whole model for it, explaining the dynamics, how to get that extra couple of pennies/day, just failing to ever mention the existence of the steamroller.

Citxmech's picture

Buy the dips.  Dollar-cost-average.  Take delivery.  What else do we need to understand?

SAT 800's picture

With regard to buying dips; the present price of silver looks like a pretty well defined bottom to me. By the present price, I mean "around 20$"; not some specific figure. Quite a lot of support has been demonstrated recently around these prices; I'll be surprised if the trend is not upwards over the rest of the year. The PM's have a strong tendency to make their low for the year in the first two months; or in mid-summer; so basically I'm saying I believe this is the bottom for 2014; and as always; skys the limit. Just depends on how much human fooiishness we're subjected to.

Race Car Driver's picture

> The PM's have a strong tendency ...

In relation to what? The past? When things were quasi-honest? When a chartist could assume that the data was organic? When patterns were caused by an open market and criminal activity was punished, not rewarded?

REDRUM! - stop looking in the mirror. We're in the future now and there is no relation to anything.

Greenskeeper_Carl's picture

I think the point he makes is also in the way we measure the price of gold, or gold price. For those of us in the US, a rising gold/silver price really just means a falling dollar. So while your oz might be worth a larger quantity of dollars, those dollars are worth less and less. A stable currency would mean a relativley stable gold price. Lok at india. Gold buys less dollars than it did recently, but for more ruppees or JPY over the past year. This is the reason I buy gold and silver. It is a bet that the central planners are going to erode the quality of dollars even further, and gold/silver will retain the purchasing power. Also, the volatility in the prices makes them look a lot less viable as a store of wealth, or a form of money to the uninformed, which in turn could cause a lack of demand.

realWhiteNight123129's picture

I have some news for you Mr Weiner, the last time Silver was used as monetary officially was in 1935 in China, you can read the account of Frank Tamagna. Gold and Silver have always been store of value, and money when they are allowed to be minted. So your argument that Silver has lost its moneyness is quite odd in fact. The mint was not closed today you know? 

As for losing its store of value...I can not say never but when the government manage to replicate a supernova explosion I guess... I think you can sleep a lot more secure than with NSA trying quantum dot to fry bitcoins.... Silver can reach quasi monetary levels, you had a first spike in 1968, another one in 1973, and third one in 1980.

So far the 2011 spike is not higher than the 1968 spike when measured in cigarettes (Tobacco was money in Virginia for longer than the current fiat regime will last). Very inelastic demand, very stable demand...

But yes you are right the MINT HAS CLOSED FOR SILVER BIG NEWS!!!.... in 1873 in the US...



Radical Marijuana's picture


1872: Ernest Seyd is sent to America on a mission from the Rothschild owned Bank of England. He is given $100,000 which he is to use to bribe as many Congressmen as necessary, for the purposes of getting silver demonetized, as it had been found in huge quantities in the American West, which would eat into Rothschild's profits.

1873: Ernest Seyd obviously spent his money wisely, as Congress pass the, "Coinage Act," which results in the minting of silver dollars being abruptly stopped. Furthermore, Representative Samuel Hooper, who introduced the bill in the house, even admitted that Ernest Seyd had actually drafted the legislation.

1874: Ernest Seyd himself admitted who was behind the demonetizing of silver in America, when he makes the following statement, "I went to America in the winter of 1872 - 1873, authorized to secure, if I could, the passage of a bill de-monetizing silver. It was in the interests of those I represented, the governors of the Bank Of England, to have it done. By 1873, gold coins were the only form of coin money."

The line I liked most in the article above was "As an analogy, think of having a rubber band in your left hand and a meter stick in your right. Which can be used to measure the length of which?" Since we have a fundamentally fraudulent financial accounting system, which is our state religion, as a faith-based currency, backed by the force of government, EVERYTHING IS MEASURED WITH A BENT RUBBER RULER.

The most astonishing things are the ways that the public bullshit system is able to promote private banks being able to create "money" out of nothing, as debts, as somehow being a "good thing," despite that necessarily violating the basic laws of nature, such as the conservation of energy/matter. As the economic system becomes more and more the state religion, whereby runaway frauds are enforced by the government, and therefore, become absurd violations of common sense and the laws of physics, those are nevertheless "taught" to people through the schools and mass media, and so, the "price" of commodities is tending towards becoming like medieval monks debating how many angels can dance on the head of pin. Similarly to as Tertullian was credited with the motto 'Credo quia absurdum' -- 'I believe because it is impossible.'

Figuring out the price of commodities in terms of fiat money, made out of nothing, as debts, is primarily done through the hypercomplicated ways that there was a long history of frauds, which were enforced by governments, and thus, were able to become a state religion, which can dominate the real ways that the market place operates. Most of us regard our state religion monetary system the way that fish regard water.


In the context of the "real" world being globalized electronic fiat money frauds, which are not actually backed by collateral, but rather backed by the force of atomic bombs, the price of commodities has become a hypercomplicated phenomenon, because it all depends upon the history of generation after generation of people being brainwashed to believe in their state religion, which then worked to the degree that its runaway frauds were enforced.

Money is actually measurement backed by murder. Therefore, the amount of money it takes to purchase an amount of silver wound its ways through the historical labyrinthine mazes, whereby measurements were backed by murders. For generation after generation, we have all been forced to believe in the state religion monetary system frauds. There IS a connection between physical commodities and fiat money, BUT, that connection was made and maintained by the history of enforcing frauds, by backing up measurements with murders.

Of course, almost nobody thinks about that within the market places which are almost completely dominated by the fiat money state religion system, since as long as the police and army are paid in fiat money, made out of nothing, as debts, and their pensions are provided in fiat money, made out of nothing, as debts, then the overall fraudulence of that system keeps on getting enforced. Therefore, to that degree, people keep on believing in it, which makes it "real" to that degree. However, whenever one is trading some fiat money, made out of nothing, as debts, for something which physically exists, like silver, the only actual physical connection between the laws of nature and human behaviors has been the long and convoluted history of a state religion, whereby huge legalized lies were backed up with lots of legalized violence, for generation after generation of people who mostly took all of that for granted, while they were systematically conditioned and brainwashed to believe in the vicious spirals of that special kind of biggest bullies' bullshit social story.

There IS a connection between an amount of silver, and fiat money, but that connection was actually achieved through the long, hypercomplicated history of backing up measurement with murder. That is the actual social context, as an established state religion, in which there operates any "price of silver." Obviously, the high priests of that state religion monetary system have almost miraculous power to manipulate the market, because their social position is the result of generation after generation of measurements, being backed by murders, whereby those high priests of that state religion have the uniquely privileged position to be allowed to legally counterfeit the money supply that the public is forced to use, despite that creation of that money out of nothing, as debts, being fundamentally fraudulent.

Through a historical process, the bimetallic money standard, where money was originally defined to be amounts of gold and silver, has gradually been transformed more and more into a state religion of frauds, enforced by governments, which has allowed the purchase price of real gold and silver to become more and more absurd, until there is about a couple orders of magnitude more electronically tagged "silver" or "gold" than there is actual physical silver or gold. Bit by bit, for generations, the runaway triumphs of financial frauds, enforced by governments, have been able to manipulate the purchase price of commodities more and more ... without any end in sight, at the present time, other than maybe, eventually, some correction to how those measurements have become absurd numbers, which became more magical than mathematical, through some kind of belated manifestation of the murders that were implicitly present, in order to originally enable the current runaway magical state religion values for silver or gold, to reconnect with the ancient history, which enabled that social concept of "money" to evolve in the first place ...

Money made out of nothing, as debts, was a form of debt control which was always implicitly backed by death control. Those were the real processes which connected the physically existing commodities to the accounting cash that was related to trading them. The background problems are that those debt controls were debt slaveries, which have driven their numbers towards becoming debt insanities, while, at the same time, for the same basic reasons, the price of physical commodities became entangled more and more in the absurd debt insanities, inherent to the runaway nature of the state religion monetary system. All of that more and more risks breaking down, or breaking through, to corresponding death insanities, in the future, because the manipulation of the price of physical commodities in terms of fiat money made out of nothing, as debts, constantly gets crazier and crazier.

SAT 800's picture

I like the comparison between the Virginia Colony's tobacco currency and the post '71 Fiat regime; there may still be fiat dollars at the end of the time line but they'll be unrecongnizable in value; proably will have undergone a hundred to one devaluation.

Deo vindice's picture

I'm just curious, but are the downvotes (there are no upvotes at the time of my post) because what is linked to is a false claim or because it is not liked?

boogerbently's picture

Votes are really just a statement on who understood, or HOW they understood your statement.

lunaticfringe's picture

I never take voting personally. There are always (x) amount of cocksuckers in the world. Some don't even read, less comprehend.

Who said this? 5% of the people think, 10% of the people think they think, and 85% of the people would rather die than think.

Hint- He was not a cocksucker.

el Gallinazo's picture

Maybe the rising spread indicates that the phony, fractional reserve futures paper market is losing its ability to set the price.  As Jim Willie put it, Wal-Mart has a 50% off sale on shoes.  So you go there and they don't have any shoes.  All you can do is swap FRN's.  But the price of shoes has dropped 50% only you can't buy them.  All the gold is moving from western vaults to China.  When it's all gone, it will be like the retarded bungee jumper who replaced his elastic rope with a hemp one.  For me, the break down of the phony paper market is a good thing.  I look forward to the day when fools can speculate in the paper casino which like all casinos are obviously controlled by the owners, i.e. TBTJ and the CB's, and people who have real physical can have a real market and valid price determination.

NotApplicable's picture

If banks are run out of the business, couldn't that cause spreads to narrow, once the banks leverage is unwound?

Transformer's picture

This article is BS.  Spreads widening... hmmm....   I wonder if there are any other reasons this might be happening.

Al Huxley's picture

I agree, the whole premise of the article rests on accepting the trustworthiness of those who run the futures markets - these are the guys who pay themselves absurdly large sums of money to congratulate themselves on having found new ways to transfer money from the general public to themselves.  These are the the same guys who've rigged LIBOR, been proved incompetent, greedy and outright criminal in their activities in the derivatives market, who've shown no qualms about taking gigantic bailouts from the public purse and essentially putting that money directly in their own pockets, who created an entire fee-driven industry loaning money to unqualified borrowers, failed to keep appropriate paperwork on their loans, and then began widespread illegal foreclosure activity when the loans went south - I can go on and on about the predatory, sociopathic activities of these institutions. 


And yet I'm to believe that in the metals markets, where ALL COMMON SENSE shows constantly rising demand, and yet the price continues to fall, in these markets, they're behaving as responsible, above-board 'warehousemen', just collecting the spread, never attempting to move the market to their advantage. 


Sorry, this is just academic drivel, class economics prefaced with the old standby that every economist uses to get a solvable model - 'if we assume that...'.  Been there, done that, know the game, recognize the handiwork.

mvsjcl's picture

"And yet I'm to believe that in the metals markets, where ALL COMMON SENSE shows constantly rising demand..."


And let's not forget, producers constantly cutting production. With prices for the metals falling below production costs, many miners are cutting back.

ATM's picture

There is a simple answer  - silver is losing it's monetary moniker. It's becoming more commodity and less money.

Al Huxley's picture

Yes, why the fuck would I suspect the innocent 'warehousemen' - JPM, HSBC, Scotia Mocatta, etc.., those paragons of fucking virtue and honesty, to fuck with the spread in the futures market THAT THEY OWN AND CONTROL, so that they can make a bigger premium on every transaction?  It must be that silver's losing its monetary moniker, that makes WAY more sense.

lunaticfringe's picture

I have always enjoyed a nice ass kicking in the morning. Thanks Al.

Fuh Querada's picture

The only spread that is widening lately is Julie Gayet's .

boogerbently's picture

The demand for physical is growing, but the price is dropping?????

Al Huxley's picture

Yes, the precious metals markets are magic markets, they follow their own laws, which are different than those that apply everywhere else.  The other unique thing about them is that they are NEVER manipulated, even when the primary market makers are known to operate dishonestly and disingenuously in every other sector they play in.  Its a very special place, like Oz, or Narnia.

satoshi101's picture

we know that only a handful of guys control the BITCOIN exchanges,

Certainly only a handful of guys control the SLV, GLD, ... exchanges

Most of it is just paper,

The exchangs can fuck with the price as they wish, .. so what?


Go live in a country where GOLD is sold for cash and the daily price is on a wall at that shop, and most prices are set by the GUBMINT for that day

The solution is to just ignore the SLV/GLD exchanges and their bullshit and their newsletter writers and the PUMPER's & DUMPERS on ZH 24/7.

SILVER is going fucking no where, this story is just an attempt to unload shit that nobody on earth wants.

Hell even manufacturing is dropping, which means less industrial demand for silver, and while the Asians want GOLD, they don't want fucking SILVER, ergo the SILVER HO's must be hurting and bad.

BITCOIN exchanges can set the price to anything they wish, ... SILVER exchanges can too, because outside of the WEST nobody wants the shit.

Fair price discovery can be found on any corner in ASIA for GOLD.


cynicalskeptic's picture

so.... China grabbing silver by hundreds of tonnes and Indians buying it up when access to gold is 'constrained' - totally meaningless?

There's less physical silver existent above ground today than 10, 20, 30, 40 years ago.  It's becoming harder and harder (and more expensive) to mine. Silver is used in electronics and medical applications (with no good replacements available).  But silver isn't really worth all that much.......