Physical Silver Surges To Record 30% Premium Over Spot, In Backwardation

Tyler Durden's picture

One of the main reasons why we have been not so focused on paper representations of real currencies (i.e., gold and silver) is that ever since the MF Global debacle, in which it became all too clear that if physical gold can be "hypothecated" via conflicting ownership, then there is no way that paper versions of precious metals are viable and indeed credible. After all, the only real owner at the end of the day is the certificate holder, which as we have explained before, is none other than DTCC's Cede & Co. Good luck collecting when the daisy chain of counterparties starts falling. Which leaves physical. And for a good sense of what the "real" price of the metal is, not one determined by institutions whose interest it is to preserve the hegemony of paper, one can either try to procure gold and silver at a retail merchant, or one can look to the premium of a dedicated physical ETF over spot. Such as Eric Sprott's PSLV which as of today is trading at an all time high premium of 30%! In other words, someone is willing to pay up to 30% over spot for the right to be closer to the physical metal than merely have a paper claim on a paper claim (pre hyper rehypothecation and what not). Incidentally the last NAV premium over spot record was back in April 2011 just as silver went parabolic and the entire commodity complex experienced the infamous May 1 takedown when it collapsed by $8 dollars in milliseconds on glaringly obvious coordinated intervention. Said otherwise, like back then, so now there is an actual shortage, manifesting itself in the premium. And while last time its was the price plunge which eased supply needs, we are not so sure how one will be able to spin a collapse of the current, far lower paper silver price.

But wait, there's more: As Keith Weiner explains below, silver also happens to be in backwardation. While we have covered the topic before, here is Keith with his explanation of what this means, although for those who like the punchline here it is, as above: shortage.

The Arbitrageur: Silver In Backwardation

March silver has been flirting with backwardation since the end of 2011, and today it has moved more firmly into backwardated territory.  This is extremely bullish for silver, and let me explain why.

Backwardation means (and I am oversimplifying a bit here) that a futures contract is cheaper than buying the physical good in the cash market.  To understand the meaning of this, the first question is this: Is it possible to warehouse the good?  If not, then the futures market is simply the market’s opinion of what the price is likely to be on the contract expiration. 

Silver, unlike interest rate futures for example, can be warehoused.  This means it is possible to simultaneously buy physical silver in the spot market and sell a future in the futures market.  One has no net exposure to the price.  One is exposed only to the spread.  This is a simple arbitrage.  One can “carry” a good (buy spot, sell future).

The possibility of this and other arbitrages in a good that can be warehoused changes the whole structure of the futures market.  One cannot look at the price of March silver as a prediction of the March price.  Absent a shortage or other anomaly, the March price should be close to the spot price + the cost of carry (interest rate and storage).  March silver should be at a slight premium to spot silver.  This condition is normal, and it is called “contango“.

But that is not the case for March silver (or Jul 2013 and beyond).  Those contracts are priced too low for anyone to make any money carrying silver. Instead, it would be profitable to de-carry silver.  See the graph for a picture of the basis (the annualized profit one would make to carry) and the cobasis (the profit to de-carry).  The basis is negative and falling; the cobasis is positive and rising.

A de-carry is the inverse of a carry.  One simultaneously sells silver, and buys a future against it.  Silver (and gold) are unlike all other commodities in that the above-ground inventories are massive, compared to annual mine production.  Whereas in wheat, for example, there is a genuine shortage before the harvest.  If one wants to buy wheat two weeks prior, one must pay a large premium compared to the first contract settled after the harvest.

In a normal commodity, backwardation means shortage.  The backwardation develops because no one has any of the physical good.  So they cannot decarry it, and thus the spot-future spread can go deeper and deeper into backwardation.

But in gold and silver it means something else entirely.  People have the metal.  But for whatever reason(s), they choose not to take this free money.  In the silver market right now, trust is in short supply.  In the past (think fall 2010 through spring 2011), this has been resolved by sharply rising prices which coax fresh metal out of hiding.

Originally appearing at The Daily Capitalist

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dereksatkinson's picture

Took you long enough.. Getting slow with age.  ;)

nope-1004's picture

No other investment is more obvious at this time.

Physical silver MUST be bought.


tmosley's picture

At the same time, everyone should note tht PSLV is NOT physical.  Sprott is a good person so far as I can tell, but one angel isn't much help when you dive headfirst into a sea of paper controlled by demons.

It is probably good for those who can't get their money out of the system, though.

bernorange's picture

I've been watching the inventory of 100ozt silver bars at apmex fall to very low levels over the last few weeks.  Tulving is also reporting a very low inventory (for them at any rate) of silver.  It feels like February 2011 all over again.

tmosley's picture

It's been a long time since I saw any 1000oz silver bars for sale ANYWHERE.  I wonder why that is? ;)

XitSam's picture

So when or how does this premium over spot show up in the price of silver eagles or 5 and 10 oz bars?

trav7777's picture

bullshit article by Tyler; PSLV is paper, not silver.

Real silver is not 30% over spot. 

BaBaBouy's picture

Remember Gringos, The Cabale controls the Dollar Price of PM's.


So no matter the REAL PRICE should be AU $25,000 and AG $200., the paper price is what Matters.


Mr. Ben Shalom has UNLIMITED PAPER FIATS to keep this SHIT going. Until he doesn't...

BaBaBouy's picture

Well just sayin'...


If they eventually try backing a good portion of the paper fiats out there right now with PM's, it could be $55,000, AU and $650. AG.


Watch that 10K Chain on your neck...

BaBaBouy's picture


The Hedge Funds and CB's of the future will be trading Van Gogh paintings and Gold, instead of the Worthless Paper Promisses of today...

Stax Edwards's picture

Silver Nuts:

TD is providing you with actionable advice that you could use to get more of your precious silver by simply selling what you have now and buying a futures contract for delivery later.  I am baffled by your reactions.  You are a fickle bunch with a penchant for losing money and poor reading comprehension skills is all I can figure.  Try reading the damn article you clowns!

tmosley's picture

Pfft, yeah, then we can get MF Global'd.  No thanks.

francis_sawyer's picture

TD is providing you with actionable advice that you could use to get more of your precious silver by simply selling what you have now and buying a futures contract for delivery later...

Tell you what... Why don't you just sell me all your physical now (paper spot), and then you can go buy all the future contracts you want with the "bride of MF Global" or whoever & we'll call it a day...

clymer's picture

Hey Trav (sevensevensevenseven):

I was going to respond with a snide retort, but your aggressive looking image caused me pause..


NotApplicable's picture

Yet no one with any sense will do so. Not even those on the street, who never turn down "risk-free" money. 

If you're not trolling, go read Prof. Fekete's "Last Contango in Washington." It might help you understand where the risk really lies.

Ponzi Unit's picture

Did Stax forget "sarc off"?

lunaticfringe's picture

Nothing lasts forever. Not even this.

Marigold's picture

Your Gold / Silver ratio is a bit out, I would suggest you recalculate to reflect reality.

trav7777's picture

you have some problem with the truth, fuu?

Real silver is NOT 30% premium to spot.  The headline is a lie.

fuu's picture

I'm fine with the truth. I also agree that physical silver can be had for under a 30% premium.


Isn't PSLV Physical Silver Trust? "So Physical Silver Surges to record 30% premium to spot." See it was a clever bit.


Bonus round: Does the spot in the title refer to physical spot price in the retail market or the spot price of the silver owned by the Trust per share?

Manthong's picture

Spot price reflects risky counterparty paper in a rigged exchange that is levered to the moon and undependably convertible to physical silver (ask anyone long silver in the COMEX in May of last year).

In that sense spot price is discounted to the real thing and represents a continuous buying opportunity at retail today.

Paper that is unlevered and dependably convertible to physical silver (within the terms of the PSLV trust program) carries a 30% premium.

I submit that the premium will go much higher and is a reflection of the both the real price and decoupling of the commodity from the derivative.

TradingTroll's picture


Just like in '08 when the boyz in the theatre were crying wolf over shortages, here in Vancouver Canada it was-and still is- all you can eat for 7% over spot. Check yourself:

TradingTroll's picture

Fuck you tmosley. I have watched your inane postings the past year, and I would rather have a discussion with a can of spam. I hope you have to pay 100% premiums. Thankfully I have many more brain cells than you and in 2003, when 1USD bought $1.50 Canadian, made the correct decision to move from Seattle to Vancouver, because at least in Vancouver we have something called an economy (I know, quaint) and a middle class (I know, old fashioned) and I can't get my neighbor infinitely detained because his dog crapped on my lawn.

The little house I bought in Vancouver in 2003 for $450,000 is worth $1.3m today. I just got the mail from BC assessment.

You are just an early example of the cesspool the US will become. By 2016 the President of the US won't represent the status quo, which might be important to you because you aren't the President. So unlike when your crack-whore girlfriend, or your AA buddy, or the guy behind you at the payday loan center, calls you a loser, in my case when I call you a loser it is 100% true. Youy can take it to the bank. Where they will remind you it must be a Canadian bank.


tmosley's picture

Fuck me?  You are the one posting a spam site that goes no-where while making nonsensical claims.  I was a buyer of silver in 2008.  You lie when you say that it was easily available.  It wasn't.  The largest sellers had a turnaround that was four times longer than normal.

And enjoy your real estate crash, you idiot.  "It could never happen here".  Herp.

NotApplicable's picture

Wow, looks like you found his launch button.

In other news, there's still someone left who brags of home price appreciation. How quaint. Of course, it's that tax-man that did the appreciating, so I'm getting a kick out of it.

Hephasteus's picture

I did chuckle. But I gave him 2 points for being smart enough to get the fuck out of seattle.

wkwillis's picture

greaterfool is the website for the Canadian real estate market. Funny, but repetitive.

oddjob's picture

I think he might of meant , which strangely enough is where I Buy my Maples.

B.C. property assessments came out yesterday, everything down except Vancouver.

TradingTroll's picture

My house is up 7% over last year. North Vancouver.

I will take the tax hit thanks.

Tony Ma runs VBCE. Lineup everyday. More mining guys in there buying PMs than any other PM dealer in N. America. Never an Ag or Au shortage. Quartermain (SSRI, PVG.TO and Giustra (Lions Gate etc) and Beatty (PAAS) are clients

But Mosley can't find the PM quotes on the website!!!

Someone as dumb as him should be paying 50% over spot. Edit: should not be allowed to buy PMs

Bay of Pigs's picture

Why aren't you doing the smart thing and selling your overpriced home and buying undervalued PM's?


akak's picture

Because he is in Canadia now, where the follow-the-herd mentality is, if anything, even stronger than in the USA --- particulary in British Columbia, the capital of smug conformity, hyper-political-correctness and statist central-planning fantasies.

Angus McHugepenis's picture

I used to live there in that overpriced scam of wanna be rich people who masqurade as homeless people. I remember 10 years ago when we would be demolishing 1950's era houses on quiet streets and little lots in the city because the new owner wanted to put up a 3-story McMansion on the lot. The property alone without a house on it was $500k. Property taxes were unreal, even then.

We tore down many beautiful old houses, and literally transformed 1940-1950 era neighborhoods into some of the most stunning pieces of modern architectural SHIT you've ever seen. It was like erasing history. And nobody gave a shit. And everyone lived happily ever after saving the whales and hugging trees as history was destroyed in their pursuit of their own ambitions and wannabe status as they try to blend in with the truly rich... but can't quite cut it. They've got million dollar properties and can't even afford to pay cash for their morning Starbucks as they shuffle off to work pretending to be what they are not.

WonderDawg's picture

Well said, uh... dude. A clearly painted picture of the "zeitgeist" of that society, and an accurate microcosm of what has transpired in cities across the US as well.

Dave Thomas's picture

I've gotta give creedance to his story though. The same thing happened in my neigborhood down south. Little 1950s ranch homes demolished for big McMansions. It's only a matter of time till the Jumbo loans stop, and the madness stops too. Just to the north of us is the largest community of low income folks in the region. It will look just like Detroit when the taxpayers leave. It was pretty heddy for a while there, when the boom was going it was the next Shangi La. Now it's only bidding time. That quick commute will give way to the fact that pesky home invasions are on the uptick. And then it's game over.


TheFourthStooge-ing's picture

Bay of Pigs posed a sensible question when asking:

Why aren't you doing the smart thing and selling your overpriced home and buying undervalued PM's?

Because the only person that thinks TradingTroll's "investment" is worth 1.3 million CAD is the tax assessor, whose motivation is to assess homes' values as high as he can get away with.

If TradingTroll were to sell today, he'd realize a profit over his 2003 purchase price of 450,000 CAD, but I don't believe he'd get over 1 million CAD. If he's smart, as the deflating real estate bubble in BC spreads to Vancouver, he'll sell for any reasonable offer, because he who panics first panics best. If not, any profit gained on his "investment" of 450,000 vintage 2003 Canadian Dollars will be nominal only.


tmosley's picture

Click on the link you posted, idiot.  It is an unregistered domain that goes to a spam site.

I wonder why you are so tremendously defensive?  It speaks volumes to your insecurities.

vamoose1's picture

you fucking horses ass.  you  probably  buy  a  couple  rounds at  a time,   try  buying  ten  million  dollars  worth asswipe

JPM Hater001's picture

I have 3 cases of spam and would be happy to arrange a meeting for a fee.  Or if you would like I can line them up on chairs and you can present to them as a group.  There is a group discount.

TruthInSunshine's picture

It's a great time to buy a house in Canada (or Australia - or anywhere, bitchez)!

The guy who is chock full of confidence because of what his local Pound of Flesh assessor's office claims "his house" is now worth is hilarious. Don't mind what the assessing offices in Clark County, NV, Glencoe, Il, or Malibu, CA were telling homeowners their homes were worth in 2006.

And Canadian banks are very well capitalized, amidst a cheery Canadian Economic Backdrop, too.

*Brought to you buy RE/MAX Canada & The Canadian ASSociation of Realtors, proud sponsors of The 2012 Curling Championship @ The Devonshire Mall Lanes.

**p.s. - There actually are a very few places left where acquiring real estate right now may pay off, but these areas are few and far between, you're going to be up against those running OPM in competing with them to acquire it, and it's no skin off their sack if those investments actually end badly, also, as they have none of their skin on the table.

Prometheus418's picture

I don't know that I agree with that.

It's a matter of what you intend to do with the houses- while it's true that it's a fool's game to take on maintainence and property tax on empty homes with the hopes that the market will recover right now, I would imagine that a guy who put the time in to learn how to purchase foreclosed properties and reinvented them as rentals could do pretty well.

Even though people lost the homes they "owned," they still need a place to live, and someone who previously held a mortgage is more likely to want a house to live in than readapting to apartement complex life.

I don't like it better than PMs, but it is a reasonable play right now.  Shelter is one of the most basic human needs, and while the property itself may not appreciate- or even continue to depreciate- it does still have the potential to generate a monthly income for the deed holder. 


Hephasteus's picture

Or we could stop pretending for one second that we do not have a horrible fucking problem with the state which makes the though of buying property a stupid ass move until it's fucking evicted from your life.

DosZap's picture


Two good friends have both done that, and are making good rents, on good homes.And, in a basically NON depressed area.

blunderdog's picture

The catch is going to be how to finance it all.  You have to be in good enough shape to have a downpayment and eligibility for the loan.  The folks who are in that kind of financial shape often aren't interested in becoming landlords.  Landlording is just another fuckin' job.

TruthInSunshine's picture

There will be many catches.

Speaking from experience, one of those "catches" will be competing with Uncle Sam, and as just one example of what you're competing with in terms of a owner-rentor experience, Freddie Mac announced today that those who are unemployed get one year's of mortgage payment forebearance, bitchez!

Free Markets, Dolla' Dolla' Bill, Y'all!

Freddie Mac Is Going To Give The Unemployed A Break On Mortgage Payments For Up To A Year