Silver Backwardation and Other Evidence of a Silver Supply Squeeze / Commodities / Gold and Silver 2021
Theeffort to squeezesilver shorts may appear to have fizzled, but naked short sellersare as vulnerable as ever.
Silverfutures prices are entering backwardation. That is a bad omen for anyonebetting on lower silver prices.
Backwardationhappens very rarely, but this condition has been a reliable indicator thathigher prices are on the way each time it has occurred over the past decade.
Inthe futures market, silver prices generally go up based on how far away the delivery month is. Most of the time,prices for future delivery are higher than today’s spot price, i.e., the pricefor delivery now. There is a cost of carry – primarily driven by storage feesand opportunity cost of funds – when it comes to holding physical silver bars.
Oneway to think of it is that sellers build in the cost of storage to the price –and buyers of futures contracts must agree to pay increasingly higher pricesthe further in the future they wish to take delivery.
However,with all that said, the silver market isn’t functioning normally at the moment.The higher prices being paid for delivery of bars today is an indication ofshort supply.
Italso may imply that investors don’t have as much confidence they will be ableto get delivery later.
Ifinvestors felt sure the bars would be there, they could simply buy a futurescontract for the lower price and stand for delivery.
Butmarket participants are weighing the risk of delivery defaults, or cashsettlements, more heavily. Many are paying up to get bars now for a variety ofreasons.
Periodsof backwardation in precious metals are relatively rare. The chart below showsjust three periods of a silver backwardation in the past decade as well as theone happening now. In each case, sharply higher prices were needed to resolvethe shortage.
Pricebackwardation is not the only evidence of tightness in physical silver supply.There is more unusual activity involving the iShares Silver Trust (SLV). Theexchange traded fund reported more than 3,000 tons of bars were added early inthe month.
Skepticsfind it hard to believe the SLV ETF was actually able to find that much metalavailable for delivery so quickly.
Noweven those who trust the ETF’s reporting should think twice. SLV altered itsprospectus on February 3rd, ratcheting up concerns about whether the trustactually has the silver it claims.
OneRedditor explains the changes:
On 3rd February, the day after the hugethree-day inflows into SLV and the addition of 3,000 tonnes +, the iSharesSilver Trust changed its Prospectus adding in three paragraphs as follows,including:
"The demand for silver may temporarily exceedavailable supply that is acceptable for delivery to the Trust, which mayadversely affect an investment in the Shares."'
"It is possible that Authorized Participants maybe unable to acquire sufficient silver that is acceptable for delivery to theTrust for the issuance of new Baskets due to a limited then-availablesupply"
Meanwhile,BullionVault reports COMEX silver stockpiles are at a four-year low. They aredown 30% from the high of 141 million troy ounces in 2007.
Thiscreates new risks for the bullion banks and others who have been feverishlyselling silver futures over the past two weeks. In recent months, the numbersof people standing for delivery of the metal on their futures contracts hasspiked.
Ifthat trend continues in March, which is the next delivery month, it may be abigger “Come to Jesus” moment than the shorts had in March of 2020.
Silverprices have been resilient in the face of extreme selling, unlike a year ago.And this time there will be even less silver available for shorts to round upand deliver.
By Clint Siegner
Clint Siegner is a Director at MoneyMetals Exchange,perhaps the nation's fastest-growing dealer of low-premium precious metalscoins, rounds, and bars. Siegner, a graduate of Linfield College in Oregon,puts his experience in business management along with his passion for personalliberty, limited government, and honest money into the development of MoneyMetals' brand and reach. This includes writing extensively on the bullionmarkets and their intersection with policy and world affairs.
© 2021 Clint Siegner - 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.
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