SilverDoctors (57.85)

Silver Backwrdation a Result of Comex Default Risk

August 03, 2011 – Comments (0) | RELATED TICKERS: SLW , SSRI , GPL

Silver Backwardation a Result of COMEX DEFAULT RISK Backwardation in a commodity can be caused for 2 reasons.  Either traders want out of the currency (they have no wish to receive US dollars when future contracts expire as they fear those dollars will be worthless) OR they fear that the physical commodity will not be available for delivery when the contract matures.
If a lack of confidence in the US dollar was the PRIMARY cause of backwardation in silver, clearly we would see a significant backwardation in the GOLD MARKET AS WELL!
The lack of coinciding backwardation in gold indicates that major players are concerned about the SUPPLY OF PHYSICAL SILVER! 
This means that the primary reason silver remains in backwardation is due to risk of COMEX SILVER DEFAULT!

Last week we reported that silver backwardation had increased by 36% in the past week.  At the time of writing, front month silver was trading at $38.14.  Silver was trading in contango from front months through July 2012, and was in backwardation from Sept 2012 on out. 
Silver is now trading $1.50 higher, closing Wednesday at $39.546 (before moving much higher during the after hours access market).  Silver backwardation has increased again, although only slightly over the past week.  Silver continues to trade in contango from front months through July 2012, and in backwardation from Sept 2012 on out.  The December 2015 contract is now trading at a 0.65 discount to front month silver.
(again, for new readers, an overview of contango vs. backwardation can be found here:)




Daily Settlements for Silver Futures (PRELIMINARY)Trade Date: 07/20/2011 Month




Settle Estimated
Volume Prior Day
Open Interest JLY 11




39.546 108 380 AUG 11




39.549 551 417 SEP 11




39.558 58,320 60,423 DEC 11




39.581 1,939 26,443 JAN 12




39.582 6 133 MAR 12




39.578 99 5,269 MAY 12




39.565 110 1,578 JLY 12




39.552 91 1,759 SEP 12




39.532 9 218 DEC 12




39.480 273 8,004 JAN 13




39.462 - 1 MAR 13




39.423 25 400 MAY 13




39.381 - - JLY 13




39.338 44 2,212 DEC 13




39.251 145 6,744 JLY 14




39.191 9 228 DEC 14




39.102 49 1,174 JLY 15




38.981 - 166 DEC 15




38.901 30 450 From the CME

Compare silver's backwardation with gold, which despite its steady bull run, continues to trade in a normal market condition: contango. 
Front month gold closed Wednesday's COMEX session at 1596.70.  Subsequent month contracts increase in price all the way out, with the December 2015 contract closing at 1730.10! This means that those wishing to purchase gold for delivery in December of 2015 must pay a PREMIUM of $133.40/oz to cover costs such as storage, insurance, etc.  This is 8.35% of the cost of the front month contract!
I bring this to your attention to contrast the silver market, and to demonstrate just how extraordinary it is that silver remains continually in backwardation to a significant extent, despite price action either up or down.
Backwardation can be caused for 2 reasons.  Either traders have a lack of confidence in the currency (they fear that when future contracts expire the currency will be worthless) OR they fear that the physical commodity will not be available when the contract matures.
If a lack of confidence in the US dollar was the PRIMARY cause of backwardation in silver, clearly we would see a significant backwardation in the GOLD MARKET AS WELL!
The lack of concurrent backwardation in gold indicates that major players are concerned about the SUPPLY OF PHYSICAL SILVER! 

This means that the primary reason silver remains in backwardation is due to risk of COMEX SILVER DEFAULT!




Daily Settlements for Gold Futures (PRELIMINARY)Trade Date: 07/20/2011 Month




Settle Estimated
Volume Prior Day
Open Interest JLY 11




1596.7 6 81 AUG 11




1596.9 135,986 250,826 SEP 11




1597.5 415 8,880 OCT 11




1598.0 1,361 15,618 DEC 11




1599.0 13,380 169,279 FEB 12




1600.4 826 11,459 APR 12




1601.9 160 6,146 JUN 12




1603.6 86 14,424 AUG 12




1605.5 1 5,016 OCT 12




1607.7 1 4,112 DEC 12




1610.2 159 11,711 FEB 13




1612.9 - 1,560 APR 13




1616.1 - 201 JUN 13




1619.8 7 11,065 DEC 13




1634.1 8 12,482 JUN 14




1651.8 - 3,136 DEC 14




1673.9 - 9,270 JUN 15




1700.0 - 3,725 DEC 15




1730.1 - 2,768From the CME