What Does Backwardisation Mean for Silver Prices?

Antal E. Fekete, a professor at Intermountain Institute of Science and Applied Mathematics, and frequent writer on precious metals, answers a timely question:

Q: People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for.

A: My answer invariably is: ‘watch for the last contango in silver’.

It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount.

When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists.

Silver price hike

Thank you professor! This is really an extension of the argument on this website dating back to before the summer rout of precious metal prices.

Physical stocks are low and the futures price has been distorted by big hedge fund forced-sales - now we are coming to the day of reckoning when the physical shortage starts to determine the spot price, and not the futures market.

The upside - which should have been there all along - will now come back with a vengeance and smash the few remaining shorts. This is likely to be spectacular - but after the culling of bulls recently not all precious metal fans will be there to benefit.

Comments

[GMiki1:]

The shorts deserve a little smashing since they have manipulated the price. See Ted Butler's free analyses. Why in the world should producers have to sell at below cost for so many resources--nat gas, silver, oil, base metals? Push is coming to shove.

2008 Dec 11 10:23 AM

[Roger Knights:]

"Push is coming to shove."
Clever!

2008 Dec 11 11:51 AM

[jeffee:]

Pulp Fiction, ha ha.

2008 Dec 11 02:26 PM

[D Johnson:]

Obama needs to have Prof. Fekete as our new Treas. Sec. instead of another scumbag banker. We need to remove the power of those who got us into the credit crisis and install people capable of solving it. Instead, all we see is the same-ol-same-ol of corruption and greed.

2008 Dec 11 03:11 PM

[MMuoio:]

Never met a Gold Bug that suggested gold was "priced right"!


On Dec 11 10:23 AM GMiki wrote:

> The shorts deserve a little smashing since they have manipulated
> the price. See Ted Butler's free analyses. Why in the world should
> producers have to sell at below cost for so many resources--nat gas,
> silver, oil, base metals? Push is coming to shove.

2008 Dec 12 09:01 AM

[GMiki1:]

If you follow the markets MMuoio, you'll see what's really happening. Mines are shutting down, as is nat gas production, tar sands production, and oil exploration--just when we need all these to bring in more supply. It's not a matter of opinion. It's a matter of reality. The markets are triggering greater shortages down the line. That means much higher prices later on and not that much later between reduced supply and inflation. You're going to say "demand destruction," which may be true in some Western countries--or not. Weighing demand destruction against demand increases, you might find a bit of creep in demand while supply destruction is taking a toll.

2008 Dec 12 11:58 AM

[Burticus:]

Disclosure: Long physical silver bullion & CEF, lead (& serious lead-delivery equipment) and non-perishable food.

2008 Dec 12 02:19 PM

[Marc Courtenay:]

Thanks Peter for clarifying the nebulous commodity exchange language. How about more info on what" the collapse of our international monetary system, based as it is on irredeemable promises to pay" will look like. I'm speaking about that which is not obvious and what that will do to the developed world's economies.

2008 Dec 12 04:44 PM