Silver Backwardation Bout Ends as SLV Fails to Announce New Custodian 8 comments
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Silver finally slips out of backwardation. Any guesses on who the new custodian for SLV is?
This article and charts is an update to an earlier article "18 Days and Counting - Silver Backwardation Persists in the London Market Place". In "Silver and Gold ARE Money", I charged that both silver and gold are money and shared information on the very important concept of gold's "stocks-to-flow" ratio and the size of the LBMA markets for both metals.
[In case you do not yet understand futures markets, "backwardation" means that silver to be delivered today is now being priced higher than metal to be delivered later. This article refers to the LBMA, or London Bullion Market Association's futures market in London, England. For more details on backwardation, please refer to my five-part December series which starts here "The End for the Dollar and all Fiat Currencies (1/5)". Contango is the opposite of backwardation and exists when futures price is higher than the spot price as I explained for those new to futures terminology here "The Money Matrix - What the Heck Are Derivatives? (PART 10/15)". [As you read, please also note that I am NOT a commodities trader, I am just an engineer by trade, so feel free to help me out with my analysis or mistakes.]
As we learned in "The Significance of Gold Backwardation Explained (4/5)", backwardation is a sign of a very tight market, and a market that will be tight for sometime into the future either 1) current supply is very tight, 2) future supply is projected to be very tight, or 3) there is a severe distrust in counterparties that the short positions can deliver the goods on time per the contract, or vice versa that the long positions will not have the cash.
Please refer to the below graphs of LBMA's silver mid rate, which is the midway point between the bid and offer prices. Here is what I note:
Silver was in backwardation for the 47 trading days since January 21. On March 27, silver finally dipped out of backwardation.
Most of this backwardation period was about three times more severe than the mild backwardation than existed from December 8 through December 24 in 2008.
Although this backwardation was very long – most likely the longest in LBMA history – it was relatively mild. The 1-month contract was the most severe, but its average level of backwardation was only -0.20%, or about $3 USD per 1000 oz bar.
Also, the disparity between the rates seen in 2006-2007 has largely disappeared; the market appears to be treating a trade on silver 12 months later as quite similar to a trade on silver 1 month later.
[All graphs in this article were created by me from this LBMA source and this US Mint source and my file is available by request.]
Let's now also look at the LBMA Silver Fix price history for a 1000 troy ounce bar. Despite all of the tightness in the market as demonstrated by the SIFO chart, the Dollar price of silver is still well below the average price for 2006-2008, while the Pound is nearing a new high due to the FOREX market. The Pound price reached £995 within 5% of its March 2008 high. The current dollar price of $13.22/oz. is 37% below its $20.92/oz. high. From the chart, I speculate the Pound price may have been surreptitiously "capped" at £1000, or perhaps is a psychological barrier, similar to gold's three recent tries at $1000/oz.
Let's now take a quicker look at gold traded at LBMA. The GOFO, or Gold Forward Offered Rate, represents the rates at which dealers will lend gold on a swap basis against US dollars. From the below charts, I note:
Recently, gold has only gone into minor backwardation once, in November 2008, for 3 days.
As GOFO started its plummet in roughly September 2007, the prices began to diverge, and currently the 1-month GOFO rate is lower than the 12-month rate.
The buckling of the British pound can be easily seen. The British pound set an all-time high of £690 per ounce of gold on February 23, 2009.
The Euro set an all-time high of 782 Euros per ounce of gold on February 23, 2009 as well.
Gold priced in Dollars is 10% below its 2008 high of $1,023, as of March 27.
It is simply too early to tell if we have seen the "Last Contango," but as Dr. Fekete notes in "The Last Contango in Washington" (2006) and "Keeping Our Eyes Peeled for the Silver and Gold Basis" (2007), the consequences could be very stark for the dollar and hence all fiat currencies.
Now, of course, there are many other factors as silver guru Theodore Butler points out in "Tightening Production". Industrial demand has been slammed by the economic fallout. However, since about 70% of all silver is typically mined as a by-product with other base metals like zinc, the supply is also greatly affected by the market conditions of zinc, copper, lead, and nickel. While the backlog in demand has greatly increased the inventories of these base metals causing a drop in their prices, the inventory of silver is growing smaller while the price has increased over the past three months from $10 to $13/oz. Butler also relates that many of the base metal mines have been closing due since they are no longer profitable. At the same time, Butler reports that the American COMEX silver futures market is under investigation by the CFTC (Commodities and Futures Trading Commission) for market manipulation and price suppression. It is also possible the London market backwardation is temporary due to the severe loss of purchasing power (relative to others) of the British pound.
[For the Reader, NYMEX Gold Session Futures chart, Silver Session Futures chart. Gold spot price chart. Silver spot price chart. When the spot price is greater than the futures price, backwardation exists.]
There is some debate about whether backwardation is bullish for gold and silver. Due to the aboveground stocks-to-flow ratio of 60 years stock to 1 year of mine production, I maintain that LBMA backwardation in gold in is not only a bullish signal, but, more importantly it is blaring siren signaling trust in the Dollar is being lost. Since the aboveground stocks-to-flow ratio of silver (1.5) is more typical of other commodities and industrial metals, LBMA silver backwardation is also bullish, for the commodity but may not be as relevant to the Dollar unless the reasons for the backwardation are clearly understood. Up to roughly 12%, or 81 million troy ounces of silver are currented effected by strikes or slowdowns at Penoles, Hochschild's, and Doe Run.
As an amateur, I do not claim to know to what degree each of the aforementioned three possible causes (tight current supply, tight future supply, or counterparty distrust) effected the backwardation although the Pound's recent relative devaluation and possible "capping" at £1000. My educated guess is tight future supply combined with FOREX declines are the dominant factors, but I please remember I also subscribe to the price suppression theories of GATA and Ted Butler. However we can look at what happened to the price of silver and gold during each of the three backwardation periods from 2006-2009 and we can see that backwardation has caused significant increases each time.
In addition to the annual supply-demand figures put together by the World Gold Council and the Silver Institute, another interesting item is US Mint-issued gold and silver bullion sales. As can be seen by the below, the 2008 gold demand quadrupled from its 2007 level, while silver demand doubled. In 2009 YTD, gold is on track to beat the 2008 mark, and silver demand is on track for roughly 24 million ounces, which would shatter its 2008 record level.
The inventory of SLV has leapt from 218 million ounces since January 1st, and reached 267 million ounces on March 26. This exceeds the limit of 264 Moz that the trust had set for the custodian, JP MorganChase (one of the "Pirates of the COMEX" as GATA's Adrian Douglas recently wrote about here). In the new prospectus (pg 8/44), the text reads:
The custodian has no obligation to accept any additional delivery on behalf of the trust if, after giving effect to such delivery, the total amount of the trust’s silver held by the custodian exceeds 264,550,265 troy ounces. If this limit is exceeded, it is anticipated that the trustee, with the consent of the sponsor, will retain an additional custodian... As a result, the new agreement may differ from the current one with JPMorgan Chase Bank N.A., London branch, with respect to issues like duration, fees, maximum amount of silver that the additional custodian will hold on behalf of the trust, scope of the additional custodian’s liability and the additional custodian’s standard of care.
I have not been able to find out who SLV has named as the new custodian. My flat-out guess is the new custodian will be HSBC (HBC) since as Douglas highlights, they are the other big player in the paper gold and silver market.
For many reasons, I view SLV and GLD with distrust. The Central Fund of Canada (third-party storage of gold and silver, CEF) and Central Gold-Trust (GTU, gold bullion only) are two ETFs you could also check out, as well as goldmoney.com and bullionvault.com. GTU and CEF currently traded at significant premiums compared to the spot price of the amount of bullion they store. Physical metal can even be placed into an IRA and stored by a third party. All I can say on any of these options is to be VERY careful, there is no simply substitute for physical gold and silver in hand or even stored at a Brinks-type depository or safety deposit box. I view all of the above as simply ways to diversify storage.
As far as the immediate future, in manipulated markets it is impossible to tell. Long-term, it is my belief the current fiat monetary system will fail, and this depression will likely not end until this occurs. Antal Fekete recently warned the quantitative easing phase of this Gold War could take quite a long time, but please prepare yourself and your family.
Let me close with a quote from Thomas Paine's "Dissertations on Government."
When an assembly undertakes to issue paper as money, the whole system of safety and certainty is overturned, and property set afloat. Paper notes given and taken between individuals as a promise of payment is one thing, but paper issued by an assembly as money is another thing. It is like putting an apparition in the place of a man; it vanishes with looking at it, and nothing remains but the air.
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This article has 8 comments:
More Supplies in the Future = lower Futures prices.
yes or no? No vacillations allowed.
Backwardization is demand/supply driven, yes or no?
Current demand exceeds current supply, but if future prices are lower, the "perception" is that future supply will go up to meet future demand, yes or no?
The graph signifying the relationship of 1,000 oz of silver against USD, Pound and Euro ("LBMA", Nov.,2006-Mar.,2009)) would have me believe about 1,000 Pounds was able to purchase 1,000 oz of silver when Silver was trading around $21oz or 1 Pound was equal to USD 21. What am I misreading since at its height the Pound only equaled around $2.10?
Thank you for the Info on the reduction of silver supply as a result of reduced mining in other metals, I knew it was north of 60% but could not remember how much. This Knowledge is Known By All. Hence, silver should be in Cantango.
Paper currencies will be replaced but not by commodities. Paper Currencies will go the route they having been going for decades, pure electronics like Debit Cards. IMO
That could mean one of two things; either (1) buyers are skeptical that some or any silver will be delivered at said future date or (2) the price of silver at that future date is expected to be less, relative to inflation.
I know most people do not redeem the silver at the future date, but if there is another buyer who does, and he does not receive what the contract (implicitly or explicitly) says he should receive, then the worth of all the contracts goes down.
I think what we can see ahead is further dollar devaluation, with the Chinese offloading more and more dollars while buying resources. At some point it will even show up in the dollar index and bread lines around the corner. Sooner or later someone will notice that the emperor has no clothes on.
As the current contract expires, the next contract becomes the current Contract. If demand still exceeds supply it will rise in price.
"that could mean one of two things" your statement.
If, as you say, buyers are skeptical that some or any silver will be available for Future delivery, the prices for Future delivery would include that factor and would price it far higher.
Second, Inflation is expected to be lower and future silver prices reflect that outcome, not the reverse.
I respect the expectation of lower prices built into the futures contracts simply because the World is still going into a rat hole.
But with the decline in supply as indicated in the Article, I suspect that in the future even with lower inflation, Silver will will go into sustained Contango because the Supply is being severely compromised and even limited demand will send it to New Contract highs.
IMO
Who filed for the investigation that you keep emphasizing that Butler quotes? I believe the Title is "Manipulation and Suppression".
Do you believe in the Manipulation "theories" of the GATA and Ted Butler.
Why haven't you followed up on Harold Goodman's knowledge of Manipulation? Is Harold part of your circle?
In my opinion, you are trying to promulgate a theory. Others are trying to do the same, You quote each other. In my opinion this circle is a Conspiracy to push the theory of Manipulation to all and sundry.
It becomes quite transparent when one reads who asked for the Investigation. IMHO
The Investment firms whom GATA(you) alleges are part of the Manipulative group in the Commodities sector, are by and large, members of the NYSE Membersip.
It is much easier to track them via their Program Trades. I believe that in the Markets UP moves, more than 1/3rd of the volume on the NYSE was strictly Program Trading, at times, that figure was over 40%(not positive). Currently, its running above 20% but has 25% occasionally. The Tail Wags the Dog. What they do, the Market does. Especially, if most of it shows up in the Last Hour.
Jake, if you want to prove manipulation, this is the area you should dig into.
If Ney is still alive, my guess is that he has records from the 1970's to the present.
He was very fastidious. I suscribed to his service for a number of years.(telephone Hotline).
I don't know if this helps you or not, but its a lead.
I'm not against your effort, I just don't like being told "I am right and You are wrong" why? Because.
Thanks for the leads, never heard of Goodman or Ney before you mentioned them, so I have so checking to do. Appreciate your comments on my other articles, I suppose I will reply in them separately. And as far as the below, understand you completely :)
> I'm not against your effort, I just don't like being told "I am right
> and You are wrong" why? Because.
"In my opinion, you are trying to promulgate a theory. Others are trying to do the same, You quote each other. In my opinion this circle is a Conspiracy to push the theory of Manipulation to all and sundry."
In my opinion, yes, I am advancing the work GATA has done because I believe I understand their evidence well enough that its not just a theory, its probably fact - central banks want to suppress the price of gold and have acted to do so. The goal from my point of view is public hearings between the US gov't and GATA
The manipulation theory is offered to the public for review as part of a quest for truth, not a quest for conspiracy. Many are still unaware, and the person on the street certainly has little clue, although all these Cash4Gold ads have people thinking a bit.
Big fan of Howard's novels by the way, although the Arnold movie never impressed me much.
He keeps pushing Manipulation and Suppression as Proven Facts and keeps quoting Butler/Turk as the sources of those Facts.
I think Richard Ney's publication was called "The Stock Market Observer". (its been over 25 years, I'm not positive) But his Conspiracy theories finally came true with the Specialist Frontrunning scandal earlier this decade.
I would think it would be easier to prove manipulation of the Stock markets and then delve into commodities with the Ammo garnered.
Membership Buys/shorts + Program Trades correlated lead to market direction regardless of economic news. Prior to the dissemination of News.
They made money hand over fist when 9/11 took place, they had been shorting the Market by 150 Million shares a week, every week prior to the attack. Richard Ney taught me what to look for, I have been ever since.
If I see anything which may be of use, I will provide it. I do not know if they knew what was coming, but it seemed too coincidental at the time and it still does. I'm all for eliminating the Hold the NYSE membership still has, permanently.
IMHO