Silver in Backwardation! Has the Last Contango Been Danced in Washington?

January 31st, 2009 6:50 pm  |  by  |  Published in Commentary, gold, Investing, Liberty, precious metals, silver  |  0

The LBMA Silver Mid Rate goes negative AGAIN!!!! Read on to see why I used 4 exclamation points.

by Jake, the Champion of the Constitution
Originally published Friday, January 30, 2009 at http://www.nolanchart.com/article5916.html

silver[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 in the 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.]  ( Photo) (2)

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.]

While gold traded as a “store of value” (a currency, really), very little is actually consumed. Silver, on the other hand, serves as both an industrial metal and a “store of value” for silver investors. As we learned here, both silver and gold are precious metals since there is very little aboveground stock. All of the gold stock in the world would fit into a cube 20.5 meters to a side. Due to high amounts of industrial usage, the silver stock is even smaller, less than 14.5 meters to a side.

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 for all traded futures contracts (whether 1 month or 12 months) have been in backwardation for seven trading days since January 21.
  • This backwardation is about three times more severe than the mild backwardation than existed from December 8 through December 24 in 2008.
  • We can see that since 2006-2007 where rates were about 4-5%, this state of backwardation is fairly unusual. (The LBMA only lists data back to 2006, but I believe it is a fair comment to say that on an even longer timeline, this is unusual.)
  • Furthermore, starting in roughly June 2008, the 12-month SIFO rate flipped over from being the lowest rate to, in general, the highest.
  • 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.

sifo1

sifo2

silverfix

[All graphs in this article were created by me from this LBMA source. I'd be happy to provide my MSExcel file by email if you wish.]

Let’s now also look at the LBMA Silver Fix price history for a 1000 troy ounce bar. While at the end of the graph, the loss of purchasing power relative to the Euro and Dollar by the British Pound can easily be seen, I remark that despite all of the tightness in the market as demonstrated by the SIFO chart, the price of silver is still well below the average price for 2006-2008.

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 $12/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.

[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.]

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:

  • 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.
  • Again, the buckling of the British pound can be easily seen.
  • The British pound set an all-time high of 656 pounds per ounce of gold this week on January 26, 2009.
  • The Euro set an all-time high of just under 700 Euros per ounce of gold this week on January 26, 2009.
  • The Dollar is still 14% below its 2008 high of $1,023, as of January 29.

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gold

The reader should be aware I highlighted in my last article “GATA’s Message on Gold and Silver Manipulation to Barack Obama (PART 2/2)” and support the group known as GATA in their battle to bring about an end to the suppression that I perceive exists from the evidence GATA has gathered. As the GOFO rate is just barely positive (+0.2%) as I write, I warn you of what will happen if gold lapses into permanent backwardation. Or rather, I will let James Turk of goldmoney.com warn you:

If gold does trade in backwardation against US dollar for a protracted period…, it will mean that a collapse of the dollar has begun. Think about it. How could gold go into backwardation for any prolonged period? If it does, it would mean that no one is willing to take the risk of selling their hoard and instead hold US dollars. It would mean that no one is willing to accept the risks that come with holding dollars while waiting until they can be used at a future date to exchange back into gold.”

Got silver? Got gold? To those I believe who are suppressing free market of these two monetary metals, my message is from this Offspring video full of gold and silver coins:

“So dance, ******, dance!
…Hit ‘em right between the eyes!
Hit ‘em right between the eyes!
When you walk away,
Nothing more to say!
See the lightning in your eyes!
See ‘em running for their lives!”

Everyone else, get some while it is still cheap!

GO GATA!

Jake, the Champion of the Constitution

[Reach the Author Here!] www.CampaignForLiberty.com http://www.yaliberty.org/ endthefedusa.ning.com (Banner courtesy Mike Burke)

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Nolan Chart Facebook Group Page Created

Summary of Articles and Bibliography for Jake, the Champion of the Constitution (1/1/2009)

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.

As a disclaimer of sorts, I am a supporter of owning physical gold, physical silver, www.gata.org and www.goldmoney.com. Any investment or financial views expressed in the article are mine and mine alone, so make your own financial decisions by educating yourself. All I am doing is sharing my views to help you decide, even if its just to become aware that you do have a decision to make. You can even say its a charitable but naive act, given the historical tendency of the US government to oppress and steal. Any questions, feel free to email me. [Reach the Author Here!]

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Other Recommended Articles by the Author

Rioting at the Gates of Thermopylae: The Ramparts of the FED & Central Banks Shudder
Published: December 14, 2008
M1 hits 37% growth!! “Most of the significant American banks, the larger banks, are bankrupt, totally bankrupt.” – Jim Rogers, 12/11/2008

The “Gold in Backwardation” December 2008 Miniseries
Part I: “The End for the Dollar and all Fiat Currencies (1/5)
Part II: “The Next Bubble to Pop! (2/4)
Part III: “On Gold and Market Manipulation (3/5)
Part IV: “The Significance of Gold Backwardation Explained (4/5)
Part V: “More on Gold and Silver Backwardation and Manipulation (5/5)
The “We Didn’t Learn Much from the Great Depression” Miniseries

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The Money Matrix Series

  1. America, Were Michael Phelps’ Eight Olympic Gold Medals Worth Winning?
  2. The Money Matrix – Prelude (PART 1/15)
  3. The Money Matrix – What is a Dollar Bill Worth? (PART 2/15)
  4. The Money Matrix – What Makes Money Money? (PART 3/15)
  5. The Money Matrix – What is Honest Money? (PART 4/15)
  6. The Money Matrix on the Grand Deception of Seigniorage (PART 5/15)
  7. The Money Matrix – How the FED Works (PART 6/15) (A must-read, this article’s content is important as I haven’t seen its information compactly put together in one place)
  8. The Money Matrix – What the Heck Are Derivatives? (PART 10/15)
  9. Save Ron Paul’s Voice – A Money Matrix Addendum
  10. A Money Matrix Addendum: Citigroup and GATA Call for an End to the Suppression of the Gold Market
  11. MY PROPHECY – The Federal Reserve Will End! A Money Matrix Addendum

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Gold and Silver Investigation Source List

The People’s Money – a Facebook group that I assist with news postings.

A Quick History of Gold

GO GATA! The premise of the Gold Anti-Trust Action Committee that the world gold market is artificially suppressed by central banks in order to make their currencies look stronger.  25 minute intro Part (1) (2) (3)

www.GoldMoney.com – GoldMoney is an international gold and silver warehouse with insured vaults in London and Zurich.  Ability to hold and pay interest on six major fiat currencies, issue payments in goldgrams, silver ounces, etc. Think of them as an alternative way to diversify where and how  your physical metal is stored, but I urge you to be wary and thoroughly investigate this and ANY method where someone else holds your metal for you before investing.  The best is always physical possession  (or pay for storage at a Brinks-type depository) although you should always be creative with your storage locations :)

The World Gold Council – A wealth of information on central bank holding, gold derivatives, supply and demand statistics and more.  Free login required.

Rothbard, Murray N. “What has the Government Done with Our Money?” (1990) A 50-page document that describes Austrian economics.  Rothbard has written a host of other great sources as well, like the 1994 work “The Case Against the Fed.

www.jsmineset.com Expert Jim Sinclair shares his thoughts on gold investing, financial markets, and trading.  For free!

www.DollarCollapse.com This site’s main use is as a newsfeed for dollar, gold, and housing market current events.  They explain their dollar collapse theory here, which I partly agree with.

www.SilverSeek.com I particularly enjoy reading the columns of Theodore Butler and Jason Hommel

www.GoldSeek.com The sister site of SilverSeek.  The Mogambu Guru’s (aka Richard Daughty) column has tunnel vision but hilarious and educational..

www.professorfekete.com A seriously pro-gold scholar.

www.lemetropolecafe.com Offers timely gold market advice and a daily “Midas” column.  Try the 2-week free trial.

Paul, Ron. “Pillars of Prosperity.” (2008) A 400+ page compilation of Dr. Paul’s writings. After reading these, one realizes that Dr. Paul did very little recent work in putting together his best-selling “The Revolution” as most of this book was written 20+ years ago.

Millar, Peter. “The Relevance and Importance of Gold in the World Monetary System.” (2006). Self-explanatory title. Understanding Graph 2 on page 3 is key.

Greenspan, Alan. “Gold and Economic Freedom.” (1966) Interesting work from the Maestro prior to his conversion to inflationary Keynesian theory.

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