18 Days and Counting - Silver Backwardation Persists in the London Market Place
"Peering through reverent fingers I watch [the Gods of the Market Place] flourish and fall. And the Gods of the Copybook Headings, I notice, outlast them all." - Rudyard Kipling by Jake Towne, the Champion of the Constitution
Saturday, February 14, 2009
[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.] ( 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 has been in backwardation for the 18 trading days since January 21. The mid-rate for the longest contracts is now slightly positive.
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.
[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 Euro/Pound are nearing new highs due to FOREX market. During this latest backwardation, the Euro price is within 12% of its March 2008 high, while the Pound is within 23%. However, the dollar price of $13.37/oz. is 36% below its $20.92/oz. high.
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.
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 666 pounds per ounce of gold this week on February 12, 2009.
The Euro set an all-time high of 740 Euros per ounce of gold on February 12, 2009 as well.
Gold priced in Dollars is still 8% below its 2008 high of $1,023, as of February 13.
There is some debate about whether backwardation is bullish for gold and silver. Due to the aboveground stocks-to-flow ratio, 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 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. As an amateur, I do not know the root cause of the backwardation although I listed three possible causes earlier, plus the Pound's recent relative devaluation. However we can look at what happened to the price of silver and gold during each of the three backwardation periods from 2006-2009.
Another sign of investor demand is the GLD and SLV ETF's, which are probably fraudulent paper derivative scams as both James Turk and Jim Sinclair claim. The "inventory" of GLD has skyrocketed 205 tonnes to 985 tonnes since 2008 ended, which is within striking distance of the central bank reserves of Switzerland, the planet's #6 holder of gold. The "inventory" of SLV has leapt from 218 million ounces to 244 million ounces since January 1. In several weeks SLV will likely hit its allotted maximum of 264 Moz per page 8/48 of the prospectus. Not sure what happens after that, but if there are any SLV experts out there, please assist! I've also noted some erratic behavior with the ETFs while LBMA is in backwardation, but I profess I do not have the expertise to dissect it further.
From the latest COT report, non-Gold Cartel traders should be wary of another initial pullback-breakout-retest-blastoff in the COMEX market which is how gold historically trades, as shown by Jordan Roy-Bryne. Others (like myself) of humbler means who do not like to play with the fire of the "Gods of the Market Place" should be quite content with holding the mythological metals of the sun and moon in the palms of our hands. For did Rudyard Kipling not warn:
"As I pass through my incarnations in every age and race, I make my proper prostrations to the Gods of the Market Place. Peering through reverent fingers I watch them flourish and fall, And the Gods of the Copybook Headings, I notice, outlast them all... In the Carboniferous Epoch we were promised abundance for all, By robbing selected Peter to pay for collective Paul; But, though we had plenty of money, there was nothing our money could buy, And the Gods of the Copybook Headings said: "If you don't work you die."
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew And the hearts of the meanest were humbled and began to believe it was true That All is not Gold that Glitters, and Two and Two make Four And the Gods of the Copybook Headings limped up to explain it once more.
As it will be in the future, it was at the birth of Man There are only four things certain since Social Progress began. That the Dog returns to his Vomit and the Sow returns to her Mire, And the burnt Fool's bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins When all men are paid for existing and no man must pay for his sins, As surely as Water will wet us, as surely as Fire will burn, The Gods of the Copybook Headings with terror and slaughter return!"
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!]
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.
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.
The views expressed
in this article are those of Jake Towne, the Champion of the Constitution only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Jake Towne, the Champion of the Constitution is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Walt Thiessen
Date: 2009-02-14 06:26:45
Jake wrote: "In several weeks SLV will likely hit its allotted maximum of 264 Moz per page 8/48 of the prospectus. Not sure what happens after that, but if there are any SLV experts out there, please assist!"
The answer is on the page of the prospectus you pointed to. It says, "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, the sponsor anticipates that the trustee, with the consent of the sponsor, would retain an additional custodian."
Posted By: Jake, the champion of the constitution
Date: 2009-02-14 06:41:10
I read all that but I am referring to SLV's actual plans - have they made any announcements? Obtaining another Custodian is actually a big deal - and the metal is also held by some sub-Custodians.
Of course, the Custodian for SLV is none other than a "God of the Market Place" - JP Morgan Chase!!
On page 37/48, it states "... the duration of the agreement with the additional custodian, its fees, the maximum amount of silver that the additional custodian will hold on behalf of the trust, the scope for the additional custodian's liability (including with respect to the silver held by the subcustodians) and the additional custodian's standard of care may not be exactly the same as in the agreement with JP Morgan Chase Bank NA, London branch." It then goes on to say - I am paraphrasing 'our chain of custody is really crappy' This "subcustodian" stuff can be a little scary. Hopefully its Brinks or VIA Mat.
Posted By: Jake, the champion of the constitution
Date: 2009-02-14 16:40:51
"But what has changed over the years...and really went off the charts last July...is the concentration of the short positions...the tiny number of bullion banks that hold colossal short positions against everyone who is long. As you know, the COT report came out yesterday, for positions held at the close of trading on Tuesday, February 10th. This is what it showed.
In gold: '4 or less' bullion banks were net short 64% of the entire Comex gold market '8 or less' bullion banks were net short 80% of the entire Comex gold market
In silver: '4 or less' bullion banks were net short 68% of the entire Comex silver market '8 or less' bullion banks were net short 75% of the entire Comex silver market
If these bullion banks had a name, it's my bet that the first three names on the list for both gold and silver, would be the same. It's also my bet that JPMorgan is number one in both. A list of the 'usual suspects' [including JPMorgan] can be found in the list of 'Market-Making Members' posted on the LBMA [London] web site. The link is here.
In other gold news today, the usual N.Y. commentator reported that "the Bombay Bullion Dealers Association told Reuters on Friday that so far this month, India has imported no gold." And what is now becoming an expected daily occurrence...the GLD ETF added another 491,500 troy ounces [15.29 tonnes] to their alleged stash. The silver ETF, SLV, did not update their website on Friday. And lastly, Ted Butler pointed out yesterday that the GLD ETF added 5.0 million ounces for all of 2008. However, since January 1, 2009...they've already added 6.0 million ounces!"
so basically, those who buy digital silver are giving JPMC the money to short the silver market? i was wondering where that physical money was coming from. i was wondering if they weren't just getting fed/treasury kickbacks for shorting. wow.
Posted By: Jake, the champion of the constitution
Date: 2009-02-15 03:50:30
i have no love lost for JP Morgan. yes, that's the horrible part of it all, in my view they are using investors to back their scheme and collect metal FOR them. And believe me, JP Morgan is not beyond manipulating the trading of the metal so that THEIR ETF gets screwed and THEY profit immensely - historically they have been able to do it on both the short and long side, but there may be a short squeeze on.
If JP Morgan Chase were to collapse, I forget what happens to SLV - I'd have to recheck the prospectus, but it's NOT good for the investors.
That said, it has tracked the silver price very well and if a day trader was using a small portion of his/her capital it would be risky but pretty safe. It's the people that buy it believing its a substitute for silver or gold in their hands that I worry about.
GLD and SLV seem like great conveniences, butone of the major reasons to buy precious metals in the first place is for insurance. Probably silver STOCKS like SSRI or SLW are safer bets - incorporated outside the USA with most/all mines outside the USA and a lot of leverage over the price of silver.Hecla and PAAS or Coeur are the major domestics - I think.
For further back info on silver lease rates, SIFO etc suggest you subscribe to http://www.sharelynx.com/
Would also recommend http://silveraxis.com/todayinsilver/ as Tom Szabo is tracking gold and silver backwardation and the ETF prices vs spot. Will help your analysis to follow the discussions.
I have seen other comments about the size of the ETFs and while not making any assessment of whether they have or don't have the metal, trying to use the size of them or their flows as proof that they don't have the metal isn't a strong argument. While they are big numbers, working in the industry they don't stike me as unrealistic.
Posted By: Walt Thiessen
Date: 2009-02-17 09:13:16
Well...I think you might be slightly overstating your case when you say that the banks are using silver and gold stored by others with them to back their silver and gold shorts. It's more accurate to say that the regulators are simply refusing to make them cover their shorts. Now, if you have a statement from the regulators saying that Morgan Chase doesn't have to cover their shorts because of others' assets on hand, that would be one thing. My impression is that the two aren't related, that this is just one more case of regulators looking the other way, similar to Madoff and a whole slew of corporate fraud cases that are about to come down the tracks.
again, just based on this model working in the past re: other financial derivatives and whatnot. the game was that they would short things, while recommending people go long (i.e. give their money to Bank X which would concentrate that money). they in turn would keep the pressure down, and use money from the new long positions to create further shorts (when advantageous to do so). I forget where i've read about this model, but it's in a related industry from the 80s if i'm not mistaken. and i have fogotten the details, but not the general architecture of the scam. and walt, i imagine you're quite right that the regulators are likely too buys counting their newfound money to be looking in any other direction!