Saturday, February 5, 2011

Silver Shortage and Backwardation

Backwardation continues in silver showing huge potential to the upside.  What is backwardation?  Gene Aresberg from the explains backwardation:
"Backwardation means that the cash or spot price is higher than the futures price for the same commodity.  Backwardation occurs when demand for immediate delivery outstrips the market’s ability to deliver the commodity.  Backwardation occurs when there are too few sellers of the physical commodity to accommodate all of the actual buyers, so a near-premium develops to compensate the sellers willing to part with metal in return for taking delivery later." 

Backwardation goes hand and hand with the recent reports of silver shortages and huge demand for American Eagles according to the US Mint

Along with the backwardation we are seeing hardly any contago in Silver COMEX Futures.  Gene Aresberg explains why little contago is very bullish:

"When there is zero contango, it means that there is not even one futures contract that is higher than the current spot or cash price.  Zero contango and structural backwardation (where each succeeding futures contract is lower for most or the entire strip) is also known as an “inverse carry” market because the futures no longer compensate holders for the cost of carry, capital, storage and insurance relative to the spot price."

The stars are lining up for silver.  Along with shortages, zero contango and backwardation we broke through key resistance of $28.70 this week.  It is very likely silver begins picking up momentum to the upside.  During the next leg up for gold and silver it is likely silver will lead on a percentage basis.  We are starting see the silver lining.

Gene Arsenberg Article Here

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