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Silver Backwardation Returns

Of course, when the price drops the injured goldbugs come out. We have written the authoritative debunking of the gold and silver price suppression conspiracy here. We provide both the scientific theory and the data. So we won’t say anything more about it today.

But first, consider the market maker for precious metals. He takes no price exposure, hedging all of his trades. I.e. when he buys a bar of metal he simultaneously sells a futures contract. When he sells the bar, he buys back the future he sold short). Or, to be more technically precise, we should say that he seeks to take no price exposure.

Let’s take a look at the Friday intraday silver price and May basis. The price fell over a buck, from $17.74 to $16.67. Clearly the market action was the selling of something. Was this something futures or spot metal?

With the price move from around $17.25 (around 13:30 GMT) to $16.60 (16:00 GMT), the basis drops from a small positive number to -0.65%. For reference, on 14 Feb, it was 0.91%. That is a big drop in basis—from contango to backwardation—as the price dropped a buck.

The basis shows us that the price move was driven by the selling of futures. That is, speculators are repositioning (either by choice or perhaps under stress elsewhere in their portfolios).

Our next prediction is twofold. One, if stocks continue to crash (and Treasury yields continue to drop) then the price of silver could drop a bit further. But, unless more silver metal comes to market and basis recovers, backwardation should provide increasingly firm support as the price declines.

© 2020 Monetary Metals

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