Well, if the VIX contango steepness over the course of the second half of 2010 (see: VIX tagged articles) was odd then expect to be oddified just a little bit more now. A contango is, after all, an expected pattern within normal basis related parameters and basically prices in the expected time-value of a delivery period into the contract month: ie a forward value should always be higher than a present value due to the inherent value of time.
Admittedly, the steepness of the contango was a bit worrying over VIX but now, we are in for something really completely different with the silver curve, on the Chicago Mercantile Exchange, exhibiting some most peculiar and abnormal behavior. Basically, silver is in backwardation across its futures curve with front months currently pricing above some future-forward rates. Okay, so topsy-turvy, here we go, and since this kicked in, roughly growing since last Thursday’s trading session, Si’s gone kinda ballistic.
UPDATE: Past Backwardation Over the Course of January 2011
The LBMA (London Bullion Market Association) did actually backwardate over the course of January (from roughly 19/01/11 onwards). However, this had not come through over to the CME until now (to my knowledge). It is possible that the recent CME move is therefore a continuation over supply/demand imbalances encountered over January. Still, this January backwardation was considered highly unusual in both its scale and severity. More available via the FT: Silver Market Gives Conflicting Messages.
So the Future Is Cheaper Than Today???
Hmm, not quite… But this is very odd. There’s been quite a bit of talk/gossip in the markets over silver and what might/might not be actually driving price discovery.
Without wanting to add to that rumour mill (there’s more than enough going around already), this current backwardation over the curve does represent a significant turning point (see above on previous LBMA moves). Silver is basically being repriced now, with what looks like a supply and demand imbalance in the front-end driving prices up (well, at least that’s one possible explanation).
From the Hushed Whispers Crowd…
Part of the rumour mill alluded to earlier relates back to silver’s very, very, very long run (we’re talking millenium-long average estimates here) relative pricing against gold. Now, estimates over this vary, and certainly variance exists in human history over this supposed gold to silver ratio but it roughly goes along the lines of silver roughly being 1/16 of Gold’s price.
Now, these kind of ridiculously long run average estimates do sound quite quaint and erudite, but the fundamentals today are probably not quite exactly the same as when the Sesterce was the main unit of currency across Europe (see Roman Empire: Monetary Union).
However, rumours are still one kind of opinion in the market and an expectation of a circa $80 range over silver can be a bit of a concern considering that we’re only roughly 36% of the way there. The chart below shows some more recent history and potential insights into a more relevant ratio.
As I said, a lot of rumours out there, there are also some more worrying rumors relating to custodians of large silver bullion funds doing something or other.
Again, I don’t want to get caught out in all that noise. That being said, Silver is now officially in backwardation over the CME, which is abnormal, and that definitely warrants a mention here.