Silver certainly proved quite the heart throb over this recent Valentine’s week. Tired of letting gold hog the spotlight and of its perennial second-place runner-up SPOT in the league tables, it’s decided to put through a sterling performance and go for gold, at least in terms of returns.
Financial puns aside, the past week gave us a startling demonstration of the extensive contango-to-backwardation shift occurring in the Silver precious metals market (see past article: Revlis Spelled Backwards).
A Historic Shift
The LBMA now holds one full month of SIFO backwardation on its books and seems most unwilling to yield up anytime soon. Unsurprisingly, the CME has now caught up in full swing and kept forward rates negative for an equally impressive length of time. It is hard to stress the historical significance of this shift.
Never, and I do mean never, in the history of the CME or the LBMA, has silver held such a lengthened backwardation across its forward curve. Indeed, I would venture as far as to say that never before, in the history of mankind (well, at least as far as my research goes) has silver held such a significant and durable negative forward yield.
Backwardated Preciousness, MK.II
Silver Backwardation as of 18/02/2011. All prices courtesy of the CME.
Silver Lining Ten Straight Days of Outperformance
On a more pecuniary perspective, the shift since my last article on February 8th brings silver contracts for March expiry up 8.94%. At 5,000 troy ounce/contract, that’s a variation margin of US$ 13,255.00 per March ’11 contract over ten days, with a new 30-year nominal high now down on the books.
Unsurprisingly, the SPAN margin requirements have gone up an impressive 50% as of last Friday’s close to keep up with the heat. Surprisingly, this margin hike did almost nothing to reduce the run-up in prices, which might indicate that the supply/demand imbalance currently pressuring prices may be driven more by core fundamental hedging than speculative momentum positions.
A Lead Lined Gold to Silver Ratio
Unfortunately, this chart is already out of date; Silver closed above $32.29/oz last Friday.
Gold, meanwhile, has pursued a fairly bullish stance as well, though its performance started to lose some shine on a relative basis. Over the course of the past week, gold gained a mere 2.2% compared to silver’s 6.2%. All of this, of course, put further pressure on an extremely downward sloping gold to silver ratio that is now at a record ten year low of 42.99. The next steps down this road involve 1998 lows and then it’s the go-go eighties all over again, which leads to the next question: what is really happening here?
A Mint Sweetener
Demand for silver is fundamentally strong. Notwithstanding that 80% of silver’s use remains for industrial purposes, the marginal impact of value-oriented bullion plays remain significant. Taking into account recent statements by government mints, silver coinage is all the rage at the moment.
The US Mint already produced record sales of American silver eagles over the course of January to meet unexpected demand (potentially explaining some of the retracement witnessed over the CME that month). However, mints are facing a bit of a manufacturing logjam at this stage, with demand seemingly overstepping the minting press’ supply rate.
Are Collector Coins A Significant Indicator?
Well, as previously mentioned, the majority of silver’s demand remains industrial, nonetheless, performance is managed at the margins and it certainly remains somewhat disconcerting that numismatic charms are facing some level of shortage.
Perhaps of greater significance is the resilience of both the backwardation and ongoing SPOT price pressures observed in the London Bullion Market’s OTC vaults. Unlike the CME that does allow cash settlement on contracts in the event of physical duress (which, just in passing, already occurred over the course of December ’10), the LBMA is a bullion only market, where contracts must be met by hard, cold, silver.
Silver’s Loco?
Loco is not just crazy in Spanish, it’s the actual underlying clearing and settlement system that underpins the LBMA market. This settlement system is a physical only market. Basically, each credit and debit is registered on a ledger and, quite litterally, weighed in a vault. The reality is, at the moment, immediate delivery is pushing beyond standard time-elasticity considerations. Demand wants its Silver now, and I do mean, now.
It is difficult to determine just yet how this backwardation will be met by the market. In theory, the incentive is there to push up supply rates. The question then becomes whether the demand, from the numismatic mirror watching consumer to the high-end photovoltaic cell maker, will abate or rise. The next few settlement-months should certainly prove interesting.
- Background Links:
- FT.com: Silver Rises to 30-year high
- Reuters, Feb. 18: UBS lifts silver forecasts on demand view, tightness (target raised to $35 from $25.50)
- Reuters, Feb. 17: Gold hits 5-week high on inflation, rising tension
- Reuters, Feb. 11: US silver term structure inverts as supply tightens
- LBMA: SIFO rates
- LBMA: Loco London
[...] Silver’s Is Back… -wardated, that is: a late reminder over the good ol’ H1 trade there, from $32.296 to $36.96, a 14.4% gain or a $23,320.00 variation margin on CME contracts. [...]