Market Curiosity: Exploring Markets And Systems

February 13, 2011

Main stream media is having a more challenging time painting silver negatively

Filed under: Just Watching — Tags: — Jeff Fitzmyers @ 2:02 pm

Articles are starting to be rather bullish with a few token, and nonsensical, items thrown in.

Miners hedge against fall in silver

Bankers said at least five miners had hedged a portion of their silver output in recent months, either by selling future production ahead of time at a fixed price or by buying options to protect against falling prices. This has helped push the market into “backwardation” — an unusual condition for silver in which the price for future delivery is lower than for immediate delivery.

Please explain how a normal activity like hedging produced an “unusual” condition.

The quantity of silver hedged in the latest wave of activity is several times the size of previous outstanding hedges, according to bankers’ estimates…. Raymond Key, head of metals trading at Deutsche Bank, estimates that about 100m ounces of silver has been hedged in the past two months. That compares with total outstanding hedges, called the global “hedgebook”, of 20m ounces in late 2010 and annual mine production of about 700m ounces, says precious metals consultancy GFMS.

What’s the rush? Silver fundamentals are only getting better. Is this backwardation or just naked shorting?

Bankers and analysts cautioned against expecting a widespread return to gold and silver hedging, noting that silver was not the main product of any of the miners who had executed hedges in recent months.

Well, selling 100 moz seems pretty widespread. Do you mean miners in general, not just silver miners, sold this?

Mining companies have cut back on hedging – and several gold miners spent billions of dollars buying back their hedges – after protests from shareholders who preferred full exposure to the commodity markets.

After such a costly lesson, why would miners be so rabid to hedge such that they forced backwardation? Has hedging ever created backwardation??

Minera Frisco, the Mexican mining company spun out of Carlos Slim’s conglomerate, said last month it had hedged 70m ounces of silver production to 2013.

One company is reportedly responsible for the bulk of hedging, but only to (Dec?) 2013. But then how come the backwardation is out to Dec 2015? And how did selling over a month ago create the current week old COMEX backwardation?

“Gold and silver’s slide in January may have spooked some producers,” said Edel Tully, precious metals strategist at UBS. “When you put it in the context of silver’s massive rise last year it is not surprising some producers are locking in price gains.”

How exactly does one of the notably tamest “slides” ever, spook anyone with experience in the mining industry?

US silver term structure inverts as supply tightens

NEW YORK, Feb 11 (Reuters) – The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months.

Market watchers said that it has been more than 10 years since silver futures were last in backwardation, an unusual term structure, associated with shortage of physical supply. Warehouse stocks of the white metal have dropped to a four-year low on surging demand, while miners have hedged their future production.

Booming industrial demand for silver and record U.S. coin sales, combined with a surge in demand from mining companies to borrow the metal for their hedge programs have led to a squeeze in the physical silver market… Some precious metals dealers said that backwardation in silver was related to the forward sales program by silver producers.

How, exactly, does a mining company squeeze the silver supply by selling silver??? Wouldn’t the “tightest physical silver supplies in four years” be helped by miners selling forward???

“When a silver mine company has to put on a hedge, it has to sell forward and borrow a lot of silver from the market, and that put a tremendous amount on the market,” said Bruce Dunn, vice president at precious metals dealer Auramet.

Sell forward — yes.
Borrow — not that I understand. Why? You are contracting a sale in the future.
Put a tremendous amount on the market — yes, which keeps prices down artificially if they are naked sales.

Or could it be that silver is going up simply due to these charts:

St. Louis Adjusted Monetary Base (AMBNS)


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