Market Curiosity: Exploring Markets And Systems

March 2, 2011

Silver update for March 2, slightly more LBMA backwardation, slightly less at the COMEX, and scarcity reports continue.

King World News interviews Rick Rule, “…one of the most street smart level-headed individuals in the business.”There is more silver called for delivery than there is silver to deliver. This has created backwardation in silver and this is an extremely unusual situation in this market. This occurs when there is scarcity of silver. Anecdotally, my sources tell me that demand for physical silver is outstripping demand for gold on dollar for dollar basis in European and North American markets.

Certainly what is of interest to me is the limited availability of new mine supply including byproduct supply in view of increasing demand. Meaning in addition to the near-term you could see explosive action in silver in the future. You could also see a sustained two or three year bull market in silver simply because supply isn’t sufficient to meet intermediate-term demand.

I don’t know how you solve a structural failure to deliver. I don’t know if regulators or exchange officials would allow a force majeure until markets could stabilize. What I do know is that set of circumstances would further destabilize the silver market and markedly increase speculative interest.

Paul Mylchreest, Gresham’s Law Squared – gearing up for
Game Over:
David Morgan on shortage in the wholesale silver market: 21 February: “But the real key is are we short on the commercial side, the 1,000 oz. bar size. And I spent a great deal of time this morning talking to the top of the pile, you might say, on the wholesale side… it looks as if we are now in that situation. I don’t want to get everybody over-excited but it seems as if, from really good sources, and I source it in two places, one in North America and one in Europe, there is more demand on the commercial bar side than they are able to produce currently.

A friend of mine stood for physical delivery of a small number of contracts in the December 2010 silver contract. He paid a visit to the (very large) bullion bank to find out when he would receive his metal since it was already paid for. The employee of the bank said that my friend was not permitted to enter the vault and (very interestingly) that the bank was no longer allowing the employee to enter the vault either. Now why would that be? My friend was told that in order to take delivery of his silver, he would need to fill out a form which would then have to be processed through the bank’s compliance department. It was supposed to take a week, but that was more than five weeks ago. [plus a lot of interesting history]

Ed Steer: I have some interesting news from the Royal Canadian Mint. It seems that their new 1-ounce silver coin, the grizzly bear, is missing in action at the moment. All the major suppliers in both Canada and the United States have their orders in, but the scuttlebutt yesterday was that the mint was having trouble getting the silver to make them…and the suppliers were going to be allocated much smaller amounts than they had originally ordered when they finally are made. The suppliers I’m talking about are the likes of Tulving and A-Mark

The following 2 charts from Mr Steer’s post suggest that any near term interest rate rises in short dated debt will be immediately expensive.

The main change at the LBMA is the 12 month dipped lower and is quite a bit lower than the other months. The current backwardation relative to the 12 month SIFO is now 2 days longer than 2008’s and still twice as deep.

Open interest for yesterday is reported at 2,251 contracts or about 11 million ounces — 25% of COMEX’s reported available ounces.

COMEX silver still in partial backwardation. $1.08 between front month and Dec 2015. The contango of the front months is slight but has extended out 1 more month to July.

If the price pattern is similar to 1979, it’s reasonable to expect silver to continue rising for the next 2 months.

James Turk on King World News: I think the major message in silver is that every dip is well bid for. The shorts and other big players may gun for stops from time to time, but they can’t change the underlying trend, or the very bullish fundamental picture… When the gold and silver markets start becoming disorderly, then we will know the metals are going to take a breather. But everything at the moment says we should be focusing on higher prices for both gold and silver.

+ Silver, backwardation update on March 1: LBMA 13 days, COMEX (partial) 19 days

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