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The silver backwardation has been on-again off-again
throughout 2009 and this portends gigantic problems for the worldwide
monetary system. Backwardation
is a situation where the fiat currency price of a commodity is pregnant with
a premium the buyer is willing to pay for immediate delivery. The price
of a commodity for future deliver is lower than the spot price. This
is contrasted with contango
where the spot price is lower than the futures price. Backwardation
seldom arises in the monetary commodity gold or the quasi-monetary commodity
silver.
QUESTIONS
The depth of one’s intellect can usually be
answered by the questions one asks. In our family we have a couple
jokes. For example, ‘How big is yellow?’ And,
‘How many kids with ADD does it take to screw in a light bulb?
Wanna go ride bikes?’
As my articles are widely syndicated throughout the
Internet it is interesting to see the comments they receive. I really
wish I had the time to read them all and respond, which I do occasionally,
but there are more important things to do. But in preparing this
article I decided to review some of the comments from my earlier articles and
found it quite humorous.
For example, on 25 Feburary 2009 Cesato remarked, “In
my experience backwardation has sooner or later led to a price collapse in
any commodity. I’ve never been a long term buyer when a commodity is in
backwardation”. On 25 February 2009 silver closed at $13.81 and
by 11 September 2009 the backwardation had ended and silver closed at $16.77,
a 21.4% gain or a 39.5% annualized rate when measured with the undefinable dollar.
On my article ‘How the Treasury Bubble Will
Burst and Why‘ at Seeking Alpha I received a comment from Alan
Brochstein, CFA and fellow Seeking Alpha Gold Standard Contributor who
provides analytical services for hire. He said, “Trace, sorry, but this
makes absolutely no sense…” This is not surprising considering
his 8 Dec 2008 article ‘Own Gold? Time to Fold‘
where he stated, “Gold remains a sucker’s bet…”
On 8 December 2008 gold closed at $772.25 and by 11 September 2009 gold
closed at $1,005.70, a 30.2% gain or a 39.8% annualized rate.
In February 2009 after I observed about two
week’s worth of silver backwardation I then proceeded to ask and answer
this question:
What if silver trades in backwardation for an
extended period? Well, I already
answered this question earlier. It means individuals are unwilling to
take the risk of holding national currency illusions or the risk of an
exchange’s failure to deliver. Potentially the national currency
illusions could be pulled into the event horizon leading to the fiat currency
graveyard.
The fundamental outlook for the FRN$ has gotten even
worse, although there is a case for the FRN$ to rise,
and the potential for a COMEX gold or silver delivery failure is a constant
specter.
BACKWARDATION SPECTER RISING
The specter of backwardation is rising. The
COMEX contracts for Sep 2009 and Oct 2009 had the same settlement price.
Likewise the London SIFO, the Silver Forward Mid
Rates, have been trending towards backwardation.
Additionally, the LIBOR-SIFO is moving toward dangerous territory.
While silver has not settled into backwardation yet
this will be an important trend to watch. Having the physical metal in
one’s possession or with a trusted third party like GoldMoney
gaining in importance. I would be particularly wary of unallocated gold
or silver accounts. Usually silver is a very quiet metal. But
when it moves, it moves! About 90% of silver’s price movement
happens in 10% of the time.
SILVER IS RELATIVELY CHEAP
SILVER INVESTING GUIDES
For those that are new to the silver market and are
considering how to buy silver an excellent
book is from Mr. David Morgan of Silver-Investor called Get The Skinny On
Silver Investing or Mr. Michael Maloney’s Guide To Investing In Gold And Silver
CONCLUSION
At all times and in all circumstances gold, silver and platinum remain money. The silver
market is miniscule compared to the amount of total tangible and financial
assets in the world. Yet silver can never become worthless because it
is a tangible asset. As capital continues seeking a safe and liquid
home silver is among the beneficiaries. With the Chinese and Indian
acquisition of physical silver there will be even more strain on the paper markets
for delivery. While silver is currently not as cheap as it was earlier
when I recommended buying; the ‘tears of the moon’ is still a
decent value.
DISCLOSURES: Long physical gold, silver and platinum with no position in
the problematic GLD or SLV ETFs..
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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