-- Posted 13 September, 2009 | | Discuss This Article - Comments:

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.