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Last week, silver slipped into backwardation, and, as Monty Python would say, there was much rejoicing.
Backwardation in silver is a Big DealTM, as it's been over 10 years since we last saw near-term futures contracts trading higher than ones further out in the curve. In fact, not since Warren Buffett snatched up 130 million ounces back in 1997 have we seen the metal go backwardated. Even then, the condition was short-lived.
This time, however, backwardation may prove to be more persistent.
Compare the silver futures curve as of last Thursday's close, the chart that sent so many silver bugs into the streets ...
... with the silver futures curve as of today, Monday, Feb. 14 [current as of 11:30 a.m.]:
In last week's chart, we see that even though backwardation showed up in 2011, it remained slight, with merely the September 2011 contract trading a few cents lower than the July 2011 one. Backwardation intensified, however, as contracts stretched into 2012, with prices dropping steadily compared with the July 2011 contract.
Today, however, we see that backwardation across the curve has intensified significantly in 2011, with not only May's and July's contracts trading lower than April's, but also December's contract trading lower than September's. Also, it's kind of hard to ignore that steep decline into the July 2012 contract"”something that didn't show up in last week's chart.
Granted, most investors don't think backwardation "counts" until the impending roll yield (in this case, the March-to-April roll) would net you a positive return"”and as we can see, silver isn't quite there yet.
Still, backwardation"”the textbook definition of it"”has hit across silver's curve, and the change from last week to this week suggests to me that traders are getting downright spooked.
As with any commodity, backwardation usually implies some shortage of physical supply. And today's chart tells me not only are traders expecting more sustained shortages, but that they think those shortages will occur sooner rather than later.
From my perspective, it's not a bad guess.
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