Silver Backwardation: Prices About to Soar

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"The absolute cheapest way to buy silver. . .is to buy it while it is still in the ground."

The price of silver has been in so-called "backwardation" for several days now. That means that the price for immediate delivery has been consistently higher than the price for future delivery. In contrast, although the spreads have gotten very tight, in the gold market, we are no longer seeing overt backwardation. The last time we saw it, gold was selling in the mid $800s per ounce. Shortly afterward, the price soared to $1,000.

Normally, gold and silver exist in a state of so-called "contango." In other words, it normally costs more to buy the metal for future delivery than for immediate delivery. This difference is said to compensate sellers for the cost of storing the metals. Backwardation is an abnormal phenomenon in both markets. Its existence implies that, at a given price, the demand is significantly exceeding the supply.

Silver, for future delivery, is selling for less than silver for immediate delivery. The relationship of higher spot to lower May futures prices held true throughout the trading session, and with various different quote-reporting services.

To obtain exposure to the rising price of silver, one might invest in a number of ways. One might buy silver bullion, directly, or in the form of the ETFs. Another option is to buy silver futures.

Sellers are happy to sell paper promises to deliver silver, because they do not expect to be required to deliver it. Over-leveraged speculators are regularly "harvested" by the short selling banks, who appear to periodically crash the price in order to chase the leveraged longs out of their positions, at a loss. However, as a well-capitalized investor, you can force compliance with any futures contract you buy.

Afterwards, you can hold your physical silver for a much longer period of time than they can afford to manipulate the price. The price will rise, over time, no matter what the manipulators do. Silver can be purchased on the futures markets at much cheaper rates than you must pay at an independent silver dealer.

The absolute cheapest way to buy silver, however, is to buy it while it is still in the ground. You can do that by purchasing shares in companies that mine silver.

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