Silver Slips Out of Backwardation


". . .the gold to silver ratio will most likely continue narrowing. . ."

Gold and silver are made for each other. The 'sweat of the sun' and 'tears of the moon' have served as money and currency for millennia. At all times and in all circumstances they remain money.

On 7 May 2009 when the gold to silver ratio was about 66.5 I wrote, "Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55." The current ratio is about 62.5 or about a 6% change.

Fortunately a failure to deliver on silver contracts at the COMEX was averted, though silver was backwardated for a record nine weeks.

On 24 February I wrote, "The chronic silver backwardation began on 8 December 2008, the same day I wrote about gold in backwardation, and silver was priced about $9.60. Currently silver is trading about $13.82. Predictably, the gold/silver ratio is narrowing. If the backwardation persists it will be interesting to see if silver's price in illusory FRN$ continues rising."

Since December, silver has rocketed from about $10 to $16 or about a 60% rise. Likewise the silver forward mid-rates (SIFO) have jumped recently. If you are considering how to buy silver and searching for a third-party to handle storage then you may want to consider GoldMoney as opposed to the problematic SLV ETF where the bullion may learn how to vanish because, under the appropriate legal documents, you are not provided with the right to physical delivery at any time.

The bipolar white metal is terribly volatile. The effect is compounded by the recent volatility in the Dollar Index, which slipped significantly below 80 before having a monstrous rally on Friday. Despite usual negative seasonality sentiment this bull up-leg in the precious metals appears to still be intact.

In addition, silver has had a huge run lately but is still only at about 1.27x its 200dma when measured in FRN$s. During previous rallies it stretched that ratio to about 1.45x, 1.7x and 1.45x. The rising SIFO rates portend interest rate movements. Consequently, the gold to silver ratio will most likely continue narrowing but the market is beginning to price in central bank action and therefore caution is warranted.

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