Like many other things seeming ‘backwards’ these days, the silver market is technically in a state that’s literally referred to as ‘backwardation.’
Basically, backwardation is a situation where a commodity’s spot price is more than its forward futures price. It’s very unusual and means investors are paying a premium to own commodity now rather than in the future.
(For example, if you’re hungry, you will gladly pay more for wheat delivered now rather than 3 months into the future)
Mark O’Byrne of GoldCore comments “Backwardation strongly suggests that the physical bullion market is very tight with continuing robust demand and limited supply. It also suggests that silver users and investors are willing to pay a premium in order to secure the physical metal.”
Opinions on why backwardation is currently occurring vary far and wide but the two main ones are short-term supply shortages and the other reason has to do with industrial users.
There’s currently much speculation regarding the supply of physical silver out there. Some believe it’s dangerously low with some large investors saying it takes quite some time to take delivery of a large order.
The U.S. Mint for example has suspended production of its popular Silver Eagle.
But with the fear of supply shortages, the silver price could easily slide into backwardation as investors get more and more nervous about waiting to take possession of their metals.
The other reason being circulated is industrial demand. With interest in precious metal investments like silver soaring, industrial users of silver are hedging their bets by locking in prices today…essentially, they hedge production by selling futures, which is what’s causing the backwardation.
If this is indeed the cause of the current backwardation in the silver markets, some say it’s causing investors to think supply shortages are occurring.
It’s unclear how long this backwardation will continue. If supply shortages do occur, you could see silver increase dramatically in price.
We’ll keep you posted.
