If you’re in the precious metals game, then you know about backwardation. If you don’t know about it, then you can google it yourself. Quite a bit has been written this week about the March 2012 backwardated state of silver. It is general consensus that this is caused by a breakdown in the trust level as related to the COMEX in light of the takedown of MF Global customer accounts.
Furthermore it is thought to be supported by the recent filing of an additional $1.5 billion shelf offering by Sprott Physical Silver Trust http://sprottphysicalsilvertrust.com/default.aspx. Here’s a link to the actual shelf filing back on November 11, 2011. http://dont-tread-on.me/wp-content/uploads/2011/11/PSLVPreliminaryshortformbaseshelfprospectus.pdf
Dave’s not so sure that either one of these is actually the cause of the backwardation. First of all, is the relationship between above ground inventories and actual mined production the same for silver and gold? Dave thinks not. Essentially silver gets used and gold doesn’t. So silver backwardation isn’t like gold backwardation. Secondly, could a $1.5 billion “potential” offering have any tangible impact on the JP Morgan Chase short position inherited from Bear Stearns? Dave thinks $1.5 billion is a lot, but Dave thinks not so much when compared to JP Morgan’s ability to take down the market.
So, then what’s the deal? Dave thinks this deal is really about the price relationship ratio between gold and silver even moreso than the price between say a silver dollar on e-bay and the price of a a silver ETF via the Comex such as SLV. If you had enjoyed selling paper silver for decades and were now faced with real shortage in the market for industrial silver deliveries (think Iphone production) whata would you do about it? Silver gets used because it has the highest electrical and thermal conductivity of any metal. Silver, more than gold is a key component of the tech boom, especially mobile computers and cell phones.
Is the backwardation in March 2012 silver prices because there isn’t enough silver to go around today but there will be in March, or is it because central banks are manipulating the price of gold downwards (see Dave’s previous theory on that from this week ) and this is causing the future price of silver to be less than today’s price. If it was gold we were talking about, Dave would say “Sure, people don’t trust the system, so they aren’t willing to sell you their gold today for a higher price and buy a contract for March delivery at a lower price.” If the backwardation was in gold, Dave would say it’s a TRUST thing; a lack of trust in the market thanks to Jon Corzine and the MF Global heist.
Could this situation in silver be different? Is it possible that the big time players in the gold market know exactly what the central planners have planned. They know that there is a takedown planned for gold in the very near future and that the price will temporarily fall. Because of the traditional relationship between gold and silver is causing the future price of silver to reflect this fall and therein lies the problem with their grand plan. They have a plan for gold while silver is just a sideshow. Gold is the sister that they’re trying to get a date with while silver is the little sister tagging along and messing up the plan.
Whether the traditional 16:1 ratio between gold and silver ever returns or not is the subject of much debate, but if gold prices drop while silver prices rise, that debate becomes moot with each tick of the chart. The bottom line is that central banks control gold and in many ways JPMorgan controls silver…. at least they have so far. The gold game hasn’t been used in the same way the silver game has been used to hijack investors because it requires a more coordinated effort as gold is the only precious metal on the balance sheets of central banks – not silver.
In other words, JPMorgan has been allowed, in Dave’s opinion, to game the silver market just like a young man who in pursuit of a date with a young lady has struck up a conversation with her younger sister. Now, that the relationship is in full courting mode, it would be great for the couple if they could ditch the relationship with the younger sister named silver, but it doesn’t work like that… silver is along for the ride and you know what they say about that; “Two’s a couple… three’s a crowd.”
The couple is gold and the central banks while silver is crowding out their game. Could governments outlaw the ownership of silver? Probably not. Could silver ever serve as an actual practical monetary unit of trade? Probably so. Dave’s no big fan of gold, silver or precious metals from a practical perspective, but he believes they are a reflection of what is going on in the marketplace. Precious metals, especially gold, create most of their utility due to their connection with human consciousness. Why do we value a piece of metal? Dave’s not so sure, but Dave knows that we do… value it.
Will the price of SLV and e-Bay silver dollars separate from each other or will the current ratio of 53:1 (gold to silver) be the one to break first. Either way Dave views a shift in those two competing ratios as an indicator that the game is unraveling. Dave doesn’t believe that JPMorgan can keep its silver short game in place and contain the inflation that is being buried within central bank balance sheets in the suppression of gold prices. One of them has to give and if you were paying for this dinner and a movie, who would you be looking to push out of the car first?