Backwardation In Gold And Silver (SLV, GLD, AGQ, IAU, PHYS)

Share This Article
May 15, 2012 9:57pm NYSE:AGQ NYSE:GLD

Keith Weiner: On Monday, May 14, something happened that hasn’t happened since Dec of 2008. Two successive near-month precious metals futures contracts were in backwardation at the same time.


To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market. It should not be possible for it to happen in gold and silver (see my article).

But ever since Dec 2008, it has been recurring intermittently, and recently it has become the “new normal” for each futures contract to head into backwardation before expiring (see here).

Even in this “new normal”, however, it has been only one at a time: one metal, and one month. This is because the backwardation occurs with the “contract roll”, as people sell the expiring contract and buy one farther out. The selling pressure on the expiring contract is most intense for a short period of time. After that, the spread widens as the market makers move on, the selling pressure abates, and with wider spreads all around, both the basis and cobasis fall into oblivion. Except for the December month, gold and silver futures are liquid in different months.

That is why one does not see both monetary metals in backwardation simultaneously because they are “out of phase” by 30 days and temporary backwardation typically persists for only about a week or so. And it should be even harder to see two different successive near-dated futures contracts in backwardation.

On May 14, this is precisely what occurred. Both May and July silver are backwardated. And June gold is backwardated. Incredibly, the May silver contract is giving away a 3% annualized profit to anyone who would sell physical silver and buy a May future that delivers in a few weeks (thus recovering the same position). Even more incredibly, no one can or will take the profit that is dangling out there!

July silver backwardation is smaller, and June gold backwardation is even smaller. But still! This should not be possible at all.

Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust. I think that it is a lack of unencumbered metal. The markets for precious metals, silver more than gold, have become quite tight.

Related Tickers: ProShares Ultra Silver (NYSEARCA:AGQ), iShares Silver Trust (NYSEARCA:SLV), SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU), Sprott Physical Gold Trust (NYSEARCA:PHYS).

Written By Keith Weiner For The Daily Capitalist

Keith Weiner is the founder DiamondWare, a VoIP software company, and is a PhD student at Antal Fekete’s New Austrian School of Economics in Munich. He is now a trader and market analyst in precious metals and commodities. He is also president of the Gold Standard Institute USA.

The Daily Capitalist comments on economics, politics, and finance from a free market perspective. We try to present fresh ideas the reader would not find in contemporary media. We like to call it “unconventional wisdom.” Our main influences are from the Austrian School of economics. Among its leading thinkers are Carl Menger, Ludwig von Mises, Friedrich von Hayek, and Murray Rothbard. There are many practitioners of this school today and some of their blogs are shown on the blogroll. We trace our political philosophy back to Edmund Burke, David Hume, John Locke, and Thomas Jefferson, to name a few. Our goal is to challenge contemporary economic thinking, mainly from those who promote Keynesian economics (almost everyone) and those who rely on statist solutions to problems. We apply Austrian theory economics to investments, finance, investment risk, and the business cycle. We have found that our view has been superior in analyzing and understanding economic and market forces. We don’t consider ourselves Democrats or Republicans, right wing or left wing. But rather we seek to promote free markets and political freedom.


9 "Must Own" Growth Stocks For 2019

Read Next



Get Free Updates

Join over 50,000 investors who get the latest news from ETFDailyNews.com!

Most Popular



Explore More from ETFDailyNews.com

Free Daily Newsletter

Get daily ETF insights from our market experts. Never miss another important market development again!

ETFDailyNews.com respects your privacy.

Best ETFs

We've rated and ranked nearly 2,000 ETFs and ETNs using our proprietary SMART Grade system.

View Top Rated ETFs

Best Categories

We've ranked dozens of ETF categories based on relative performance.

Best ETF Categories