Silver in backwardation, set to move up

Although the silver price has declined by 11% over the past three weeks, tightness in the physical market continues as the metal is again in backwardation, i.e. the spot price is higher than the futures price.

James Turk of GoldMoney provided the following comments to King World News: “Silver is in backwardation which is an extremely important development. Backwardation happens regularly in most commodities, but it is rare in the precious metals.”

“Silver is in backwardation not just in the short-term, this time it is extending twelve months forward! The last time this happened Eric was in January of 2009. Over the next few weeks silver rose from about $10.50 to $14.50, a roughly a 40% move higher. The key to understanding backwardation is that the price must rise to entice holders of physical metal to sell and accept a national currency in return. I think we can expect a similar event to repeat over the next few weeks.

“A similar type of move would clearly put silver well above its previous high. What this backwardation shows is that there is a disconnect between the physical and the paper markets in silver. As I said previously, the silver shorts simply cannot hold the paper price down here any longer without seriously discrediting the paper silver market as a price discovery mechanism.”

Also, Goldcore alerted us to another positive development in the silver market, reporting a massive increase in silver bullion demand from China, with the country’s imports surging fourfold in 2010. As on so many other fronts, China is turning out to be a game changer.