Silver is in record backwardation despite recent gains

Back in February of this year I wrote that silver metal was shaping up to be a good bet.   I quoted the spot price back then as $27.12 for 1 Troy oz of .999 silver.   Today it is $37.82 for that same Troy oz.  The reason I thought that it was a buy back then was because a significant dip had occurred and it looked to be ending based on the rules of Elliott Wave Theory.  Buy the dips, not the peaks.  So in any case I am long term bullish on silver and, short term pullbacks aside, I think it will eventually go much higher, even if in a turbulent fashion, before it becomes properly valued relative to the dollar and other basically valueless fiat currencies around the globe.

At today's price silver is up against some important resistance which, if it can break out, could lead to much higher prices.  At the same time if the break out does not occur fairly soon then it could be the catalyst for metals taking a pretty healthy breather.  Gold is up against some especially strong resistance that looks like a glass ceiling on the chart.  In other words, I would wait and see rather than make a big purchase at this point.  Of course, others have different views.  James Turk was quoted by King World News today as pointing to the historically large backwardation that currently exists in silver.  It is well worth a read because Turk is well respected in the metals trade.

Backwardation is a term used in the futures market. In the case of silver backwardation, it means that it’s cheaper to make a contract with someone to buy silver for future delivery (say, 6 months from now) than it is to buy silver for immediate deliver today even though the person promising to deliver in 6 months has to pay to store the metal that whole time.  Backwardation is unusual (the normal state of things is called contango) and we are in a period of historically large backwardation in terms of time. Bottom line: silver buyers believe that a bird in the hand today is worth more than a future bird in the hand. It means that silver traders are nervous. They are valuing physical possession more than future promises.  They aren't always right but they always have their eyes on the ball.  If your cat is looking up into the sky then you can be assured he sees something.  Whatever it is might not be as important as the cat is making it out to be but whatever he is looking at certainly exists even if your eyes aren't sharp enough to see it.  Metals traders are like cats.  Watching the cat can often be easier than scanning the skies yourself.

Many of James Turk's interviews clearly show that he is worried about massive inflation as the Federal Reserve destroys the integrity of the dollar.  He might be a bit early on that call but only time will tell how early.  For people who still have faith in the government I will leave you with this:  Federal Reserve Notes have an important sentence printed on each and every bill which says "This note is legal tender for all debts public and private".  I personally believe that the government will be able to enforce this statement.  If you need to pay taxes then you will always be able to do it using dollars.  If you have a debt today (or if someone owes you a debt) then it is denominated in dollars and so it will be repayable in dollars no matter what happens to the dollar.

But what Federal Reserve Notes do not and cannot say is "This note must be accepted by your fellow citizen in exchange for his goods and services under penalty of law".  In other words, deals that have already been made will be paid off in dollars and nobody is going to change that.  This includes your pension, social security, your house note, etc.  However, if you want to buy things in the future after some point where people have lost faith in the dollar then there is nothing the government can do to force a shopkeeper to accept dollars in exchange for their goods because debt is not involved in any way.   This is why having some silver bullion coins is a very smart idea.  If people don't accept dollars for commerce they will certainly accept silver and gold.  Bernanke can no more predict what is going to happen 2 months or 2 years from now than James Turk can.  For that reason, neither should be ignored.