This is not investment advice. I’m neither qualified nor knowledgeable enough to do that.
However, I remember “backwardation” from 2008. Seeing it in silver for the first time in decades (or ever?) really made me jump today.
The attached short paper was prompted by the first ever occasion of backwardation of gold, which occurred during the 2008 Global Financial Crisis (almost certainly a manufactured event though no less real for that). The author was very clear about the likely implications of backwardation here.
Some people believe it’s a signal that we’re approaching the end of the global, unbacked, fiat currency system which has existed since the 1944 Breton Woods agreement as amended by the 1971 removal of the US dollar from the gold standard (the US ended the ability to convert USD into gold at a fixed price).
All governments are using one version or another of currencies backed by nothing beyond “confidence”.
History teaches that every such money system goes to zero, albeit in an unpredictable way especially in relation to timing.
What a perfect prelude to a Reset! If our money is declared worthless and if our assets are legally stolen, the vast majority of us will do exactly what they’re told by their governments.
Only the perpetrators know the timing & means of such a Reset, if that’s what this is about.
Normally, you can buy any commodity that’s traded in a number of ways. The most straightforward is to buy (or sell) in the “spot market”. The price you see as you click the execute trade button is what you’ll pay (or receive). The goods turn up a couple of days later.
Because commodities are being created all the time, you can also buy an option to buy the commodity in the future, say in three months. Now, for all commodities & for so long as there’s been a futures market, the futures price will be higher than spot. There are storage costs to the seller and more importantly they don’t get paid for three months (so forgo interest) yet carry the liability to deliver the goods. That normal premium varies between actual commodities and with market sentiment. This state of affairs is called contango. Why, I couldn’t tell you. It’s probably intended to confuse rather than to clarify.
Under exceptional conditions, the futures price is lower than spot, todays price. If you had confidence that all transactions would be honoured, this is free money. You’d sell your commodity and get the proceeds, and you could buy it all back in the futures market at a lower price, pocketing the difference. That’s why this generally can’t happen. This distortion is called “backwardation”. It was seen previously & briefly in gold in 2008 & it exists right now, in silver. I recall it happening in crude oil in 2008 (IIRC) and that’s what prompted me to learn a little about it.
What does backwardation signify here? One interpretation is that there are concerns about supply, which would force up spot prices. But if futures prices are lower, that’s got to include the possibility that you’re simply not going to get the silver indicated on your futures contract. Supply isn’t limiting. There’s a few years of mined output available above ground.
One commentator, who is a “gold bug”, stated that their concern is that we’re approaching the end of the fiat money era. Hence the extraordinary imperative to buy it right now, in the spot market, while obtaining it remains possible.
I am concerned that one component of The Great Reset is destruction of sovereign currencies. If you’ve even a little spare money, you could do a lot worse than to own a few coins of silver or gold.
One final thing about precious metals: there’s no “counterparty risk”. If you own UK “gilts” or US Treasuries, there’s always the risk of default.
Anyway, this event disturbed me enough to write a post on it. Make of that what you will. It’d be true to observe that I’ve got a certain view of the future which colours everything I see or read. It doesn’t mean it’s correct.
Best wishes
Mike
