The Backward Asian

As you know by now, The Turd has a friend he affectionately calls "Mr. Hyde". Some day, I'll explain to you why Hyde is Hyde but, for now, I have to tell you a story.

You see, Hyde is a former D-1 football player. Contrary to stereotype, he is actually a pretty sharp dude. However, there are times when you'd swear he was either dropped on his head as a baby or he's dealing with Post-Concussion Syndrome. One such moment was when I first mentioned silver backwardation to him about a year ago. We carried on a discussion at great length and I thought we were on the same page. Then, out of the blue, Hyde looks at me and asks: "what does this have to do with the backward asians"? I sat in stunned silence for a few moments while this sunk in...then I burst into hysterical laughter. (Just typing that is making me laugh again.) Anyway, my fellow Turdites, I hope you understand this important phenomenon a little better than old Hyde because we're about to talk about it.

Here's a definition from Wikipedia:

It is argued that backwardation is abnormal,^[who?] and suggests supply sufficiencies in the corresponding (physical) spot market. However, many commodities markets are frequently in backwardation, especially when the seasonal aspect is taken into consideration, e.g., perishable and/or soft commodities.

In Treatise on Money (1930, chapter 29), economist John Maynard Keynes argued that in commodity markets, backwardation is not an abnormal market situation, but rather arises naturally as "normal backwardation" from the fact that producers of commodities are more prone to hedge their price risk than consumers. The academic dispute on the subject continues to this day.^[2]

As you likely know, the silver market is currently in backwardation on the LBMA. This is, potentially, a significant development. However, there are varying explanations as to what this means. Here are just five of the myriad rationale available to you via the internet:

1) http://seekingalpha.com/article/252741-why-silver-backwardation-matters

2) http://www.marketoracle.co.uk/Article26239.html

3) http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/2/10_Turk_-_Silver_Backwardation_for_Years,_Possible_Hyperinflation.html

4) http://www.zerohedge.com/article/silver-bullion-backwardation-suggests-supply-stress

5) http://www.gotgoldreport.com/2011/02/near-zero-contango-in-comex-silver-futures.html

In the end, I'm not convinced that this is as big of a deal as some would have you believe. It may become a big deal but its not a big deal yet. Silver in backwardation can indicate a short-term supply squeeze. It can also simply indicate a lack of speculative buyers in the forward contracts. I suspect that, for now,  what we have on our hands is a combination of both. What that means for price in the near term is difficult to ascertain. My guess is this:
1) Physical silver truly is in short supply.
2) In time, buying of the forward contracts will lessen the backwardation.
3) Silver will continue to rally, all the while maintaining a small backwardation.
4) This ongoing backwardation will ultimately be interpreted as simply as an indicator of consistent demand for physical silver, not a signal of the impending destruction of The Death Star, and will become the "new normal" in the precious metals market.

Please feel free to share your opinions in the comments section.

OK, back to business. Harvey didn't have anything particularly exciting to say tonight but I did find this nugget from Jeff Nielson: http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=16527:shock-and-awe-in-precious-metals&catid=42:rokstories

And this is certainly interesting as the US$ does not have the same luxury(?):
http://www.telegraph.co.uk/finance/comment/jeffrandall/8284235/Buy-euros-the-single-currency-is-finished.html

Silver is maintaining its toehold above $30.50 with a last of 30.59. Lets hope that holds overnight.

Finally, today is Valentine's Day so I'd like to sign off with a dedication to the lovely and gracious Mrs. Ferguson, without whom none of this would be possible. In her eyes, I see the "resolution of all my fruitless searches".  I love you, sweetie.
(and yes, I'm hoping this increases my chances for a little lovin later).   Turd out.  ;)
http://www.youtube.com/watch?v=o7WtavVdBCk