Monday, February 14, 2011

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

73 comments:

  1. LOLOL

    I just read this post to my gf and she laughed hard and said "Awwww, I hope Turd gets some action!"

    GREAT post tonight, much needed sobriety about a potential COMEX explosion. Not gonna happen. Nor will the USD evaporate and vanish into thin air as many seem to imply

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  2. Hey Turd, thanks for being so thorough explaining backwardation, and on Valentines Day no less! Give my love to Mrs. Ferguson, if you know what I mean. Mrs. Scratchy is out of town so I'm going to click on all of your ads and hope one of them has some bikini models. Also when I get my tax return I will "Feed the Turd" just prior to buying my next batch of silver rounds, you've earned it!

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  3. This clip sums it all up nicely for tonight...

    http://www.youtube.com/watch?v=xxvdvoQgAy8

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  4. This comment has been removed by the author.

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  5. Sounds like it is not just silver and gold that is up!

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  6. I think the paper price will go to 0. I have given this a lot of thought.

    The Wynter Benton scheme works "if" they settle in cash + premium. I believe the CME will change the rules to settle in cash at the spot price. The rules will change to protect the rule makers. They changed the rules on the Hunt brothers (more than just margin increases) and Jim Rickards stated "cash settlement" a few months back on King World News. If the premium on settlement disappears, the short sellers will be emboldened to flood the market by selling more paper this will drive the spot price down. There will cease to be long buyers because they will know the paper is worthless. Lots of sellers and no buyers...

    (Paper) Price goes down.

    Someone please explain how this will not happen. What am I missing?

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  7. I think you said it yourself best "There will cease to be long buyers because they know the paper is worthless"
    In other words a new price mechanism will be discovered and it would need to be able to deliver.
    GLD and SLV are the obvious targets and then Sprott's funds.

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  8. As regards Winter Benton
    Here is my position: http://screwtapefiles.blogspot.com/

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  9. legerde,

    FOFOA has some similar thoughts - but he believes that after the precious metals collapse then we wait a time... then we get freegold. It's a very interesting concept. Here is his diagram:

    http://1.bp.blogspot.com/_cvdgPlEKW9k/TJ1k2Kw5ipI/AAAAAAAABcc/n8pY_udAeQE/s1600/Freegold_future_chart.jpg

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  10. "It can also simply indicate a lack of speculative buyers in the forward contracts."

    Why would anyone pay more for current contracts if they could buy future contracts at a cheaper price if there weren't a supply problem? Can someone explain that?

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  11. Made my $1 contribution toward the new website. Cheap price to pay for the amount of info you put out along with readers.

    Haven't seen anyone post this yet, but silverfuturist gave you a shout out again!

    Silverfuturist loves Turd

    Word verification: flert

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  12. here's hoping the wife comes through and doesn't put the turd into any uncomfortable "backwardation" of his own.

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  13. Here's a bit more about the backwardation issue. Chris Marchese writes some good stuff and I'd recommend checking out his other seekingalpha articles.

    http://seekingalpha.com/article/248146-silver-multiple-bullish-indicators-signal-breakout

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  14. Speaking of Chris, he just posted another article worth checking out:

    http://seekingalpha.com/article/252785-silver-is-on-the-brink-of-a-breakout

    BTW LC, I wasn't trying to give you a hard time, just trying to make sense of what's going on.

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  15. Good post at jesse's cafe americain http://jessescrossroadscafe.blogspot.com/
    re: comparing usa post 2010 to japan post 1990 is retarded

    "
    As I said, Japan, around 1995, went into a full peak cheap oil panic. A lot of the government borrowing went to what is characterized as "building bridges to nowhere", but I would characterize it as building some bridges to nowhere, building some airports in nowhere, and fixing the entire rail and road infrastructure of the country.

    All the bridges and tunnels have been steel plated reinforced, all the bridges are in perfect repair, and the Shinkansen system will next month be extended all the way from Aomori to Kagoshima.

    In other words, I think they knew this 15 years ago and did everything that requires a lot of energy, such as steel, asphalt, cement, and completely the public transit infrastructure. The per capital floor space in Tokyo was doubled.

    So, if we really do have a decade of serious energy problems coming, Japan has become about as energy efficient as it can be, with further improvements coming as appliances are replaced, etc.

    The US has done nearly nothing, although I did note that the gasoline use declined by 7% in one year. There really is a lot of squandering going on. Now, however, the US needs to completely reconstruct its infrastructure, and it doesn't have the money or energy to do it.

    This is why I have thought for more than a decade that the trigger for a really nasty collapse of the dollar would be peak cheap oil.

    Do they realize that if the dollar drops by half that oil becomes $200 a barrel? Gasoline would be over $5, and the country would be paralyzed. If the dollar drops more than that, the existing infrastructure would become nearly useless and worthless.

    I am afraid that the US has already passed the point of no return.  Had the cheap oil continued, the ponzi could have continued for a good while longer."

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  16. Meanwhile PIMCO, the biggest bond trading firm, is reported to have dumped a huge chunk of its Treasury holdings. Abandoning the ship, baby.

    http://www.gata.org/node/9607

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  17. talked to my supplier today..some guy randomly called him, bought 25 monster boxes...who the fuck needs 25 monster boxes? Tick tock, tick tock, time is on or side Blythe

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  18. mythblasters, that's a damn good question and I'd like to hear any rational answers...

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  19. Black OPS trading discusses today's silver and gold technicals (skip forward to 4:30):

    http://www.youtube.com/watch?v=h6Hcs0ybOEY

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  20. Yes, flaunt, that would seem to be a bit of a paradox. You almost expect some "opportunity arbitrage" would close the gap.

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  21. Chris Marchese says Perth Mint out of 100oz bars. Not true - see here:
    http://www.perthmintbullion.com/au/Buy-Silver-Bars.aspx

    But they are currently out of 1kg bars.

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  22. At my age, you gotta strike while the iron is hot...if you get my drift.

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  23. As a father of three, I certainly do get your drift

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  24. I believe this is on topic, per your headline and anecdote...
    This elderly Chinese lady, living in the US, has a regular event, she gets some yuan sent to her from home and of course has to convert in weekly at her local bank. Things are pretty routine for years, but then she notices she is getting slightly less dollars for her yuan, and then one day she sees a marked difference.
    " Hey now, why you give me only $325 this time?"
    The teller shrugs and says, "Fluctuations".
    "Oh yeah? Well fuck you too round-eye!"

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  25. Turdle, he said they recently ran out which is true... Check this blog entry of theirs:

    "On January 27, I wrote: “Regarding supply of 100oz silver bars….. these bars are just suffering a temporary shortage due to demand and general production pressures. Our online store has some available today but restocking probably wont occur until March.”"

    http://www.perthmintbullion.com/blog/blog/11-02-10/100oz_Silver_Bars_Back_In_Stock.aspx

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  26. Actually re-reading it they may not have completely run out, but were close enough to feel inclined to post that above.

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  27. Heller talked about physical shortage.

    http://news.coinupdate.com/more-indicators-of-physical-silver-supply-squeeze-0680/

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  28. flaunt,
    gotcha.
    Then on Feb 10 they said on their blog:
    "Today, I am pleased to let you know that we have been able to re-stock earlier than expected, but quantities are still very limited! Unfortunately, 10oz and 1 kilo bars are now temporarily out of stock."

    I actually bought some last week.

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  29. Can anyone recommend a good site for tracking real-time silver futures volume during NYMEX please?

    Thanks

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  30. Similar jokes.

    (* Don't take it badly if you are an Italian, just silly jokes. ^_^ )

    A bus stops and two Italian men get on. They sit down and engage in an animated conversation.
    The lady sitting behind them ignores them at first, but her attention is galvanized when she hears one of the men say the following:

    "Emma comes first. Den I come. Den two a$$es come together. I come once-a-more. Two a$$es, they come together again. I come again and pee twice. Then I come one last time."

    "You foul-mouthed swine, " retorted the lady indignantly. "In this country we don't talk about our sex lives in public!"

    "Hey, calm down lady," said the man. I'ma tellin' my frienda how to spella Mississippi."

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  31. A friend of mine rents a room in his house to a stripper. Pretty girl as you would suspect but the elevator is a little weak and she hilariously mixes her metaphors on a regular basis. Seems that a few days ago some of her co workers were insulting her intelligence and she came home and said to him "I'm not stupid, I have the mind of an eagle!"

    Goodnight

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  32. I saw that.. it's totally crazy... I don't know how they could pull something like that off.

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  33. Citizen Doctor, Earl ... don't get fooled into that nonsense. Stay calm. These guys (and most others as well) are just out for noise, clicks and fame, because they don't earn enough from their trading ... utter nonsense.
    This is what Cyclist had to say on this topic: *** Click ***.

    Imho silver to > 40.

    BTW: Gold just broke out.

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  34. Doesn't make much sense to confiscate gold in US. It's not like American Public are sitting on 10 thousand tons of gold for government to grab. There's simply not enough inside US to back up a new world currency unless it's a global confiscation, which would be an even bigger whopper.

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  35. Speaking of backward Asians, the Chinese have adjusted the impact of food costs from on inflation stats. It's not like people need food, right?


    " China’s inflation accelerated in January as prices excluding food rose the most in at least six years, bolstering the case for more interest-rate increases to tame overheating risks in the fastest-growing major economy.

    Consumer prices rose 4.9 percent from a year earlier after a 4.6 percent December gain, the statistics bureau said on its website today. A separate central bank report showed banks signed 1.04 trillion yuan ($158 billion) in new loans, less than forecast while still the third-highest January total.

    The acceleration in inflation reflects rising rents, a 48 percent surge in money supply in two years and increasing domestic demand in the nation that’s replaced Japan as the world’s second-biggest economy.

    Food prices climbed 10.3 percent last month from a year earlier, according to today’s report. Vegetable prices rose 2 percent, fruit prices surged 35 percent and grain rose 15 percent, according to the statement.

    Under revised CPI weightings, the component for residence- related charges, which include rent and utility costs, was increased by 4.22 percentage points, the statistics bureau said. Other categories got smaller weightings, with food declining by 2.21 percentage points, the agency said.

    It didn’t give the exact make-up of the index. Food previously accounted for a third of the basket of goods and was the main driver of inflation last year. Residence-related costs jumped 6.8 percent in January from a year earlier, the most since August 2008, today’s data show.

    http://www.bloomberg.com/news/2011-02-15/china-s-january-consumer-prices-increase-4-9-producer-prices-climb-6-6-.html

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  36. The Nielson article is a must read! I tend to get too focused on the daily action and the article brings perspective back to the cause.

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  37. Morning thought as Gold rises in over night action .... could all this focus on Silver the past six weeks have been designed to take our eyes off of Gold?

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  38. Nice Jump in Gold today... heading 1400+

    FUBM ...


    Turd gogogo

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  39. To confiscate gold - into the face of free markets in russia and china and everywhere else on this planet - would be like capitulation of capitalism itsself.
    Long before gold - they had to confiscate wheat, crude .. and other essentials.

    You can bet your shirt - that confiscation of gold is the absolutely last shoe to drop - and only in the face of plain Armageddon or dictatorship just around the corner.

    Never to happen imho - long before they will create hard asset backed new currencies or devaluate currencies.

    As it simply means: we have lost control.
    Can you imagine an american president to say - we have lost, no free markets anymore, capitulation as far as you can look ????

    That may change though, once there is a one-world-governmint established. Maybe around 2025-2035 before planet X arrives ... and desperation on global scale ... or so ... to steal all the gold available ... no, no - all that confiscation talk is just noise to catch the stupid fish ... works each time, as sure as there come a night after each day ... lemmings.

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  40. It's a whack a mole market for poor Blythe and the EE; seems there are too any rodentia to keep down all at once.

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  41. Turd - a suggestion for the new site: a spell checker for comments .. and smilies ... ;)

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  42. Gold up against ALL currencies, which is a sign of REAL strength. Bonus time when the dollar is down as well, so price in dollars is even more to the plus for us Americanos. Up least against Euro, but still up.
    Very nice.

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  43. I'm old enough to remember the Ed Sullivan show, and the circus act with the guy who would have plates spinning on like 10 different sticks. No biggie at the beginning, but as he added more sticks and plates he'd have to rush back to the earliest ones and spin the plates, etc. Got very hectic.
    I have this visualization of the EE laying out over all these suppressed beachballs, kicking them back underwater as they relentlessly float back up- a very trying occupation. At some point gravity always wins.
    Reminds me of a great Mitch Hedberg line...
    I tried tennis once, but gave it up. I found out quickly I was never going to be as good as a wall. man, those things are relentless.

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  44. wineguy, been wondering that for some time now. But for this huge silver campaign, there'd be even that much more interest in hoarding gold. Depends I guess on whether gold, silver or both will be the metal to own after a possible collapse. While FOFOA's a big proponent of gold, I guess I hedge my bets by owning some silver physical as well. I think the best analogy I read & the way I'm shifting my defensive strategy is to have emergency supplies, some currency on hand, physical silver for barter if necessary and as a last line of defense, gold.

    If as David Morgan said during the Cheviot conference is true, that X # of ounces of silver will buy an averaged price house, even better.

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  45. I hoe nobody is in the below mining co.

    Of that 100 million ounces, the standout was the 70 million ounces sold forward by Mexican silver company Minera Frisco...in which Mexican billionaire Carlos Slim has a huge position. These hedges were placed at $18.82 the ounce...and the last time we were that low in price, was back in the third week of August 2010...so that's probably when it happened.

    Not only did they sell forward a huge chunk of silver...but they also did it for gold, lead, zinc and copper. Silver and gold hedges run for three years...and the base metals for two.

    This is what Ted had to say about it in a note [headlined "Hedging Insanity"] to his subscribers yesterday..."I don't think I have ever seen such a dangerous hedge book [and I've seen plenty]. By my calculations, the company is already in the hole for upwards of $600 million on all its metal hedges...with silver accounting for $300 million of that total. Its additional exposure will be many times that amount if prices move higher, as they are expected to do."

    This sound exactly like what happened to Apex Silver many years back...and they ended up filing for bankruptcy. It's also similar to what happened to Ashanti Gold...and AngloGold had to come along and take it over because their hedge book had become toxic. And let's not forget a Canadian gold company called Cambior. As Ted went on to say..."The hedging experience [also] cost Barrick Gold $10 billion in total."

    Based on what happened to all four of these companies, I doubt that Minera Frisco will survive long enough to pay out its hedge book...and I also doubt that the owner [billionaire or not] will have deep enough pockets to cover his company's ever-increasing losses.

    The comentary is from a daily email I get from casey Research (Ed Steer)

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  46. Is this the catalyst that's going to get our "renewed speculative interest" as Dan Norcini has said we need?

    Precious Metals Surge Immediately On Higher Than Expected UK Inflation

    http://www.zerohedge.com/article/precious-metals-surge-immediately-higher-expected-uk-inflation

    Happy Tuesday!

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  47. If you haven't checked since saturday morning, there's a lot of new stuff over at KWN. Some of it is fresh today.

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  48. Yeah I just noticed something from Eric's "London Source" about Asians buying SLV to take delivery.

    Things get more and more interesting every damn day...

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/2/15_London_Source_-_Asians_Buying_SLV_to_Take_Delivery_of_Silver.html

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  49. And just like that, silver catches and goes ahead of gold in % gain. Gold in Euros catching u also.
    PM killing it against all fiat shit, me likey

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  50. My miners are still lagging, in aggregate still about 9% down from the beginning of the year. Is this lag normal as the prices rise?

    Thanks!

    Kiwi (Bird with a big yellow hat)

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  51. And I will say I'm getting a little tired of my cotton stocks....it's like a freekin light switch, it goes limit up or limit down on any given day, for no particular reason at all. At least with the PMs there is endless speculation to mull on.... ;-)

    Kiwi (small bird, big hat)

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  52. The market is well bid this morning, hopefully Blythe doesn't get naked at 8:25

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  53. kiwi
    gold and silver are still down for the year (but coming back!). When the metals make new highs, so will your miners (one hopes).

    Various miner ETF's are still down 4-8% for the year. Sounds to me like your miners are right around where you should expect them to be. Sit tight.

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  54. 8:30am 9:30am 10:30am... What is it about those hours that the shorters love so much?

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  55. kiwi,

    Since Jan 3rd:

    My US mining stocks on AMEX are down 12.61%.
    My Canadian stocks on TSE are down 2.95%.

    Don't know why the difference. To be fair, I only own two US stocks - Alexco and SIL (Silver Miners ETF).

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  56. Jeffrey Sachs tells it like it is:

    http://www.youtube.com/watch?v=bCPz2SzROFQ

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  57. I'm seeing some upward movement in the asks just before the open in the miners. Haven't seen that in recent days. I think they are waiting for the move through 31 as there is a lot of uncertainty and fear. Maybe today is the day!

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  58. Reefman,

    I also own just a few US stocks AXU, SLW.
    It looks like today is the day we move.

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  59. Urban Survival had a great opening segment on dollar dilution!! As anyone who reads this column knows, Elaine & I have been great fans of gold since 2001 when we made our first purchase at around $275/ounce. Then again, in 2005 when we moved into silver between $6.96-$7.05.

    As I explained then - but it bears repeating once again - the price of the metals doesn't move. Leastwise not by those kinds of numbers.

    Instead, what moves (and this is the Big Ugly Secret of Bankers) the purchasing power of your money gets watered down.

    Sneaking up on my key point: Using the [Minneapolis] Federal Reserves calculator here, and starting with just $100 in 1913, how much money do you think you'd need in today's dollars to give you the same amount of purchasing power?
    Answer: $2,233.91.

    I don't mean to sound like a drooling idiot on this stuff (although there is a certain resemblance, I'll grant you...) but here's the whole key to understanding all financial news which I learned back in the mid 70's:

    Prices don't go up. Purchasing power of money gets watered down.
    And, thanks to the Minneapolis Fed, we can see it in the government's own figures plain as day. Obviously, by dividing that $2,233.91 into our starting $100, we can calculate how much of a dollar's purchasing power is left compared with one dollar in 1913. Blood pressure pills at the ready? Thanks?
    Answer: 4.4764 CENTS! http://urbansurvival.com/week.htm
    ............................
    Much more at Urban Survival on questions asked here from solar generators; to food & water storage; common sense preparations of surviving in an uncommon world!!

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  60. Thx for the link,afrum.You're more subdued today. Hope it's not a trend.

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  61. Hey, that's not Peter Gabriel!

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  62. Any thoughts on this Turd ? Was in the Financial Times today, entitled 'Silver miners start hedging on price falls'. A legitimate factor for all Turdites to be aware of...

    http://www.ft.com/cms/s/0/af6a0ca8-386c-11e0-959c-00144feabdc0,s01=1.html#axzz1E3i0XRTH

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  63. I will give you and yours some backwards action. after we own you and your land

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  64. eToro is the #1 forex trading platform for new and advanced traders.

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