Corrections and Perception Shifts
By Dr. Jeffrey Lewis
price of silver futures contracts have been regularly flirting with a state of
backwardness ever since the 2008 Financial Crisis, which is a sign of a growing
physical silver shortage.
state of backwardness occurs when the front month silver futures contract
commands a price premium to the subsequent months’ contracts.
one hand, this situation could actually provide larger traders who own the
physical silver with an opportunity to simultaneously sell it and purchase
futures contracts to recover their metal holdings for a net profit.
Paper and Physical Silver Price Backwardness
Backwardness also tends to indicate that industrial and personal silver
consumers need the metal more now, rather than later.
backwardness in the silver market is driven by perception on The Street, this
phenomenon would actually reveal the true fate of larger traders with
insufficient physical silver supplies available to profit from this apparently
Nevertheless, the silver futures market ceased being a physical market years ago
when the overall short position became dominated by just a few bullion banks.
Whether these players control 25% or 50% of the net shorts, this concentration
influences the paper price.
People Will Pay Whatever it Takes for Silver
price of silver will ultimately be driven by premiums, which are ultimately
determined by demand at the retail level. As confidence is lost in the futures
market and shortages develop at physical metal dealers and scrap flows drop
because they have already been panned out, an industrial panic will compete for
the large (1000 ounce) silver bar supply.
Following the notable silver rally in 1980, the market saw a divergence in
demand flow. One consisted of a reduction in demand for increasingly expensive
silverware and silver jewelry, which fell out of favor as wealth declined and
cultural preferences shifted.
contrast, silver production and demand for use in electronics and other industry
took off, although governments sold their stockpiles of silver cheap, indirectly
debasing their paper currencies along the way.
Silver Price Corrections and Perception Shifts
recent downward corrections in the price of silver make it look like the market
is being pushed off a cliff by the concentrated shorts in order to influence the
perception spectrum of retail investors.
Nevertheless, these downward moves do not seem to consist of reality-based
corrections, because the price of silver was never too high. The price was just
too high for the shorts and so it needed to be muscled lower.
their large short positions become too deeply underwater, the threat of panic
short-covering tends to raise its ugly head. Although the deep-pocketed bullion
banks seem unlikely to cover their shorts quickly, a speculative buying panic
will move money into each and every physical or derivative form of silver that
Margin raising, coordinated dumping and halting futures trading would not stop
the rally in silver once the market’s perception of the metal shifts along the
spectrum from fear, disinterest and disdain towards curiosity, interest, action
and — finally — greed.
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