Thursday, January 20, 2011

Silver Spreads: Contango Crush Update -

Silver Spreads: Contango Crush Update

A Continuation from Yesterday’s Story: Silver Contango Crushed – Short Squeeze Imminent or Position Limit Ruling Fall Out? (below)

Courtesy of FMX Connect

Silver spreads continue to sell off on Thursday. So far, any theories that weaker spreads are ultimately bullish for the physical metal have to be viewed suspiciously. We spoke with a couple of traders on the topic and our revised possibilities list is as follows:


Silver spreads are being sold because..

1. There is a physical short squeeze coming.
2. The appearance of a short squeeze was manufactured as an exit strategy for a long to get out.
3. Spreads are being messed with in light of the CFTC position limit ruling.
4. Two-year silver rusts and spot silver doesn’t.


1. Why is the market lower?
2. It’s an awful lot of money to spend to camouflage your selling. Millions,upon millions of dollars.
3. This theory remains entirely possible but the kind of sophisticated funds affected by the new regulation probably wouldn’t puke that way unless they were blowing out.
4. We’re no chemists, but we suspect this statement is somehow inaccurate.

For the time being, we can not discount that there is a short squeeze coming but more information is needed before we can know for certain. If a bullion dealer is selling spreads because they anticipate making delivery we think we’d probably be the last to know, that’s why we are think it is more likely than not that this a charade. Whatever the message may mean, it is certainly expensive to send.

There is one other theory worth mentioning. The most important thing to know is that history does not repeat itself but it sometimes hums a similar tune. What happened in 1997 we do not think will happen again, exactly the same way. In 97 spreads collapses and the market screamed higher, there was no misinterpretation of the signal. We think someone is being fooled or making a mistake, we just don’t know exactly how yet. There may be a sap at the table, but his identity is unclear for the time being.

FMX Exclusive: Silver Contango Crushed – Short Squeeze Imminent Or Position Limit Ruling Fall Out?

Courtesy of our friends at FMX Connect.

Silver Contango Crushed – Short Squeeze Imminent or Position Limit Ruling Fall Out?

In silver, the contango was hit hard about 3 AM this morning with 2 year futures coming in as much as 15 cents relative to spot. The Z11/Z12 futures spread settled 21.40 yesterday and the market today is 13/15. The H/Z futures spread settled 19.2 The market today is 9/11.

What could cause this?

Factually speaking, 2 reasons cause contango to collapse. The first is interest rates and interest rates would have to decrease a large amount for this type of move in the spreads. The second is delivery concerns. When a producer, bullion dealer, or speculator is short the front month, come expiration, it has a a choice: make delivery or don’t make delivery. There are 2 ways to avoid making delivery, Reissuing, which is essential covering shorts, and deferment. Deferment involves leasing the metal from someone else or rolling your short to a back month.

Last time we saw a contango move this significant was in 1997 before Warren Buffet took delivery. While more information is needed, and this could be a fake out we think the spread’s move is important. It happened during Asian hours and the Asian market has shown strong physical demand. If this continues in conjunction with higher lease rates you will more than likely see a short squeeze. There is another less exciting reason it could be happening. Additionally, it could be related to the CFTC position limit ruling. Silver position limits will be implemented in 2 tiers. The first tier is a limit on front month contracts. The 2nd tier limits the aggregate number of contacts for all back months combined. Someone could just be moving their position around to deal with the new regulatory structure. Our conclusion is that we are going to have a short squeeze or increased volatility in the spread market as major players shuffle their open interest around. Stay tuned..

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