One or more entities must be desperately short of physical silver...

Too bad - VHF

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Silver backwardation is here

Izabella Kaminska

January 21, 2011

Something is definitely up with silver.

Earlier this week we reported that rumours of physical silver shortages were doing the rounds in Europe.

On Friday, something stranger has taken place.

The silver forward rate — known as SIFO and published daily by the London Bullion Market Association — did something very unusual over the course of Wednesday and Thursday.

It plunged into negativity.

Here’s the most watched three-month rate:

Of course, this rate alone means very little. It is usually compared to Libor — since precious metal market rates for gold and silver are accounted for as a money proxy (time value of money and all that, effectively).

Notably, this spread (known as the silver lease rate) sees SIFO completely breaking out against recent norms:

And the last time that happened was… 2008:

Now, as far as we can see, all this may be down to the fact that the forward dollar cross currency rate, XAGUSD, has gone into backwardation at the very front end.

Notice how the bid for the spot rate was last quoted at 27.3500, while the next quotes up until two weeks (2w) ahead fall below that rate:

That, of course, suggests to the lay observer that demand for the physical stuff is at unprecedented levels.

We will, though, look into getting some professional comment about what all this really means.

For the time being, it is worth remembering that silver bullion markets have always been more illiquid than those of gold.