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Message: Silver Backwardation Increases
As noted by James Turk below, the silver backwardation condition is intensifying. The physical strain on the NY cartel must be reaching red alert status.
Cap'n she can't take anymore, she's gonna' blow - VHF
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Turk - Massive Short Squeeze in Silver, Gold to Hit New Highs
Eric King
February 16, 2011
With gold recently strengthening and silver attacking multi-decade highs, today King World News interviewed James Turk out of Germany. Turk commented, “Eric, there are a lot of stories making the rounds talking about silver hedging. People should not be scared by them. When you actually analyze it and consider what is happening, the implications are bullish for silver.”
Turk continues:
“The media is putting this talk about hedging in a bearish light, and normally they would be right to say hedging is bearish for the price of metal. But not now. Even if these reports of new hedges are true - and the rise in silver interest rates recently suggests as one possibility that some hedging may be taking place - the underlying bullish dynamics for silver are not negatively impacted.
In fact, the rise in silver interest rates itself suggests both a desperation to borrow physical silver at whatever cost to meet delivery demands and avoid a default as well as that physical silver is in such short supply people are willing to borrow it at unusually high rates. So rising silver interest rates here is bullish, but let's consider what happens in a hedge.
In a typical hedge, a bullion bank borrows physical metal, which it sells into the spot market in exchange for dollars. The bank then lends these dollars to the hedger. So hedging depresses the spot price. That's why gold had so much selling pressure placed on it in the late 1990s and early 2000s when hedging by many gold mining companies was the rage. But look at what is happening to the spot silver market now.
There is no pressure on the spot price, as evidenced by the fact that spot silver has jumped more than $4 higher over just twelve days while these hedges were supposedly taking place - and of course silver is still in the extreme backwardation that I mentioned when it first happened last week...
It's bullish because it represents a recognition by the big bullion banks that are short silver that they are in trouble and need to cover their losing position.
To explain this point, let's assume you are a big bullion bank with a huge short silver position that is bleeding losses as the silver price rises. What do you do? One thing you can do is to send your marketing teams out to the silver mining companies to get them to hedge - sell forward - their silver production. But instead of borrowing silver which you sell in the spot market, you just borrow dollars which you lend to the mining company and take the hedge on to your balance sheet. You now have a silver asset (the forward you bought from the mining company) offsetting your short silver position. But there are two problems here.
First, you probably are not able to get enough mining companies to sell forward a large enough quantity of silver to entirely offset your short position. So you have only partially covered your short position. That's bad enough because you are not really solving your problem of being exposed to rising prices as a result of your short position, but my second point is even more dangerous to the bank.
Namely, you are borrowing short-term and lending long-term. In other words, you will get silver in say 1 or 3 or 5 years when the forwards mature and the mining companies in the future mine silver which they deliver into those forwards, but that silver coming years in the future isn't going to help you now because you have a liability to deliver silver right now into the spot market.
This imbalance between long-term illiquid assets and short-term liabilities is the fatal dynamic which invariably creates a banking crisis. The bullion bank owns a forward that is a 'paper' asset but has a liability in the spot market to deliver physical metal. Silver that is only going to be mined one or two or three or more years in the future is not going to help the bullion bank with its short position today where it needs to deliver physical metal now or default.
So Eric, regardless whether or not the reports of hedging are true, the underlying dynamics in silver remain very bullish. So expect higher prices and a growing short squeeze. The ownership of physical metal - as opposed to paper-silver - is becoming increasingly important.”
Regarding gold Turk stated,
“Don't be worried about the so-called triple top formed over the last few months. An old and generally reliable adage in technical analysis is that triple tops are always broken. The logic is that if a bull market has enough buying power to take the price back up to form a triple top, it has enough buying power to eventually take it higher. Therefore, look for new highs in gold soon.”
So the commercial shorts in silver are about to be squeezed again and gold is going to hit new highs. All just part of a secular bull market in the metals, sit back and enjoy the ride.
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