Silver Goes Into Backwardation As Price Breaks $70 (And Live Q&A)

Key Concepts

• Backwardation: A market condition where the futures price of an asset is lower than the spot price, indicating immediate demand and potential supply shortages.
• COMEX: The Commodity Exchange, a futures and options market.
• Spot Price: The current market price for immediate delivery of an asset.
• Futures Price: The price agreed upon today for delivery of an asset at a specified future date.
• ETF (Exchange Traded Fund): An investment fund traded on stock exchanges, often tracking the price of a commodity like gold or silver.
• Bricks: The economic alliance of Brazil, Russia, India, China, and South Africa, potentially challenging the dominance of the US dollar.
• Dolarization: The process of a country adopting the US dollar as its official currency.
• Strategic Minerals: Minerals deemed essential for national security and economic stability, like silver due to its industrial applications.

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Gold and Silver Market Rally – December 18, 2023 Analysis

I. Market Overview & Price Action

As of December 18, 2023, both gold and silver experienced significant rallies. Gold futures were up $96.40, with the spot price increasing by $110, reaching a new all-time high of $2,043.60, only 50 cents off its intraday peak. This rally began in January 2024, more than doubling gold’s price from under $2,000. Silver’s spot price was nearing $69, with interesting dynamics between the spot and futures markets.

II. Silver Market Dynamics & Potential Shortages

The silver market exhibited unusual behavior, with the futures price briefly trading at a discount to the spot price (backwardation) earlier in the day, mirroring conditions seen in October during a period of reported shortages. While the market had seemingly “normalized” to a less than a penny difference between spot and futures, it briefly re-entered backwardation. This fluctuation suggests underlying tightness in the silver supply. The speaker believes the metal moved from COMEX to London, but this movement wasn’t sufficient to permanently resolve the supply issues. A record deficit, coupled with continued inflows into silver ETFs, further exacerbates the situation.

III. Historical Context & October 2023 Silver Squeeze

The speaker references the silver squeeze in October, where backwardation reached $3, a historically unprecedented level, potentially exceeding even the Hunt brothers’ era. This event signaled a breakdown in the silver market’s normal functioning. The current fluctuations in the spread between spot and futures prices are seen as an indicator of ongoing supply issues, though not yet as severe as in October.

IV. Global Factors Influencing Precious Metal Prices

Several global factors are contributing to the rally:

• Geopolitical Tensions: While acknowledged, the speaker believes geopolitical tensions are not the primary driver of the price increase.
• US Monetary Policy: Anticipation of potential US Federal Reserve rate cuts is contributing to the rally, although the speaker questions the consistency between market expectations and statements from former President Trump regarding a potential 1% interest rate.
• China’s Role: Metal is flowing from COMEX to London, and China is facing its own supply issues.
• India’s Demand: A surge in demand from India, including the addition of gold and silver to pension plans, is adding pressure to the market.
• BRICS & De-Dollarization: The speaker suggests the growing influence of the BRICS nations and potential moves away from the US dollar are contributing to the demand for gold as a safe haven asset.
• Industrial Demand: The increasing industrial demand for silver, particularly in solar panels, is creating a structural imbalance.

V. Mining Sector & Investment Implications

Despite the rising metal prices, retail silver sales remain high. The speaker notes a discrepancy between gold, where central banks are actively buying, and silver, where retail investors are still largely selling. However, he believes the persistent deficits will eventually drive prices higher. He suggests that mining stocks, while lagging behind bullion price increases, may still be undervalued, particularly if the price of silver continues to rise. He cautions against relying solely on day-to-day correlation between bullion prices and mining stock performance.

VI. Bloomberg’s Perspective & Long-Term Outlook

Bloomberg reported that gold and silver hit all-time highs amid rising geopolitical tensions and expectations of US rate cuts. The speaker, however, believes the rally is the result of long-term, inevitable forces, including the silver imbalance that began in 2020. He posits that the current rally is still in its early innings, especially for gold, and that a significant revaluation of gold could occur in the future, potentially linked to global debt loads and the rise of the BRICS nations.

VII. Technical Analysis & Market Volatility

The speaker acknowledges the potential for volatility, noting the rapid price increase in silver over the past month. He suggests a pullback is possible but believes supply issues could limit the downside. He draws a parallel to the cocoa market, where a supply shortage led to a dramatic price spike.

VIII. Key Quotes

• “I don’t think there’s anyone who knows exactly how this is going to play out.” – Emphasizing the uncertainty in the market.
• “The longer it stays [high], the more that these companies are actually capturing it.” – Regarding the potential for mining companies to benefit from sustained high metal prices.
• “I think gold you can make a more… I won’t say what anyone else would do. I would have a higher degree of confidence of gold being in the earlier innings over a longer period of time.” – Expressing a bullish long-term outlook for gold.

IX. Data & Statistics

• Gold Price Increase: More than doubled in the last two years (from under $2,000 to over $2,043).
• Silver Price: Approaching $69, with fluctuations in the spot/futures spread.
• Silver Backwardation (October 2023): Reached $3, an unprecedented level.
• US Retail Silver Sales: Remain high despite rising prices.
• US Treasury Debt: The speaker believes addressing global debt loads is a primary driver of the rally, but this issue remains unaddressed.

X. Conclusion

The gold and silver markets are experiencing a significant rally driven by a confluence of factors, including geopolitical tensions, monetary policy expectations, industrial demand, and global economic shifts. While volatility is expected, the speaker believes the long-term outlook for both metals is bullish, particularly for gold, and that the current rally may still be in its early stages. The silver market’s unique dynamics, including potential supply shortages and high retail sales, present both opportunities and risks for investors. Continued monitoring of the spot/futures spread and global economic developments is crucial for navigating this evolving market landscape.