Friday, January 21, 2011

Silver is in Backwardation

Per James Turk.

"Silver is in backwardation not just in the short-term, this time it is extending twelve months forward! 

The last time this happened Eric was in January of 2009.  Over the next few weeks silver rose from about $10.50 to $14.50, a roughly a 40% move higher.  The key to understanding backwardation is that the price must rise to entice holders of physical metal to sell and accept a national currency in return.  I think we can expect a similar event to repeat over the next few weeks. 

A similar type of move would clearly put silver well above its previous high.  What this backwardation shows is that there is a disconnect between the physical and the paper markets in silver.  As I said previously, the silver shorts simply cannot hold the paper price down here any longer without seriously discrediting the paper silver market as a price discovery mechanism.

Gold is not in backwardation, nevertheless the demand for physical gold is extremely intense.  With the sentiment ".

If we get fireworks they will start next week, but will explode in March when the exchanges must deliver physical vs just rolling them over.

I have been buying silver junior miners on every significant down day.  EXK and AG are my choices.  I intend to ride this next wave higher in silver with a very large SLW call position, a position I will begin by buying 31 strike calls and selling 30/25 puts.  I will alternate between Feb and March.  If the 50% retrace lines break, I will roll down strikes to 28 and 27/22 or 20.  Any break back above the 20 EMA, and I will go agressively long again.  Let' see what Monday brings.


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