Silver Shortage Looming?

Tuesday, February 15, 2011, 12:22 PM
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The silver market continues to send urgent signals that supplies are very tight, an often bullish condition sometimes associated with rapid price rises.

For those not up on the lingo of the futures market, there are two ways to describe the prices of commodities in the future as compared to today. One describes a condition where commodities cost more in the future than they do today, and it is rather non-intuitively termed contango. If a commodity is "in contango," it is priced higher for delivery in future months than it is for delivery today. Oil is an easy example, as it is nearly always in contango, and for perfectly intuitive reasons: There are carrying costs associated with storing oil (such as interest, storage fees and insurance) and those costs assure that future oil is almost always more expensive than present oil.

The other term describes the situation where the future price is less than today's price, a rare condition for practically every commodity, and it is called backwardation. A commodity that is "in backwardation" is priced lower for delivery in future months than it is for delivery today.

Silver is in backwardation and has been for a while now.


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