Exposing Fraud in the Silver Market

What backwardation is telling us...

   In the investment world, It is always best to look for red flags before deploying capital. The first red flag can often be disregarded as little more than an anomaly. When the second red flag comes along, it’s either one hell of a coincidence, or the universe is trying to tell you something. The third red flag? Well, that’s a pattern, and you better take heed. Today’s blog is designed to expose the red flags and false narratives currently permeating the Silver market. As regular readers of this column know, Bag has spent 35 years as a market maker in physical silver. Silver Eagles, rounds, sterling, 100 oz bars, 90 bags - you name it - Bag has bought & sold tons of it.

    Bag has never been too keen on trading in the silver futures market for two reasons. The first is it’s a highly (20x) levered market. The human brain is not designed (with rare exceptions) to fully comprehend the power behind exponential numbers. In other words, the dangers of trading in highly levered markets are not easily understood. The single most significant cause of the stock market crash in 1929 and the generational long depression which followed was the widespread use of (only 5-10x) leverage. When you trade anything with the kind of leverage they were using back then, human frailty mandates, it is only a matter of time until it all comes crashing down.

    The second reason Bag has done very little trading in the silver futures market is due to the fact it is a world rife with “paper promises.” The kind of world where the Charles Ponzis and Bernie Madoffs make a living. Bag much prefers the cash & carry world where you hand me a wad of cash, I hand you some silver bricks - and we both go on our merry way, transaction complete. The futures market does not work this way, as transactions are almost never completed. The futures market is little more than two parties putting up cash and gambling on opposite sides of which way the market price will move before some arbitrary date in the future. Heads I win, Tails you win, LFG.

CARRY & CONTANGO:

    For the sake of discussion, let’s assume the current spot price of Silver is X. When you go into the futures market and contract to buy silver a year from now, you can expect to see the price quoted above the current spot price of X. The reason it is quoted above X is the “CARRY” charge.  CARRY is the sum of storage costs + interest. These charges are fair when you consider the guy on the other side of the trade who is promising to sell you the silver is without the use of his money while he waits the year for you to pay. Since you are the one employing leverage, effectively using his money, it is only right you pay him some interest.

   So with Spot silver currently about $20, if you were to enter the futures market and look at taking delivery of silver a year from now, you should expect the price to be $20 +, say, 4% interest (80 cents) + 1% storage costs (20 cents). Add it all together, and your contract price should be about $21.00.  The further you contract out into the future, the greater the “carry” charges. The fact future prices are higher than spot prices (due to CARRY) is very normal, and is known as “CONTANGO.”  It is a sign of a healthy, honest market.

BACKWARDATION:

     The polar opposite of contango is “BACKWARDATION.”  This is a situation where the futures price is BELOW the spot price. It is very rare, having occurred only briefly in the silver market a handful of times in the last 35 years. The reason it has occurred only briefly is that backwardation presents the opportunity for “risk-free” profits for anyone holding silver. For example, Bag could dig up all the 1000-ounce bars buried in his backyard, sell them today at spot, put the money in US treasuries currently earning 4%, and contract to get the silver back at a price lower than current spot, at some point in the future. In other words, the futures market is offering Bag interest on his silver position AND an immediate profit by selling high today and locking in a lower buyback price in the future.

    No-brainer arbitrage opportunities like this are very rare. With their insatiable appetite for free money, the Wall Street suits are historically quick to pounce on situations like this. Their willingness to bring silver to market & pick up the risk-free profits effectively pushes the market back into contango. This explains why backwardation in the metals market, historically, never lasts. The free money is just too enticing.

THE LAST CONTANGO:

     For the better part of the last six months, the silver market has been in backwardation. This is an unprecedented length of time. Persistent backwardation is the proverbial red flag indicative of a fraudulent market. For months now, anyone long physical silver has been offered “risk-free” immediate profit + Interest, to bring their silver to market today. And yet, nobody has stepped in to fill that void and pick up the free cash. How can this be?

   Article after article, like this one (link here) published recently by Zerohedge, are quick to propagandize away this persistent backwardation as just an anomaly. It is “due to strong physical demand right now,” - they say. Bag has no doubt there is currently strong demand for physical silver - he has written about it extensively. But no matter how often TPTB repeats the narrative, the market is in backwardation due to strong demand, know this: there is NO connection between strong demand and backwardation. NONE. When you have unusually high demand, what you should expect to see is a rise in price, not backwardation. When there is surging demand and no corresponding rise in price - well, that is just another Red flag indicative of a fraudulent market.

Please take a deep breath and allow the following two sentences to land:

The market is in backwardation because those of us currently holding physical silver, who are being offered the “risk-free” immediate profits plus interest, do not believe for one second the paper promises to get our silver back in the future will be honored. Simply put, the diamond-handed physical longs are calling the bluff on the paper promises offered by the futures market.

   For decades now, the futures market has dictated the spot price of metals. Those days are coming to an end. Just this past week, one of the country's biggest bullion dealers (Apmex) started waving yet another Red flag by putting out a standing offer of Spot + $10 on all the Silver Eagles you want to sell them. That’s $30 an ounce for what the futures market is telling you should cost $20. A 50% premium!! Ask yourself, which price of silver is more accurate: the price the futures market tells you it is, or the price offered by the guy with an open checkbook?

  Bagholder’s years of experience in the silver market lead him to believe the 50% premium on offer will not be anywhere near sufficient to bring enough supply into the market to meet current demand. TPTB are just chumming the waters with that offer. Bag would suggest the 50% premium to spot currently on offer (which was only 20% in March - link below) will soon be 100%, then 200%, and so on…. They could offer $200 an ounce, and it still won’t balance supply & demand.

The entire narrative in the silver market presented by TPTB is completely woven with Red flags. The futures market is clearly broken, and it is only a matter of time before the rest of the world recognizes the fraudulent scheme for what it is. Persistent backwardation, the end of contango, and soaring premiums for physical silver are all the proof you need to know; the days of the futures market TAIL, wagging the spot price DOG, are over.

Good riddance….

For those interested in more, you can ….

Click here to see why premiums for physical silver are soaring.

Click here for a macro-view of the ongoing fraud that is the futures market.

Click here on what to expect when the futures market defaults.