A recent article titled ‘India Has a Voracious Silver Appetite’ discusses the concept of backwardation, a situation where the fiat currency price of a commodity is pregnant with a premium the buyer is willing to pay for immediate delivery, such that the price of a commodity for future deliver is lower than the spot price.  Backwardation is the opposite of what is referred to as ‘contango’, where the spot price is lower than the futures price. The article says that “Backwardation seldom arises in the monetary commodity gold or the quasi-monetary commodity silver”, and goes on to say that (with price statistics provided) there has been backwardation in silver for the past twelve months, that “This is a highly unusual event”, and that “it means individuals are unwilling to take the risk of holding national currency illusions or the risk of an exchange’s failure to deliver”.  The author says “Gold and silver are both monetary commodities”, and that “At all times and in all circumstances gold and silver remain money. They are both immortal monetary instruments. Therefore, the only risk they are subject to is exchange-rate risk”.

My Comments:  The author then goes on to say:

•    “silver is an odd monetary instrument because it is also consumed”.  I agree with this, and as I have said in previous posts, for this reason I find silver much more difficult to analyze than I do gold.  I also do not think of silver as a ‘monetary metal’ to the degree most commentators seem to;

•    “Indians in India, being fairly smart, have a voracious appetite for both physical gold and silver. They are a lot smarter than most Westerners who clutch their paper instruments with such blind misplaced faith.  Indians consume/import an estimate 3,000 tons of physical silver per year”.  I am not sure why the author qualified the word ‘smart’ with the word ‘fairly’.  My experience suggests I would not have done that.

The author’s implication is that as a result of silver’s current ‘backwardness’ its price is likely to go up in the near term, or at least that is how I interpret her comments.

Read the article by clicking here.

See Blog Legal Disclaimer

Email this Post to a Friend.

Trackback URI | Comments RSS