Monday, February 7, 2011

Is Gold money? And what's going on with Silver?

Some fascinating developments in both Gold and Silver this weekend that are worth noting.

Many of you are aware of the turning tide with Central Banks around the world dramatically increasing their Gold reserves, but we often hear precious metals dismissed as the preserve of Gold and Silver 'bugs'.

Faithful readers know that I speak about the topic because I believe the fortunes of these metals are changing dramatically, a trend the represents a tremendous opportunity.

And in a sign of Gold’s further remonetisation in the global financial and monetary system comes word this morning that JP Morgan will now accept physical gold bullion as collateral.

Speculation is that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. It is important to note that they will not accept ETF trust gold as collateral. But real gold... for JP Morgan gold is money.

Don't they know you can't eat it or heat your home with it?

Morgan is not the first, either. In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds.

Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral.

JP Morgans’s move shows how gold bullion’s fungiblity and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system.

Meanwhile on the Silver front, there was a very important development this weekend.

Over the past few months, Silver has been showing sings of significant shortage. There has been a shrinking inventory on the Comex in the face of rising prices where the registered inventory now stands at a lowly 43 million ozs.

Anecdotal evidence suggests tight supplies everywhere and there are reports of refineries refusing to take new orders due to insufficient silver feedstock.

News out of China recently showed that China's net imports of silver quadrupled in 2010 to 3,500 tonnes (112 Million ozs). China has traditionally been a silver exporter. For example, in 2005 China made net exports of 3,000 tonnes of silver.

Then there were US mint silver eagle sales last month which set a record of 6.4 million ozs sold. If this torrid pace were to continue all year, the United States would have to import silver for the first time to meet the legal requirement to supply silver eagles.

But by far the most significant piece of news was that Silver entered a zero contango and on Friday closed in complete backwardation on the Comex, possibly the first time in history that this has happened.

In January Silver traded in backwardation between the spot price and futures contract up to one year out. But now the entire futures structure is in backwardation.

In plain English, this is a definite sign that there are shortages of silver.

Contango is where the spot price of a commodity is lower than the following futures contracts. That is the normal condition in the precious metals futures markets.

Contango is a sign that a commodity is in ample or adequate supply.

Backwardation means that the cash or spot price is higher than the futures price for the same commodity. Backwardation occurs when demand for immediate delivery outstrips the market’s ability to deliver the commodity. Backwardation occurs when there are too few sellers of the physical commodity to accommodate all of the actual buyers, so a near-premium develops to compensate the sellers willing to part with metal in return for taking delivery later.

When there is zero contango, it means that there is not even one futures contract that is higher than the current spot or cash price. Zero contango and structural backwardation (where each succeeding futures contract is lower for most or the entire strip) is also known as an “inverse carry” market because the futures no longer compensate holders for the cost of carry, capital, storage and insurance relative to the spot price.

It cannot be overemphasize how unusual and rare it is to have zero contango in the silver futures.

That means that there is heavy demand for immediate delivery silver. It means that silver players are earning a premium to sell physical for delivery now and to wait for the return of their metal until the March contract, the near active contract, which is trading at 1.6-cents lower than spot.

Full-blown backwardation has arrived in the COMEX silver futures market. Backwardation suggests that competition for whatever metal is available is heavy and most analysts consider silver backwardation to be a decidedly bullish condition.

These are significant developments and worth keeping an eye on.

Finally there is this latest offering from the Royal Canadian Mint:

The Mint is offering a new $20 face value coin that is being sold for $20 with free shipping. The coin is pure silver. A $20 silver coin for $20?

This return to silver currency is an interesting development to be sure. But take note, there are only 200,000 coins being minted and there is a limit of 3 coins per person (available only to Canadians, sorry). From the Mint website description:

  • Strictly limited new edition. Authorized by the Government of Canada. Only 1 in every 175 Canadians can own one. This new Canadian silver commemorative coin is legal tender with a value of $20. It is available for the official price of only $20. You simply exchange $20 from your wallet for a $20 coin of pure 99.99% silver.

It also means when you want to get rid of it, you simply take it to the bank and get $20 in fiat currency.

If you are interested you can get them from the Mint at this link.



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  1. The $20 coin weighs 7.96 grams, or 1/4 of the troy ounce. Today's price is $29 something, not $80. Also, they want to know too much about you at the checkout. Bad offer, IMO.

  2. I just order 3, thanks for the tips!

  3. "Also, they want to know too much about you at the checkout."

    as most know well gold at least has been illegal to own and confiscated

  4. I thought you were going to write about this:

    "$2,000 Gold And 10 More Surprising Predictions From Credit Suisse"