Silver Comex September

September 10, 2009 – After being in and out of backwardation several times this year, silver has again slipped into backwardation.  There are however, some notable differences this time.

Early this year the backwardation was mainly in London.  In recent months the backwardation has been occurring mainly in New York, indicating the shortage of physical metal is now on this side of the Atlantic.

More importantly, during the backwardation in London early this year, which was an unprecedented 47 trading days in a row, the silver price averaged $13.02.  Silver in other words was relatively cheap, so a backwardation at those prices is perhaps somewhat understandable.  Buyers of physical silver wanted to back-up-the-truck and buy at those low prices.

Silver today closed in New York $3.63 above the average price from the London backwardation earlier in the year.  So silver is no longer as cheap as it was then.  Also, from its August low only 15 trading days ago, silver has risen 20.0%.  That it today still slipped into backwardation is simply staggering.  Clearly, there are buyers who want physical silver, and are willing to pay for it.

Here are the front month Comex settlement prices for today.

Importantly, the bullion banks that typically arbitrage the various markets have not stepped in to deliver physical metal and buy it back in the future at a lower price, while also avoiding storage costs in the meantime.  Either the bullion banks don’t have the available physical silver to arbitrage, or they are unwilling to take the risk.  In either case, the conclusion is a bullish one for silver.  The possibility of a short squeeze in silver cannot be ruled out, particularly given its very bullish chart picture.

There are two noteworthy points on the above chart.  First, and most importantly, silver has broken through the downtrend line going back to its 2008 high, which was $20.68.  That price now becomes silver’s next target, and it has been my view that this $20-something price will be reached before the end of this year.

Second, note how silver slipped below its long-term uptrend channel after the Lehman Brothers collapse, and then climbed back into this channel.  It is becoming increasingly clear that this break in silver’s price was an aberration that occurred only because of the de-leveraging accompanying the Lehman collapse.  In other words, overleveraged hedge funds and other players threw out the baby with the bath water.  They sold what they could sell, not necessarily what they wanted to sell.

September is an important delivery month for Comex silver.  The shorts are now being tested to see if they have the physical metal available that is needed for delivery.  The outcome will unfold in the next week or two as we move toward the final delivery day at the end of the month.  It looks to me that we can expect much higher silver prices before then.