The Battle For $50 Silver - Spot Price Analysis

With the U.S. banks closed on Monday, and with the Canadian markets also closed for Thanksgiving, the COMEX futures price for silver reached over $50 for the first time in history. So, what's next? A surge of 100% over the next 18 months, like gold has just accomplished, or will this be another failure before a sharp pullback and years-long decline? 

We'll try to answer that question in a moment but let's first assess what's going on as the new trading week begins. With the holiday closures on Monday, the entire metals complex has been rallying. See below for a snapshot as of mid-morning in the U.S. These are some pretty impressive gains! 

But it's going to be a long week and, if we've learned anything over the past 15 years, it's that it's never how you begin the week that matters. Instead, it's how you end it. That said, prices ended last week with big up days and that momentum has carried over to the new week. As you can see below, the COMEX silver price is maintaining a toehold above $50 as I type. 

$50 COMEX silver is, obviously, a very important psychological barrier and, as such, it must be watch very closely in the days ahead. Any move that sustains and grows above $50 is likely to result in even greater momentum and short-squeezing. As such, expect a major battle at/near this level all week long. 

What's driving this current surge in price? Massive stress in the Fractional Reserve and Digital Derivative pricing scheme that held for more than 50 years. The pricing scheme relies upon leverage, rehypothecation and unallocated accounts...and it has held for decades as physical demand has been suppressed. However, nearly one billion ounces of mine supply deficit over the past five years, combined with increasing industrial and investment demand, has created a drain of physical metal from the London warehouses, placing the entire pricing scheme at risk of failure. 

Evidence of this stress can be seen in the VERY unusual configuration of the price quotes. Under almost all circumstances, the spot price of a commodity should be less than the futures price. Why? See below: 

So while the full board of futures on COMEX remains in contango, note that the SPOT price in London remains over $2 in backwardation versus the "front month" of Dec25. In fact, the spot price is backwardated all the way out to the Sep26! 

As such, it can rightly be concluded that London has a physical shortage on their hands and the LBMA is "actively monitoring" the situation"....LOL! 

When we plot the prices of spot silver and futures silver together, you can see how the situation has developed over the past two weeks. On the chart below with Dec25 COMEX silver in candlesticks and the spot price as a blue line, note that the spot price was in contango (below) the futures price until about October 2. Since then, the spread has moved to backwardation and increased, reaching nearly $3 last Friday, the 10th. 

So how does this problem get fixed and the board return to a "normal" order? To narrow the spread and return to contango, one or a combination of two things must happen and it's not complicated...