Reposting from earlier this AM:
The strong backwardation structure that has existed in the silver market for some time, at least on the futures board, appears to be easing even as the March contract goes into its delivery period. This is happening even as we continue getting reliable reports of tightness in the spot market and long waiting periods for silver bars.
March silver's open interest is drawing down rapidly having dropped a bit over 14,000 contracts in yesterday's wild session. There is a decent amount of rolling out of March into May based on the exchange's today, but it is not a one for one roll. Both longs and shorts bailed out yesterday.
There are still a considerable number of contracts open in March, 14,259 to be exact, but we have today's session yet which no doubt will see a further reduction in that contract month.
If a squeeze is going to occur, we will need to see the March return to a premium to the May and preferably also to the July.
Here are the spread charts detailing the change from one of backwardation to a more normal contango situation. When a backwardation structure exists, the spread line will be above zero; when contango exists, the spread will be below zero.
As you can see, the backwardation structure has been easing. At the risk of repeating, if there will be a move to push the shorts during the delivery period in the March next week, this spread line will indicate it by moving back above zero against the May and if it is particularly strong, also against the July contract. I do wish to point out however that while the backwardation structure of the March has eased it is just barely in contango.
Keep in mind that this chart is a snapshot in time and can change so we will need to continue to monitor this for further developments.
To get an even more accurate read on this we would need to capture a snapshot in time comparing the spot silver market bid/offer to the current bid/offer of the nearby March silver contract. At the time I am posting this, spot silver is actually trading about 6 - 7 cents higher than the nearby March futures contract which makes the current structure of the Comex silver market seemingly at odds with the physical market once again. In other words, we have a rather strong backwardation in the physical market but an easing backwardation moving towards contango on the paper market.
An ideal situation for a short squeeze exists when both the futures board and the spot market are speaking with the same voice. In the case of what we have now, if the physical market is as tight as it seems to be, there should be a large number of players standing for delivery in the March. AFter all, if you are a large buyer of silver, and you can get the exact thing by buying a March futures contract at what is a DISCOUNT to the physical market, who in their right mind would not want to do that? If nothing else, a player with the right connections could arbitrage the setup and guarantee an immediate and healthy profit.
Stay tuned on this one. With Silver there is never a dull moment.
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