Investors to Silver: “Let’s Get Physical”


The scramble for physical gold and silver is intensifying. People increasingly want to own the real thing, and not some paper substitute, all of which comes with counterparty risk. This conclusion is apparent from the fact that the futures prices for gold and silver have moved into “backwardation.”

Allow me to explain…

Because gold is money, gold almost always trades in “contango,” meaning that the future prices – i.e., forward prices – are higher than the spot price. The percentage difference between gold’s spot and forward price is gold’s “interest rate.” So in this regard, gold is not different from other moneys, except gold’s interest rate is lower than those of national currencies.

But supply and demand dynamics also influence the differential between the spot price and forward prices. And this is where our story gets interesting…

If the forward price is lower than spot – a condition called backwardation – you can sell your metal in the spot market, invest the dollars you receive to earn interest, and then buy your metal back in the future at a lower price and profit the difference. But there is another important factor to consider outside the math of this formula.

If you sell your physical metal in the spot market and at the same time agree with someone to buy it back at a future date, you are now holding someone’s paper promise instead of physical metal. In other words, you have counterparty risk, which, of course, is avoided when you hold physical gold or physical silver.

Normally, few people worry about counterparty risk. So bullion dealers and other institutions that deal in the precious metals watch for opportunities to profit from backwardation, with the result that gold rarely trades in backwardation, which explains why the chart below is so extraordinary.

Gold for 1-month and 3-months forward has been mainly in backwardation for more than one year. Even more exceptional is that gold 6-months forward has been in backwardation since November 5th. To show how rare this event is, I checked the LBMA database, which goes back to 1989. There is not one instance of 6-month forward gold being in backwardation, which confirms my own experience. I’ve been trading the precious metals since the 1970s, and I can’t recall any time before this year when 6-months forward gold was in backwardation. The current and continuing backwardation is truly incredible.

12-month forward gold is also approaching backwardation. These downtrends make clear that the demand for physical gold is intensifying.

The picture is even starker in silver. Silver 6-months forward has been continuously in backwardation since June 2nd and mainly in backwardation for more than one year. What does it all mean?

In a word, it is bullish. The only way the increasing demand for physical metal can be met is with higher prices. The higher price will at some level entice people to sell their metal and hold a national currency instead.

Some skeptics may argue that there is no backwardation apparent from COMEX settlement prices. Aside from the fact that COMEX recently changed the method to determine settlement prices from a market-driven basis to instead allow a manual override, which now makes backwardation on the posted COMEX settlement prices virtually impossible, one has to first recognize that COMEX is first and foremost a market for paper- gold and paper-silver.

Therefore, a piece of paper can promise virtually anything, without regard to the underlying reality of how physical metal is actually trading. In other words, COMEX shows March futures in contango, when they should in reality be in backwardation. Thus, if you are buying March silver or April gold futures, you are overpaying. This overpayment is no doubt going into the pockets of those banks that are perennially short and use their size to control the paper market. They can, after all, always conjure up whatever paper they want out of thin air, which of course they cannot do with physical metal.

Any way you look at it, the backwardation in gold and silver is a truly rare event and an exceptionally bullish one too. So be prepared for an upside explosion in the price of both precious metals as the scramble for physical metal intensifies even further, and investors increasingly choose to hold the metals themselves, instead of paper promises.


James Turk,
for The Daily Reckoning Australia

Editor’s Notes: James Turk is the founder and chairman of GoldMoney, an excellent website that provides a convenient and economical way to buy and sell gold, silver and platinum online using the digital gold currency – a currency for which he was awarded four US patents.

James Turk
James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. He began his business career with The Chase Manhattan Bank, with whom he worked for eleven years, principally in the International Department, which included assignments in Thailand, Hong Kong and the Philippines.


  1. There is a lot of talk around about the volume of short paper on Comex being impossible to back with real borrowed silver, which if true stinks of not only price manipulation but outright fraud at a global level.

    I wonder why people no longer trust the paper PM’s. If you move to physical, your have physical risks (safes, insurance, etc) which have a premium attached. This premium is now lower than the priced in risk of dealing with COMEX’s ponzi.

    Chris in IT
    December 9, 2010
  2. At your (advanced :D ) age, you’ll probably remember the Hunt Bros manipulation of the silver market a few decades ago, Chris.

    That was a real ponzi… and it utterly failed, of course. ;)

  3. As much as I have my reservations about Oz houses at today’s prices, they are at least real. And one can drive round and visit them and kick them and say Yep, it’s still there! Which is even a step up on having cash in bank – In that particular regard.

  4. “And one can drive round and visit them and kick them and say Yep, it’s still there!”

    Sometimes it isn’t, Ned. Classic news story about a woman who mortgaged her home AND an investment property to earn promised riches… and lost it all. Widow with two kids. If it looks too good to be true, etc.

    The measuring stick we use is: “Could we _build_ it for that?” If we could buy a similar block and build it cheaper, why would we buy an established house and then pay _stamp duty?_

    I know two years from now I’ll probably be beating myself up for not whacking another two up now, but it would just be overdoing a good thing… . We really do have enough invested in property. :D

    Your warning was spot-on, BTW, Ned. Four posts failed before I cleaned out the bugs. Funnily enough, the first two praised Bill’s latest article!

  5. “Those Nigerian and Ghanian women only want me for my great physique, good looks and witty personality” – The English to Strine translation being “beer belly, ugly mongrel head ‘n sick sense of humour” you mean? ;)

    Yes, as I’ve said before, I remain of the opinion that the one piece of unquestionably good financial advice I’ve ever given on this site is that Binding Financial Agreements exist! :D

    (As to sending $600K OS to one’s true internet love what they’ve never met – No amount of good financial advice can protect against gross stupidity I guess.)

  6. The truly scary thing is that the Australian concerned, probably hasn’t had her right to vote taken away. Hell, she could probably even run for a Federal seat – And get one! :(

  7. “English to Strine translation being “beer belly, ugly mongrel head ‘n sick sense of humour” you mean? ;) ”

    You’re implying here that I’m not really God’s gift to women???!!!~
    (“No fool like an old fool!” intones the missus.)

    It is indeed extraordinary that fools and their money are so easily parted!

  8. Whoops – Left out the “my” in the English to Strine translation being “my beer belly, ugly mongrel head ‘n sick sense of humour” … :)

    The ability of all the gorgeous young heiresses of the world to continue to resist my obvious charms has never ceased to amaze me either Biker?

    Mind you, I have on rare occasions seen older uglier poorer ladies’ obvious disinterest in me do a total reverse when the fact I own a house has come up in general conversation? – Run away VERY quickly son!!!

    PS: I’d keep me cake hole shut about any significant bullion holdings these days as well Lachlan? :D

  9. Just lately it’s the Ghanian women who hit on me almost daily, Ned!~
    That’s the problem when your Skype account includes your photo.
    They just cant resist. :D *

    * Missus intones: “Yeah, you’re a catch all right.
    They think you look close to death, Biker.”

  10. You gotta watch those foreign cuties who express a fondness for ‘the mature, “ripe”, or senior gentlemans’ Biker – Lots of them simply don’t realise there actually are countries where the authorities bother doing autopsies on the elderly! ;)

    I’d probably advise a side bet on it just being Boris in Russia sending you some pics of one of the Ghanaian working girls he spent an hour with on HIS last holiday abroad though??? :D

  11. Have had some fun asking them who that _guy_ in the background is, Ned.
    Level of computer literacy is so low they do a double take. Never think to ask me what they’re wearing, etc.

    “You have a lovely tan!”sez I.

    Her downstairs: “You’re teasing those Ghanian gals again, Biker! You know the excitement’s gonna kill you!”

  12. I went through it all with a mate a while back – Brother, she’s young, beautiful, well educated and has no kids; You are not young, or beautiful or well educated, and have dependent kids! Think seriously about these facts my friend!!!

    My final advice to the potentially lovelorn was to get her phone number and start chatting to her ‘live’ – Boris had not seen fit to part with his mobile phone number the last I heard? :D


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