Silver price hits record highs on ‘backwardation’  

February 22, 2011

The precious metal has outperformed gold recently, apparently due to an unusual condition in the silver futures market

Silver spot and futures prices hit a record high on Monday on the spreading unrest in the Middle East and the falling dollar. However, it seems that the real reason for the surge may lie somewhere else.

Very simply, if silver has risen due to the political turmoil in the Middle East, why has gold not gained at the same pace, and why is the dollar which is traditionally the safe haven in a crisis still weak?

The current situation in the silver market isn't just about prices, but about a particular condition called 'backwardation'. Silver is in backwardation, which is a condition when buyers in the futures market are ready to pay a premium to receive the contract sooner due to fear of a shortage of the metal.

Two banks JP Morgan and HSBC are rumoured to be short on silver and they are said to be covering up their positions and this is pushing the price up.

The current prices are being built up on speculation, not on fundamentals. Depending on the technical position of the silver futures market, these prices may or may not sustain.— Sharad Matade