Backwardation and Declining COMEX Inventory

Silver inventory at the New York Commodity Exchange (COMEX) is declining. Since the beginning of 2011, in addition to the overall decline, a lot of inventory has been shifted from the registered to the eligible category.

For much of 2011, the COMEX silver futures market has been in backwardation. Similarly, the London OTC silver forward market is in backwardation as reported by the London Bullion Market Association (LBMA). Figure 1 shows the Silver Forward Offered Rate (SIFO) from November 22, 2010, to May 19, 2011.

Figure 1: The LBMA Silver Forward Offered Rate (SIFO) 2010-2011

 
We see from Figure 1 that the contango of the LBMA silver forward market collapsed on January 19, 2011, and silver has been in backwardation ever since – with the exception of about 4-5 weeks in March and April. For more background, please take a look at Backwardation in The Case of a Monetary Metal.

In this article, I briefly explain why it is perfectly natural if

• COMEX inventories are declining,
• Silver is being moved from the registered to the eligible category,
• Silver deliveries occur as late in the delivery period as possible,
• Silver deliveries suddenly appear out of nowhere and are checked into the registered category only at the last minute before delivery,

as long as silver is in backwardation. None of these indicates that there is a shortage of physical silver or that there is a short speculator about to default.

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