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Silver Spreads: Contango Crush Update

January 20 2011, 16:43

FMX | Connect – www.fmxconnect.com - (Reported 1/20/2011)

Silver Spreads: Contango Crush Update

A Continuation from Yesterday’s Story: Silver Contango Crushed – Short Squeeze Imminent or Position Limit Ruling Fall Out?
h/t Tyler Durden of Zero Hedge

Silver spreads continued to sell off on Thursday. For example, H/Z came in from 7.50 yesterday to 6.50 today, a 13% change. So far, any theories that weaker spreads are bullish for the physical metal have to be viewed suspiciously. We spoke with a couple of traders on the topic and our revised possibilities list is as follows:

Points

Silver spreads are being sold because..

1. .. there is a physical short squeeze coming.

2. .. the appearance of a short squeeze was manufactured as an exit strategy for a long to get out.

3. .. Spreads are being messed with in light of the CFTC position limit ruling.

4. .. Two-year silver rusts and spot silver doesn’t.

Caveats

1. If there is a short squeeze why is the market lower?

2. It’s an awful lot of money to spend to camouflage an exit strategy. Millions,upon millions of dollars.

3. This theory remains entirely possible but the kind of sophisticated funds affected by the new CFTC regulation probably wouldn’t puke in that manner unless they were blowing out.

4. We’re no chemists, but we suspect this statement is somehow inaccurate.

For the time being, we can not discount that there is a short squeeze coming but more information is needed before we can know for certain. If a bullion dealer is selling spreads because they anticipate making delivery we think we’d probably be the last to know, that’s why we are think it is more likely than not that this a charade. Whatever the message may mean, it is certainly expensive to send.

There is one other theory worth mentioning. The most important thing to know is that history does not repeat itself but it sometimes hums a similar tune. What happened in 1997 we do not think will happen again exactly the same way. In 97 spreads collapsed and the market screamed higher; there was no misinterpretation of the signal. We think someone is being fooled or making a mistake, we just don’t know exactly how yet. There may be a sap at the table, but his identity is unclear for the time being.

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