To make a point on silver I show the spot and forward swap prices for AUDUSD.
Now look at 1 year Treasuries and the same maturity for Australian federal paper.
Put it together. The interest differential is 4.61% in favour of Australia. Note the swaps are at a discount, meaning the left side (bid) is lower than the right side (offer). The forward Aussie discount is equal to the interest differential. Take the mid point of the swap (.0453) and divide it by the spot (.9965) and you get 4.50%. (the 11bp is spreads, ‘noise’ and basis risk differentials.)
Conclusion you can take to the bank: The forward price is equal to the interest differential. Simple.
OK, with that in mind look at silver today. The futures price is trading to a discount to the cash price. Go back to my example for the AUDUSD. For silver to be backward it MUST mean that the cost to borrow silver is GREATER than the cost to borrow dollars. This is one of those ‘red flags’.
My conclusion? There is a shortage of the physical metal. Blame it on whoever you like. The Mint, the JP Morg, underwater producers. There are dozens of suspects to consider. Either way, it’s bullish for the price.
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