The prices of both metals were down this holiday-shortened (Labor Day in the US) week, especially on Friday. The decline corresponded to a spike in interest rates. Of course everyone watched the action of the stock market on Friday. Whatever the proximate cause, the root is credit. When borrowing to buy assets does not work, then selling assets to repay debt is required. It could be companies who bought their own shares, it could be European banks. It could be leveraged investors speculators in their Etrade accounts.
This leads us to another reason why a high basis is a bearish signal for the USD price of a metal. The basis is the carrying cost. One month ago, if you bought a December silver contract, you paid a big premium. As we recall, it was around 14 cents per ounce. As you hold that contract, this premium decays. If you wait until First Notice Day, it could be completely gone or even negative. That is, you may get a few pennies under the spot price to sell the contract. If you roll the contract – i.e. sell December and buy March – you will incur that cost of carry again.
This post was published at SilverSeek on Monday, September 12th.
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