by Ned Naylor Leyland

When a new Pope is elected, as we know, smoke is pumped out of the Vatican (either white or black) to indicate the success or failure of a ballot of Cardinals. What is less well known is that before this happens, in order to check that the previous Pope is indeed dead, his cadaver is tapped (on the forehead) three times with a Silver hammer. It would appear from the black smoke signals coming from the LBMA at the moment that the Silver hammer has been deployed, but no agreement has yet been reached as to what the LBMA does about it. I am of course referring to the decision by the LBMA to go ‘dark’ on their reporting of the Silver Forward Rate (SIFO) from Nov 2nd 2012. The LBMA claim that they did this in consultation with all LBMA forward market makers. They, apparently, had decided at the bottom of the most recent wash and rinse cycle (see the Silver Spot Chart below) that there was no need to publish this data anymore, as it is just an ‘indicative’ level, not a dealing level. Quite what that means for GOFO is anyone’s guess, but according to the LBMA that, unlike SIFO, is a ‘real’ data point.

I spoke to the LBMA today and asked what other ‘indicative’ levels I could look at to get a feel for the market in the absence of SIFO, and they suggested that I could subscribe for $14 a month to an LME feed of the ‘end of day silver forward curve’. When I asked how to do this, they told me I had to send them (the LBMA) an email, which they would then forward on to the LME for their consideration. The data to compile this curve must be coming from the LBMA, so it seems, shall we say, a touch odd that they should farm this role out to the LME who have no active involvement in Precious Metals markets. At the very least this whole arcane process reiterates exactly how opaque Precious Metals markets are, and puts a further premium on those who can shed light on what is really going on.

Below is the key extract of the LBMA announcement:

Following consultation with the LBMA forward Market Makers, and more generally with other market participants, the LBMA Management Committee has agreed that after 2nd November 2012, the forward Market Makers will cease making contributions of their mid-price silver forward rates to allow the calculation of the SIFO means on the Reuters system each day. The reason for the withdrawal of the dataset was that unlike GOFO these rates were indicative rates only and therefore not dealable rates between forward Market Makers.

For a while now I have ignored SIFO and GOFO anyway, as I subscribe to Sandeep Jaitly’s splendid ‘Bullion Basis Service’ (http://feketeresearch.com/gold-basis-service.php), which gives far more depth and visibility into the true machinations and physical tightness of the LBMA system. Imagine my surprise to note the huge coincidence that his much more accurate Silver Basis- Co-Basis was screaming into a state of clear backwardation at exactly the same time as the LBMA went dark on SIFO. Silver is, as Sandeep would say, ‘going into hiding and being taken off the market’. The Silver is, of course, still there, but people’s intentions to put this on the market are retreating rapidly. This is the definition of a silver shortage – nothing to do with the physical amount of the substance being in deficit, but people’s psychological intention not to sell. The extent to which a shortage is developing is witnessed by the extent of backwardation.

Bearing in mind that while this was going on there has also been near-frantic churning taking place between the COMEX and SLV (see Andrew Maguire’s recent article on this subject) and reports of genuine trouble in size orders of Silver being delivered by LBMA members, it seems to me that there are presently a lot of coincidences layering themselves all over the Silver market. God’s work perhaps… either way, these backwardation smoke signals are black as can be, and indicate that a move to much higher ground is imminent.

SPOT SILVER CHART

…IS THIS THE REASON WHY SIFO DISAPPEARED?: