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The
spread, or futures spread, is a less interesting
tool than the basis but it does provide
some useful frames of reference. For an
explanation of the basis, please see here.
The futures spread is primarily
a tool to gauge the level and depth of speculative
involvement in the gold and silver markets.
I
calculate the spread in 1-year increments
representing the difference between the
closing spot price of silver and the closing
COMEX futures prices out 1, 2, 3 and 4 years.
I will use the active contract months (Jan,
Mar, May, Jul, Sep, Dec) such that the actual
basis period will always slightly exceed
one year (for example, on May 15, 2006,
the active contract is July so the one year
basis is the difference between the May
15 closing spot price and the closing price
of the July 2007 futures contract).
It
often occurs that there are no trades in
contracts out more than 1 year or the last
trade does not occur near the close and
therefore does not reflect late day trading
in the nearer contracts. This can be a problem
for spread calculations but based on my
historical research, it is not as big an
issue as one might suspect. However, on
occasion it can give you some pretty screwy
readings. For example, as I write
this on May 15, 2006, the one year spread
in silver is 26 cents, which seems reasonable
if a little low, but the 2 year spread is
only 1 cent (should be closer to a
dollar) while the 3 year spread is actually
backwarded by 22 cents while the 4 year
spread is backwarded by 51 cents! At the
4 year mark, this represents several dollars
of drop in spread from where it should
normally be. These types of discrepancies
can only be dealt with by smoothing out
the results over a period of time, which
I plan to do once I have more data (and
time).
On
the other hand, perhaps it is not a coincidence that backwardation
is starting to creep into futures prices
which are more than a year away while one
year silver lease rates seem to be indicating
the existence of a healthy supply of silver
available for lease. I think in both cases
we could be seeing signs of Mr. Fekete's
hypothesis about silver owners looking for
yield from an asset with no inherent income.
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