What Is a Spot Premium?

Backwardation is also called reverse market or inverted market. In special cases, the spot price is higher than the futures price (or the contract price of the recent month is higher than the contract price of the forward month), and the basis is positive value. Widening spreads in the reverse market can lead to bull market arbitrage gains and bear market arbitrage losses.

Spot premium

In the reverse market, over time,

Spot premium, as its name implies, is that the spot price is higher than the futures price. In the silver market, it is expressed as the spot silver price versus the futures silver price, and the recent month contract has shown a premium to the far month contract. In the precious metals futures market, when the supply and demand relationship is normal, due to the existence of various storage costs and opportunity costs, forward contracts are usually given more premium, that is, the price of the forward contract is always higher than the contract price. Once this situation reverses, it is abnormal. As James Turk commented, spot premiums are not uncommon for general commodities, but they are a "significant event" for precious metals such as silver, which is often accompanied by significant price changes.

Turk pointed out that the emergence of the spot premium phenomenon means that there is a shortage of supply in the silver market or a sudden increase in demand, and a market pattern that is in short supply will promote the rapid rise in silver prices. It is expected that this phenomenon will not end in the short term, and the spot premium may continue for as long as 12 months!

Turk mentioned that there was a spot premium in the silver market in January 2009. In the next four weeks, the price of silver rose sharply from $ 10.50 / ounce to $ 14.50 / ounce, an increase of nearly 40%. If silver prices can seize the immediate spot premium opportunity, then another strong rally will be ready. It's no surprise that the 30-year high above the $ 31 reached in early December is unimpeded in the coming weeks.

It is also worth mentioning that China's demand for spot silver is growing rapidly, and the country's silver imports in 2010 increased by 400%. All indications indicate that China is expected to become the dominant player in the global silver market.