Something rather big is brewing on the commodity markets at the moment.
I've put the popcorn down for a moment because a few things are worth writing about and maybe some furious typing can help me burn some of these calories off. The fact that I'm writing this post on the 25th of February 2021 matters greatly to the spot price as I'll explain shortly.
The backdrop here is that since mid last year basically every commodity has been going up in price recently (at least when priced in USD):
So the question is if all the commodities are going up what's the deal with Silver?
Specifically the silver market is a weird hybrid between a commodities market and a precious metals market. Silver has huge uses in industry but the structure of the market has typically been more like a precious metal, meaning acting a bit in the manner of a currency exchange pair.
How the spot price is calculated
Not that long ago I posted a poll on social media asking people if they knew how the spot price of metals was actually determined. As it turns out the majority of people who responded either didn't know or they were unsure of their understanding. Say you want to go get some sort of commodity delivered immediately, there's a notion of a "spot price" is the price that you'd have to pay per unit of a commodity to get that commodity delivered immediately.
It's important to note that for any sort of physical delivery the price you can get any commodity for will be the mid-market rate, this is the real spot price. Effectively for delivery of a commodity you have to pay enough such that someone will sell it to you.
The prices as determined by the futures market is entirely different in nature, and many people confuse this with the spot price. The futures market is quite different in nature because its primarily about producers hedging their risks into future dates.
Increasingly a confusion has come about where people think that the COMEX is where the spot price of silver is set. However the COMEX is explicitly a futures market and not a physical delivery market. This is relevant for a lot of reasons. The main reason this is especially relevant is that in late 2020 and early 2021 a large shortage of physical commodities that can be delivered has come about. What's also happened is that paper contracts to commodities have still traded just as though nothing has happened, expect of course we had a pandemic that both reduced production and impacted delivery logistics.
The COMEX is currently set up such that only certain months of the year are designated as being delivery months. For silver these months are March, May, July, September, and December. The other months are front months for the delivery months. The last two trading days of the previous month before a delivery month people can start getting deliveries. When a delivery month happens futures contracts get rolled over into future months or get settled for delivery.
In 2021 this means that Feb 25th is the first day in which physical deliveries start getting processed through in the COMEX futures market. Expect price change pressure from the physical demand to start to have a much bigger impact on the days around the roll over. But if you aren't new to this market things just don't move fast in an upwards direction usually because lots of very powerful players have a vested interest in suppressing the sliver price.
More details about the end of month deliveries can be found in this comprehensive article: https://www.sprottmoney.com/blog/Ahead-of-March-COMEX-Silver-Deliveries-Craig-Hemke-Feb-23-2021/
I'll be watching very closely as this next delivery window comes up tomorrow.