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Gold/Mining/Energy : Gold and Silver Juniors, Mid-tiers and Producers -- Ignore unavailable to you. Want to Upgrade?

To: tyc:> who wrote (21233)	9/17/2006 11:46:15 AM
From: The Vet	Respond to of 78408

<< So a big question in my mind is when can we expect normal contango in the metal markets ? My particular interest is zinc. Any comment you have here would be very much appreciated. >> I haven't followed zinc closely but I have a particular interest in copper and I expect the general rules apply. While there is backwardation, expect the price to continue to rise even though there will be high volatility in both directions. The backwardation is caused by the shorts inability to close nearby contracts due to shortage of physical metal and their rolling forward of those contracts at a loss. Once supply improves or demand lessens then expect contango to start to become evident, but when that happens the bulk of the rise in price is probably past. Backwardation, rising prices and volatility all go hand in hand in a market where there are physical shortages combined with high open interest because the majority of the contracts are being written by speculators who have no intention of actually completing the contract to involve delivery of metal. Their interest is financial only and most of the short interest comes from speculators whose reasoning is nothing more than "well it's gone up a lot very quickly, it must correct soon". So they sell naked short positions and then find that there is a real shortage and they are losing their shirts. So the progression should be, rising spot prices, backwardation, volatility, high spot premiums, leading eventually to improving supply when there will be a reduction in open interest, return of contango and then a more balance market which settles at a higher base price. Just my view of these markets where paper exceeds physical by a huge margin. Obviously, imposed on top of the basic price movements are the influences of supply shocks, war, strikes, fires, earthquakes etc. which cause short term supply disruptions and economic, political and financial issues which affect demand.