Where each morning Vince brings you the financial and precious metals news to get you ready for your day. And now, here’s Vince. Well, actually our dear beloved Vince is taking a well-earned day off today to take care of some things and get a day of rest, although fortunately he left behind something that I thought would be helpful because especially with everything that’s happening in the gold and silver EFP markets, Vince had recorded a primer on the futures and the EFPs, so especially if you’d like to understand any of those better, fortunately Vince has you covered and here we go.

Here’s an X and Y axis, right? And down here, I’m not going to label anything because I want to move quickly, this is time, that’s time, and this is price. And we’re going to graph, we’re going to graph the silver market as it normally is. Now, this part here we’ll call this one month, we’ll call this six months, and we’ll call this one year, all right? This is time zero, time zero is spot, okay? Now, this is a curve of a, I’ll do a different color, this is a commodity curve, a futures curve.

Remember, derivatives are derived from spot. Now, this is a representative curve of silver or gold. Now, if it helps you to think of gold, think of gold because it’s the same thing we’re talking about, so let’s call this gold right now. The price of gold is X, that’s the spot market. Where is the spot market? The spot market is recognized globally because of the amount of metal they have coming out of London. Now, there are spot markets everywhere, but the globally accepted spot market comes out of London for legacy reasons. They also have the metal there.

Now, this is the spot market, this is where the actual metal is. So, I’m a trader in New York and I say, you know what? The convex has the futures market. I want to know what the price of gold is a month out, not predicting the price of gold. For anyone who doesn’t understand this stuff, I know that you guys will do, but some listeners may not. A month out, the price of gold, so let’s say that this price here, let’s say this price here is 2600. That’s the spot price. That’s the raw price you can get in London if you’re a dealer.

This price here is a spot price plus the cost of money for 30 days. What’s the interest rate for 30 days? Let’s say it comes out to be $5. So, the price of gold here is $2605. The price of gold six months out is six months times the interest rate. So, the price of gold here is $2600 and $50. So, it’s $2650. And the price out here for gold is $2700. So, let’s, for argument’s sake, interest rates add 5% cost here. I’m sorry, $5 cost here, $50 cost here, and $100 cost here.

Now, the cost, the differential between futures and spot is based on many things. Traditionally, in a smooth-running global market, and I say global because the spot markets in London and the futures are in the US, the smooth-running market means there’s no hiccups between London and the US. No hiccups. Everybody’s in love. Global supply chains are functioning perfectly. Well, this price differential is a function of, and Bob, you can just jump in and correct me if I’m wrong or add to it. Number one, the interest rates I just told you. Number two, and I’m not saying it’s a big or a little difference, but it’s part of the math.

Insurance for the metal, for the business that’s carrying the metal. Storage, how much does it cost to store? I pay for my storage. And other incidentals, maybe transportation. Did I miss anything there, Bob? Yeah, the cost to carry. Yeah, definitely. Right. You put all those things together, and that’s what people like Bob and myself would say, that’s the cost of carry, or carry. So, when someone says carry trade, yen carry trade, they’re talking about this shit. Now, carry doesn’t have to be storage. It’s just how much it costs to carry it for a month.

So, your carry goes up the more time that goes out. But, as you go towards infinity, the cost of carry at infinity is X. The cost of carry at infinity plus one is X plus nothing. So, in a normal curve, you have contango. And the contango goes out, and at infinity, it goes to flat eventually. And that’s normal. When you have a short squeeze, so essentially, to simplify it, in a smooth running world, the curve is almost entirely a function of interest rates. So, as interest rates go up, this curve would do this.

Let me stretch out my chart here, since we’re going off the scale. As interest rates go down, your curve does this. So, interest rates are a big factor in cost of carrying. In a normal functioning market, they determine a differential between spot and futures. That’s what we need to know about that. Now, in a short squeeze, which have a physical, legitimate short squeeze, what happens is they want the commodity. Now, this is easiest to understand and see in a market like a commodity that’s fungible, not fungible, a commodity that’s used or unrecoverable very easily.

So, for example, spot market is here, futures are there, and then someone says, oh, shit, I need food tomorrow because I just had a million immigrants move in. I need to feed them. Or it’s really cold, I need my heating oil replenished, or the soybeans that I have in my barrel have gone bad, I need to replenish them. So, spot goes up here. If the market were still behaving normally, the futures curve would go like this. And the futures curve would go like that because the deferred purchase of this product is still a function of interest rates.

But in a short squeeze, you get this. Or you get this. Or you get this. Now, the shape of the curve can vary. But what definitely happens is the difference between here and here shrinks. The contango goes away. Eventually, if you need it badly enough, and you can’t get those soybeans, I need soybeans now, or my family’s going to die, means I’ll pay whatever it takes to get the soybeans there. So, the futures market goes into backwardation. Now, there are things you may ask, which I don’t want you to ask right now, but I will answer them.

If they want the soybeans today and right now, why would the price actually literally be lower out here than there? Well, there’s multiple reasons for it. One reason is all the demand that used to be out here is now here. So, I was going to buy it a year from now, now I need to buy it today. So, that actually destroys demand out here and increases demand here. Another reason is hedgers will unwind hedges here and bring them forward because they end up having to get short squeeze themselves. So, what ends up happening is you have backwardation.

Now, that’s a short squeeze. That’s a normal short squeeze. And they happen in physical commodities like natural gas and grains all the time. They happen in silver once in a while. Now, before, now we’re getting into the EFP. So, let’s say the spot market goes to here. Before the futures start doing this weird stuff, there is a tell. And the tell in metals is called the EFP. Now, the fact of the matter is the spot market is here in terms of price at time zero. But geographically, this area here is the US.

And this area here is London. So, let me buy that. The metal that we need to deliver against our futures positions has to figuratively and literally come over on a boat. It’s literally in London. So, it’s actually on this side of the line. I’m just kind of making up a configuration there. And so, if you want to get metal from London to the US, remember, it’s a different exchange. COMEX is COMEX. London is LBMA. You say, you say, I need to get London metal shipped over to me. And London says, what will you pay? And so, the guy in New York says, I’ll pay.

We’re using gold still. I’m using gold at $2,600 at spot. And you say, I’ll buy it at $2,600. And London says, uh-uh, I got lots of people calling me to buy it. I know that you guys in New York need the physical metal. I’ll sell it to you at $2,700. Now, it doesn’t go to $2,600. It goes to $2,601. And so, in this area, which is literally the negotiation between a London physical player and a New York futures player, London has the metal. New York wants the metal. The EFP moves. The EFP moves like the prices.

Oh, shit. The price is, see, my 30-day future says that gold should be worth $2,605. So, spot’s worth $2,600. And I say to the guy, I’ll pay $2,600 to have some shift over to me. He goes, uh-uh, uh-uh. You got to pay $2,610. It’s like, but the future is $2,605. And the guy in London says, yeah, but I got the metal, right? And so, you get backwardation starting here and eventually filtering out. Does it happen in gold? Almost never. Does it happen in silver? Yes, more frequently. That’s a classic short speech. Now, I’m taking a long version of this because there is a new phenomenon, a relatively new phenomenon, that started during COVID.

And it started because governments fuck things up. It is, right? So, London and the US had this relationship. And I may not be right over the details. Bob can correct me. But if I’m in New York and I say, hey, I want some gold to come over from London, I do my EFP. And London ships the gold. And whatever the EFP is, it’s in line with interest rates most of the time. But during COVID, the refiners shut down. Now, why do the refiners matter? Because in London, the gold has to be rerefined into Cormac’s acceptable bars.

They would take it for granted. The refiners were just making money refining gold to go from London to New York. But the refiners shut down and Cormac’s would only accept 100 ounce bars. They wouldn’t accept the 400 ounce bars. And so, for a while there, Cormac’s, even though there was plenty of gold in London here, Cormac’s wasn’t allowed to take it. It was almost like taking the wrong commodity. So, Cormac’s gold went like this. Cormac’s silver did that even more because you could not deliver the London bar. Nothing was wrong with the silver.

Nothing was wrong with the gold. But because of the governmental exchange driven regulations, they couldn’t accept that size, right? The contract’s for 100 ounces. How do you deliver a 400 ounce bar against a 100 ounce contract? And so, you had a, what I call a venue squeeze. And what it really was is a refinery or formatting squeeze. And then COVID ended and the refineries came back online and Cormac’s and London got together and they said, okay, we’ll come up with an agreement. We’ll create a swap contract that makes it okay. And we’ll basically do a carve out.

So, we never have this problem again. Problem solved, right? No. Problem comes back not because of the swap, but because of gold in another place is no longer acceptable in the US. Now, it’s happening in gold too, but it’s more obvious in silver because while all the gold in the world is easily gettable if you need it, all the silver is not. So, silver has more in common at certain times in its life cycle with grains and natural gas than it does with gold. It’s consumed or hard to get back. And as a result of that, gold from, remember silver from London was not acceptable in the COMEX.

Well, silver from other areas is not acceptable potentially because of tariffs not acceptable in COMEX. So, I’m going to let Bob explain it from here, but that’s where it comes in. So, we don’t see, just to take it to the EFP thing again, the EFP is the canary in the coal mine. When the EFP goes one way too much, that tells you that there’s a problem and they need the physical gold and they don’t have any left in London to give you. And when the EFP goes the other way, which happens more frequently than I actually first thought, that’s a comment on there’s plenty of physical silver out there, but we’re just not accepting this flavor of silver, whether it be London silver, whether it be Russian silver, which Bob and I discussed about a year and a half ago, we’re not accepting Russian silver anymore, or whether it be potentially tariffable silver, which is the risk that they’re all dealing with now.

Well, thanks for watching this morning’s markets and metals with Vince Lancey. Sure hope you enjoyed the show. We appreciate you being here this week and hope you’re getting set for a great weekend. And before you do that, though, I did want to let you know that something we had mentioned on the channel throughout the week, but now first majestic silver has completed their acquisition of gato silver. So they did receive the necessary shareholder approval at those meetings and shareholders of gato silver will receive 2.55 first majestic common shares. And as Keith Neumeier mentions here with the closing of the transaction, first majestic is integrating a high quality long life and positive free cash flow operation into their portfolio producing lines in Mexico.

So congratulations to them on finally finishing that transaction, which will obviously increase first majestic silver exposure as now that deal is complete. So with that said, go out there, have a great weekend, and we will look forward to seeing you again on Monday. [tr:trw].

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