Chapter 7 of 16

Silver curve dislocations, storage and location spreads

Investigate whether a curve or venue spread reflects financing, storage, scarce deliverable metal or mismatched data.

3 min read · Original educational chapter

In this chapter

Write the spread before writing the story
Financing is only one element of carry
Specify the package and access
Stress the book while only one leg is liquid
Use a residual as a question
Worked example
Common mistakes
Check your understanding
Desk assignment

Write the spread before writing the story #

Define near/deferred instruments, settlement locations, qualities, units and timestamps. A spread of rupee prices may include FX or product differences that a dollar same-location curve does not. A continuous chart can also conceal which contracts were actually available.

Carry, location and grade spreads can move independently. Do not call a calendar spread an EFP or assume a quoted cross-venue differential can be captured without transforming the underlying claim.

Financing is only one element of carry #

Storage, insurance, funding, metal availability and ownership/lease terms can affect the economics of holding silver. Silver’s physical mass per unit of value makes storage and handling an economically relevant question, but actual charges need firm terms for the relevant form and location.

A backwardated observed curve can be consistent with nearby tightness, but it is not a universal predictor of future spot gains. Dislocated data, maturity effects, credit and participant constraints can also matter. Test these possibilities instead of treating the sign as a complete diagnosis.

Specify the package and access #

For a hypothetical carry package, document the cash metal purchase or borrow, the futures/forward leg, the funding arrangement and the eventual delivery or close-out. Every transformation must be executable at the required quantity.

For a calendar-spread research candidate, specify which leg is long and which is short, entry data, thesis invalidation and a time stop before delivery complications. A spread thesis is still a leveraged book if either leg needs cash along the way. Registered exchange procedures and local regulatory access must be established before an actual transaction.

Stress the book while only one leg is liquid #

A cross-venue interruption, an unexpected haircut or a change in available credit can turn a relative-value package into an outright position. Model one venue closed while the other reprices and a roll that cannot execute at the intended size.

Measure gross exposure, simultaneous adverse cash calls and the cost to neutralise the remaining leg. A small initial net spread value does not imply a small liquidation loss. Funding and exit liquidity belong in the position’s feasibility test.

Use a residual as a question #

Build a cost bridge with funding, storage, transport, insurance, assay, location handling, taxes and the relevant bid/ask sides. Separate known costs from estimated ones and state timing.

If the observed differential remains unexplained, the next step is a sensitivity analysis and an access check, not the word “arbitrage.” The reported residual should remain visible even if it does not support the desired narrative.

Hypothetical worked example

A fictional curve and spread move

Near silver is 25.00 dollars per ounce and a 60-day deferred reference is 25.30. The simple annualised carry is (25.30/25.00 − 1) × 365/60 = 7.30%. It is a normalized price ratio, not a 7.30% promised annual return.

In a separate illustrative spread with equal 5,000-ounce legs, long near and short deferred, the near price falls 1.00 while deferred falls 1.20. Near loses 5,000 dollars and deferred gains 6,000: net +1,000 before costs. The relative gain does not cancel the interim funding or failed-leg risk.

Common mistakes

Calling annualised curve slope a guaranteed yield.
Ignoring leg liquidity because the initial spread is small.
Assuming transport, tax recovery or borrow access without evidence.

Check your understanding

Why can a profitable terminal calendar spread still be unacceptable?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Desk assignment

What to submit

Write an all-in spread bridge and a long-near/short-deferred scenario ledger. Include a failed-leg close-out and the minimum cash headroom.

Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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