An Estimate of Bullion Bank Exposure to Spot Silver Delivery Claims in London

Unallocated Spot Contracts

“The process by which banks create money is so simple that the mind is repelled.”

John Kenneth Galbraith

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In August 2011 the London Bullion Market Association (LBMA) published in its Alchemist Magazine ( https://www.lbma.org.uk/alchemist/issue-63 ) the results of its survey of members’ gold trading in the City of London market - the world’s largest and dominant physical gold and silver market representing more than 90% of daily global spot gold and silver trading. This survey was titled the Loco London Liquidity Survey (LLLS) and can be found on pg. 9 of the above publication.

Until that point, there had been no public disclosure of the actual turnover of gold trading in the City of London as the LBMA simply published monthly clearing statistics giving net gold trading in the London market.

Clearing statistics understate actual turnover or trading volume in the market as it nets buying and selling by each member and then simply publishes the aggregate of the deducted difference between these numbers for its member.

What the LLLS showed, with less than 2/3 of LBMA members responding and further conservative assumptions, was that daily gold trade turnover was 10x higher than the LBMA’s published Monthly Clearing data. It could be materially higher than 10x.

The LBMA’s published data for March 2024 ( https://www.lbma.org.uk/prices-and-data/clearing-data ) state that London’s average daily gold clearing volume total 20M oz. of gold per day. Using the LBMA’s 10:1 ratio, actual daily turnover thus approximates 200M oz. of gold per day in March 2024.

Silver Daily Trading Volume

The LBMA has not published a similar survey for silver trading in London, however it can be reasonably assumed that the ratio of actual daily turnover versus published clearing data is of the same 10:1 ratio.

For March 2024, the LBMA’s clearing data state that average daily silver clearing volume is 292M oz. of silver per day. Using the 10x multiplier yields an average trading turnover in London of 2.92B oz. of silver per day. Annual mine production of silver in 2024 is estimated at 823M oz.

London trading consists of approximately 90% spot (or immediate ownership) trading in the cash market of which spot contracts are simply unallocated promissory notes with no specific metal backing.

Daily spot / cash trading of silver in London can thus be estimated at 2.63B oz.

Estimated Open Interest or Total Spot Claims in the London Market

Commodity markets’ Open Interest, or standing total market claims, typically run between 2x to 3x the daily traded volume.

Using a 2x multiplier, Spot Open Interest (immediate ownership claims) in London for silver is estimated at 5.26B oz. in March.

Using a 3x multiplier, the Spot Open Interest (immediate ownership claims) in London for silver is estimated at 7.89B oz. in March.

The LBMA states London’s vaulted silver is 819M oz. in April 2024 ( https://www.lbma.org.uk/prices-and-data/london-vault-data ). Of the 819M oz. of silver, ~ 500M oz. are held by Exchange Traded Funds (ETFs). Of the remaining ~ 320M oz. of silver, some is segregated and allocated for private owners and not available to market.

Silver Short Positions Threaten Bullion Banks

Given the vast scale of the Spot Open Interest in London at between an estimated 5.26B oz. and 7.89B oz., it is assumed that the vast majority of the short positions can only be held by bullion banks.

Unlike the U.S. COMEX futures market, the scale of such large claims for London’s limited physical silver are so far beyond the size of even annual global supply and global vault stocks of silver, it is likely only bullion banks could have issued the large majority of contracts for this spot physical silver.

The problem that is faced now is that with an estimated global supply deficit of 265M oz. of silver in 2024 and tight global vault stocks of silver, delivery demand against the London spot contracts could well trigger default by spot contract issuers.

Such delivery default can trigger cascading demand for delivery against spot contracts that appear to have been vastly overissued in the City of London’s market, with oversight by the Bank of England, thus ending the paper silver price setting mechanism that creates excess spot claims for metal at multiples of the market availability.

Demand for delivery in a defaulting market quickly flips paper claim price-setting to physical supply vs. demand price discovery. Given the size of extant claims in the London market, the potential exists for the price of silver to soar to multiples (perhaps many multiples) of the current $USD 32 /oz. price.

The handful of dominant bullion bank players in the London market could then potentially be facing an aggregate liability of $500B or higher and balance sheet rupture.

The mind is repelled.

Recall the Shanghai Gold Exchange, that also trades in silver, publicly announced that it has had recent Western bullion bank visitors seeking cooperation.

More recent news:

March 12, 2024.

April 30, 2024,

May 20, 2024.

Best regards,

David Jensen