Silver Liquidity on the Shanghai Futures Exchange May Soon Be Limited Leading to a Quantum Price Level Transition for Silver

The SFE May Be the Last Source of Highly Liquid Vaulted Physical Silver for the Market

In 2024, we face a global silver supply deficit of approximately 265M oz. according to The Silver Institute. This means that refinery production of silver bars, both from mine production and recycling, will fall short of market demand requiring the gap in supply to be met from vaulted refined silver bar stockpiles.

The world’s primary physical silver market is in London and vault data there have only declined 14M oz. in 2024 providing an indication that this is not a source of supply to meet the known silver market supply deficit. Given that the 830M oz. of silver in London vaults has approximately 500M oz. of that silver held for ETFs, that leaves 330M oz. remaining in London much of which may be held by investors and users with a longer term view to hold - as the vault data suggests.

A previous post of May 28, 2024 estimates, using LBMA data, that the total open interest (number of claims) in the City of London’s spot (cash) promissory note market stands between 5B and 8B oz. of silver.

If London spot silver contract holders encounter default upon their demand for silver delivery, this can trigger other spot contract holders to quickly demand delivery as well in order to secure the metal that they believe they own, lifting the veil on the levered London market.

ETFs that have shorted client silver into the market, as indicated in 2021 by Jeff Currie then of Goldman Sachs, are likely also anxious to not face demand for bar delivery against silver contracts they have sold against client silver bars, if this indeed has occurred.

The dynamic draw-down of Shanghai Futures Exchange (SFE) silver vault stock from 3,100 tonnes in early 2021 to the current level of 699 tonnes indicates that this vault stock is available to supply market needs both in China and globally.

Shanghai Gold Exchange (SGE) vault holdings of silver, currently at 1,636 tonnes (52.6M oz.), are not currently seeing the same rapid draw-down as the SFE silver vault holdings .

The reason may well be in the trading volume of these two different metal trading platforms in Shanghai. The SFE sees 15x the daily silver trading volume of the SGE. This means an interested party can enter the SFE and secure claims against available vault silver without moving the price materially compared to the SGE - that is until the SFE vaults are drawn-down enough to alert the market of the significant shortage.

In the 4 trading days to June 13, 2024, the SFE saw its silver vault holdings drop by 56 tonnes from 755 tonnes to 699 tonnes translating to a 7.4% decline.

A continued weekly drop in SFE silver inventory tonnage of this scale going forward will soon alert the market to the rapid move to secure silver bars due to the continuing market deficit.

At that point there is the potential for both disorderly market pricing and disorderly market delivery of silver as the parties who have sold leveraged claims on silver into the London spot market are revealed and price discovery flips over to a physical metal supply vs demand balance.

As such, Western bullion banks may seek, or may currently be seeking, to secure further silver in Shanghai which can be used in swaps against London or NY silver for quick delivery to market.

This may explain why the SGE highlights visits from these bullion banks noting they are seeking ‘cooperation’.

If the SFE silver inventory is further drawn-down on pace, another source of silver will soon be needed - or the City of London’s promissory note cash market for silver will see interesting times.

Let’s watch the SFE’s 22.5M oz. vault silver holdings going forward.

Best regards,

David Jensen