Paywall Lift: What I See Transpiring in the Gold and Silver Markets Right Now - Silver's Criticality Point

By Request

The typical approach of gathering intelligence is not to look for the ultimate Rosetta Stone that fully informs but to gather over time a large mosaic of discrete data points that together paint a picture.

Let’s start with looking at some of the data points that we have to date on the global gold and silver market and then follow with the implications of these data points to what we are seeing currently:

• The London gold and silver markets, the world’s largest gold and silver markets by daily spot (cash) gold and silver trading volumes, have traded spot promissory notes in lieu of physical gold and silver bars since the Bank of England (BoE) central bank currency printers were given oversight of these markets in 1986 by the Thatcher government ‘Big Bang’ financial reforms and the BoE’s oversight of creation of the London Bullion Market Association (LBMA) in 1987. It is unclear how many promissory note claims exist for each gold and silver ounce held in the City of London vaults (i.e. the number of London spot contract immediate ownership claims that are held by investors globally on each ounce in the City of London vaults is unknown).

• Of silver Exchange Traded Funds (ETFs), Goldman Sachs’ Head of Commodity Research Jeff Currie said in February 2021 that the price of silver could never rise from retail client demand because “The (silver) shorts are the ETFs. … the ETFs buy the physical. They then turn around and sell on the COMEX to be able to hedge that physical position.” When an ETF buys metal for client investors, there is no risk for the ETF to hedge. The ETFs are simply to hold metal for paying investor clients who can hedge their own silver long position. In other words, Currie told us ETFs use their clients’ metal to actively short silver investments against their clients. How many short positions the ETFs take for each ounce held and thus how many claims there are against each of their clients’ units of metal that the ETFs hold, is unknown. The practice of creating multiple claims on client assets is termed ‘rehypothecation’ and is illegal. Once the process of rehypothecation is started, there is no limit to the number of claims that can be created on each ounce of physical metal held in London and N.Y. vaults.

• The LBMA alleges that the City of London Vaults hold 819M oz. of silver as of April 2024. Of these silver ounces, approximately 500M are claimed by ETFs (and their subsequent rehypothecated silver clients). Of the remaining 300M oz. of silver, it is unclear how many of these ounces back the total London silver market spot contracts issued and how many of these ounces are segregated and allocated to private investors who vault their metal in the City of London. Of the subset of the 300M oz. of silver not allocated and segregated in the London vaults, how many times have these silver bars been sold by bullion banks?

• It is illegal to export gold from China (other than gold first imported into the Shanghai Free Trade Zone for export) however it is legal to export silver from China.

• In March and April of 2024 the Shanghai Gold Exchange (SGE), that trades both gold and silver spot contracts, issued news releases of visits from the following global bullion banks seeking cooperation with the SGE:

  • Deutsche Bank

  • HSBC Bank

  • JP Morgan Chase Bank

  • Standard Chartered Bank

SGE Announces Bullion Banker Visits : Screen shot from Shanghai Gold Exchange main web page - https://en.sge.com.cn/

• In 2024, the LBMA has added two Chinese refineries to the LBMA’s list of accepted ‘good delivery’ refiners of silver for settlement of silver trading in London:

  • Jiangxi Copper Lead&Zinc Metal Co. Ltd - February 15, 2024

  • Shenzhen Cuilu Gold Refinery Co. - May 8, 2024

• Since March 15, 2024, there has been a 31% draw-down in the Shanghai Futures Exchange (SFE) silver warehouse vault holdings. SFE silver warehouse holdings stand at 790 tonnes as at May 15, 2024.

Given the totality of the above information, it seems reasonable that the following is likely:

• as there are obstacles to exporting material amounts of gold from Chinese sources, the interest of bullion bankers in the Chinese gold and silver markets seems focused on silver as it can be readily exported to address a bullion bank need.

• it is likely that much of the silver ETF silver vault holdings have been rehypothecated (multiple legal claims/title given to each oz.) to multiple owners.

• bullion banks have written multiple spot contract claims on each ounce of silver in London’s vaults not held directly in allocated and segregated vault areas and accounts.

• given that individual investors globally have witnessed the grossly accelerated increase in currency creation by the world’s central bank regulators and high cost of living inflation that former Treasury Secretary Larry Summers says is understated by 50%, as well as a banking and financial system upset that is likely given the prolonged shock interest rate spike driven by past central bank policy, individuals and investment funds globally are increasingly going to attempt to secure gold and silver in segregated and directly allocated holding.

• there are several and possibly numerous claims for each ounce of silver in non-ETF City of London and N.Y. vault holdings that are not segregated and specifically allocated to their account holders.

• the increased cadence of delivery demand as well as an increase in demand for physical silver investment due to forward global market conditions is incenting bullion bankers to try to secure silver bullion to reduce the level of multiple claims to which they have exposure and risk of discovery by clients and third parties as the physical silver shortage manifests itself.

Given the above, I think it likely that there is a silver squeeze and run on bullion now started as both bullion banks and ETFs attempt to secure bullion to cover their silver rehypothecation practices. They likely know that there is no sense in panicking - unless you’re first.

Shortage and a run on bullion is terminal to those who have sold multiple or many claims on the metal that they hold for their clients.

Let’s watch.

Thank you for your support to date.

Best regards,

David Jensen