LBMA Admits “matter of weeks” silver supply

In a surprising move amid so many signs of supply distress in the silver market, the LBMA (London Bullion Market Association) have just released their first ever Silver Investment Report.  That the report admits to London nearly ‘running out of silver’ and acknowledging the effects of the #silversqueeze movement is even more remarkable.

You can read the full report here however below we highlight some of the key points with the help of analysis by Ronan Manly.

As we reported in detail (The Great London Silver Squeeze) at the time, amid the massive silver rush in February of this year, cracks started showing in the supply of silver to satiate the demand, particularly in the ETF’s which even changed their rules to accommodate it.

Here are some key excerpts:

Regarding the 20% increase in investment demand for silver in 2020 they noted “the past 12-18 months have witnessed some incredible developments in the silver investment market, including a dramatic improvement in investor activity”,

Of course much of the focus of that #silversqueeze social campaign was on the ETFs (more broadly described as ETP’s in the report), to wit:

“Early 2021 saw an unprecedented 110Moz added in just three days. Although some liquidations emerged, there were concerns that London would run out of silver if ETP demand remained at a high level.”

Commenting on the logistics constraints of London based custodians:

“this year, the location of the custodial vaults has come into sharper focus as ETP demand has jumped, leading to concerns about the potential availability of metal.”

“As the social media frenzy gathered pace in late January, demand for coins, bars and ETPs all jumped. For the latter, global holdings surged by 119 mn ozs in just three days. This was concentrated in the iShares fund (SLV), where holdings rose by 110 mn ozs. Given that most of this metal was allocated in London, fears emerged as to whether there was enough silver should demand continue at this pace.”, and:

“had demand in iShares continued at the frenetic rate of late-January/early February it would only have been a matter of weeks before London’s existing stock was used up.

While it would have been surprising to see ETP demand maintain this pace of buying, the concerns were still very real.

This reflects both the time required for a refinery to convert non-Good Delivery (GDL) material into 1,000oz bars approved by LBMA as Good Delivery and then delivery of this by sea freight into London.”

That is a remarkable admission from someone like the LBMA and highlights just how close the campaign came to ‘breaking the system’.  They then look more broadly at available stock asking the question “the recent jump in ETP demand has led to fears as to whether there are sufficient above-ground bullion stocks, should ETP holdings see a further sharp increase”.  Their answers were hardly encouraging (unless you own silver of course 😊):

“there is a gulf between the total of silver above-ground stocks and the portion which can be quickly allocated against ETPs.”

“Even though above-ground stocks are difficult to pin down, there is no doubt that bullion stocks account for a small share of the total.”

“The biggest identifiable silver holdings are held in London, COMEX [New York] and Chinese approved vaults, which at the end of 2020, stood at a combined 1.694 bn ozs of silver.”

Outside of those LBMA London and China holdings, and excluding metal held on COMEX (which is accounted for) they warn “silver bullion stocks that exist elsewhere and are in a deliverable form (specifically LBMA or COMEX Good Delivery compliant) appear extremely modest.”

Ronan Manly takes issue with one particular statement that:

“Another way to view this is to look at combined Comex/LBMA holdings, which at end-February were 1,518 mn ozs. ETPs vaulted in these locations stood at 880 mn ozs, which meant that 42%, or 638 mn ozs was in theory immediately available to meet new silver ETP demand.”

He says this is plain wrong “Because silver not currently in ETFs is not necessarily available to ETFs, and besides, ETFs which hold their silver in London cannot hold silver in New York (apart from SLV). Its against their prospectus rules.

This, however, doesn’t stop the LBMA report from sweeping the problem under the carpet by concluding that “the pool of available metal should be sufficient, for the foreseeable future at least, to meet new ETP demand.””

Maybe one of the most startling admissions in the report, hidden as a ‘she’ll be right’ statement is that should we have a repeat of February, something very easily re-orchestrated if they just use the following line from LBMA that “this also pre-supposes there is no repeat of the social media frenzy.”  So in other words – they have enough metal (which was incorrectly calculated) as long as we don’t have another orchestrated push!  How’s that for a red flag to the bull (or Ape as it may be)!!

In terms of the normal retail market that Ainslie services:

“Retail investment in silver (coins and bar demand) recovered in 2020 and into 2021”

“The [retail] sector then burst into life this year, initially as a social media buying frenzy emerged”

“The industry was quickly beset with product shortages, in part due to logistical restrictions”

“While social media discussions have abated, silver coin and bar demand has remained extremely strong, especially in the US”

“Ongoing strength in the US coin and bar market, which also reflects some supply issues, extended product delivery lead times and premiums”

“Global retail investment in silver coins and bars in 2020 is estimated to have exceeded 200 mn ozs for the first time in four years. This was the result of higher demand in the US and Germany, while purchases in India weakened sharply.”

“Over the past decade, the US has been the largest retail investment market in all but two years (2018-19), when purchases fell sharply”

“During 2018-19, India occupied top spot, with retail investment in each year exceeding 50 mn ozs. ..In general, Indian demand has typically benefited from strong silver price expectations, with many viewing silver as being undervalued. This has often led to a surge in investment when prices have fallen.”

“In India, high net worth individuals tend to purchase large silver bars, such as 5kg, 15kg and 30kg bars. Others are consumers and investors who buy small-minted bars”

“Germany completes the top-three listing and has only emerged as a prominent market for silver bars and coins over the past two years.”

And finally, whilst there were record flows into ETF’s it didn’t take business away from physical buyers as they are 2 different types of buyer but ultimately both drawing from the same pool of available silver:

“[Silver] ETPs have attracted a large swathe of new buyers, including those active in the stock market who might not have previously bought precious metals. As a result, there appears to be little sign of an adverse impact on physical investment by the success of silver ETPs.”

This report is a remarkable piece in that it admits just how very tight this silver market is and how prone it is to another orchestrated social media attack.  It is (maybe deliberately) very light on COMEX inventories but we all know there is the same tightness there as more and more authorised participants stand for delivery of physical rather than these synthetic proxies.