ALERT: No Silver Liquidity In London | David Jensen

Key Concepts

• LBMA (London Bullion Market Association): A key global hub for the trading of gold and silver.
• Liquidity: The ease with which an asset can be bought or sold in the market without affecting its price.
• Back Contango/Backwardation: In futures markets, backwardation occurs when the spot price of a commodity is higher than its futures price, suggesting immediate demand outstrips future supply.
• Claims: Financial instruments representing ownership or the right to receive an asset, often traded in the paper market.
• Lease Rate: The interest rate charged for borrowing a commodity, such as silver.
• Monetary Expansion: The increase in the money supply by central banks.
• Debasement Trade: An investment strategy that anticipates the devaluation of currency.
• Safe Haven Asset: An investment that is expected to retain or increase its value during times of market turbulence.
• Physical Possession: Holding actual gold or silver bullion, as opposed to paper claims.

Summary of Discussion on the Silver Market and LBMA

This discussion, featuring mining executive and precious metal analyst David Jensen with Elijah K. Johnson of Liberty and Finance, delves into critical issues currently impacting the silver market, particularly concerning the London market and the LBMA. The conversation highlights a potential "seizure" of the market due to a severe lack of liquidity, with implications extending to the broader financial system.

The Silver Market's Liquidity Crisis and LBMA Issues

• Zero Liquidity in London: The central thesis is that the London silver market is experiencing a severe liquidity crunch, with reports suggesting "zero liquidity available." This situation is described as the market "locking up."
• Discrepancy Between Claims and Physical Assets: A core problem identified is the trading of "claims in the cash market for immediate ownership and immediate delivery of assets that aren't in existence." The LBMA has operated this way since its inception in 1987.
• Billions of Unbacked Claims: It is estimated that there are billions of claims for silver ounces and hundreds of millions for gold ounces that are not physically held and segregated for market delivery.
• Outflows from Exchanges: While some debate exists on whether outflows from major exchanges represent actual removal of metal or just internal transfers, evidence suggests significant physical removal. Hundreds of millions of ounces have been drawn out of London.
• Lease Rate Surge: The lease rate for borrowing silver has exceeded 100% annually, with one report indicating it reached 200% at the end of the previous week. This signifies extreme difficulty and cost in obtaining physical silver.
• Market Seizure: The combination of intense leverage and the demand for physical delivery is causing the market to seize up. The balance between individuals requesting delivery and those removing it to other locations is unclear but collectively sufficient to cause this crisis.

Market Dynamics and Potential Consequences

• Silver Price Surge and Psychological Levels: The discussion notes the recent weekly close of silver above $50 an ounce, a significant psychological level for traders, as highlighted by Dr. Mark Thornton.
• Unraveling Market Structure: The current setup with standing claims is described as being "set up to unravel very quickly."
• Knock-on Effects on Gold and Bonds: A major concern is the potential for a spillover into the gold market, which faces similar liquidity issues, albeit with more central bank involvement. Ultimately, this could impact the bond market, recalling the 1970s when rising gold and silver prices led to bond selling and increased yields.
• Global Debt Implications: With over $300 trillion in global debt, a surge in bond yields would have significant consequences for the "speculative debt bubble economy" created by central banks.

Contrasting Mainstream Narratives with Underlying Causes

• Mainstream Explanations: The mainstream narrative often attributes silver outflows to Indian demand or "hunch brother squeezes."
• Jensen's Perspective: Reaction to Central Bank Monetary Expansion: Jensen argues that the primary driver is a reaction to central bank monetary expansion and the anticipated inflation.
• Declining Indian Demand: Data does not support a material impact from Indian demand; in fact, demand from India has been observed to be declining.
• Fed Policy and Treasury Sell-off: Following the Federal Reserve's announcement of interest rate cuts on September 17th, rates on 10, 20, and 30-year Treasuries began to tick up, indicating a sell-off.
• Unjustified Liquidity and Inflation: Jensen questions the justification for additional debt and liquidity injections when stock markets are at all-time highs and inflation is significantly above the 2% target (estimated to be closer to 5% in reality).
• Shift to Safe Havens: Investors are moving out of currency and interest-rate-sensitive assets into safe havens like gold and silver. This trend is expected to extend to other commodities like oil, copper, and foodstuffs.
• Currency Inflation and Real Asset Inflation: Decades of loose monetary policy and currency inflation, previously sequestered in asset inflation, are now expected to manifest as price inflation in real assets.
• Historical Definition of Inflation: Jensen reiterates the historical definition of inflation as an increase in the money stock or currency outstanding, which central bankers have downplayed.

Monetary Demand and US Silver Eagles

• Increased Premiums on Eagles: A significant increase in premiums on wholesale and retail silver and gold Eagles has been observed.
• Silver Eagles as a Key Indicator: The strong demand for Silver Eagles, in particular, suggests monetary demand and a loss of confidence in the US dollar, as people seek recognizable assets for potential barter.
• US Mint Production Cuts: The US Mint is producing Silver Eagles at 20% of last year's rate, exacerbating the supply-demand imbalance.

Global Mint Distress and Supply Constraints

• Royal Canadian Mint: Dealers are unable to obtain 10 and 100-ounce bars.
• Royal Mint (UK): Only selling 1-ounce silver coins, having stopped larger denomination bars.
• Perth Mint (Australia): Has completely halted sales of all silver products.
• Four Major Mints Showing Distress: These actions by four major global mints indicate the distressed nature of the silver market.
• Higher Prices as the Only Solution: The only way to address this situation is through "enormous moves higher" in the price of silver to allow the market to clear.

Impact on Bullion Banks and the SLV ETF

• Bullion Bank Short Positions: Bullion banks are reportedly net short 220 million ounces in COMEX, with billions of ounces sold into the London market.
• Balance Sheet Risk: Significant price increases could lead to financial institutions "rolling belly up."
• Hedging Claims vs. Actual Shorting: The mainstream narrative that banks are merely hedging client positions is questioned.
• Goldman Sachs and SLV ETF: Jeff Currie of Goldman Sachs's 2021 comments are referenced, suggesting the SLV ETF sold client silver to create claims against it, artificially increasing apparent liquidity.
• JP Morgan's Role: Questions are raised about JP Morgan's role as the primary vault operator for the SLV ETF and whether they facilitated the creation of claims against hundreds of millions of ounces held for shareholders.

The Inevitability of Higher Prices and Gold Market Concerns

• Higher Prices to Liquefy the Market: The only cure for the LBMA's potential silver shortage is "materially higher prices" to bring liquidity back.
• Vast Untapped Silver Reserves: While 25 billion ounces of silver exist in various forms (electronics, solar panels, jewelry), it is not in the readily deliverable 1,000-ounce bar format required by exchanges.
• Gold Market Vulnerability: Similar issues are anticipated in the gold market. Central banks hold vast amounts of gold, with a significant portion vaulted at the Bank of England.
• Central Bank Intervention: Central banks have historically intervened by lending gold into the market to suppress prices.
• Currency Crisis and Unobtainable Gold: As a currency crisis looms, central banks may find it impossible to reclaim gold lent into the market, as people will be unwilling to exchange it for devalued fiat currency, reminiscent of the Weimar Republic.

Technical Indicators and the Debasement Trade

• Technical Analysts' Caution: Some technical analysts suggest the market is overbought, with indicators like RSI flashing caution.
• Debasement Trade Override: Jensen argues that in a hyperinflationary scenario, traditional technical indicators may become irrelevant as investors rush into precious metals regardless of signals.
• Decades of Monetary Inflation: The current situation is a result of decades of currency creation and loose monetary policy, which has temporarily sequestered inflation in asset markets.
• Rapid Price Inflation: This inflation is expected to quickly spill over into real assets, leading to a rapid spike in price inflation.
• "Debasement Trade" in the Press: Investors are anticipating currency debasement, leading to a "debasement trade."
• Asset Class Repositories: Asset classes like stocks and real estate have acted as repositories for inflated currency. Even a small percentage shift from these assets into gold and silver can cause significant price appreciation.

Conclusion and Final Thoughts

• Silver Above $50, Gold Above $4,000: The discussion concludes by noting the significant weekly closes for silver above $50 and gold above $4,000.
• Physical Possession is Key: Jensen emphasizes that the ultimate safe haven is physical gold and silver in direct possession, contrasting this with London's "promissory note market" of artificial assets.
• Protecting Against Upheaval: He advises people to consider protecting themselves from inevitable upheaval that arises from artificially fixed asset prices.
• "If You Don't Hold It, You Don't Own It": This adage is presented as a crucial reminder regarding the fragility of paper claims versus physical ownership.

The conversation underscores a critical juncture for the silver market, with potential systemic implications due to a breakdown in liquidity and trust in paper claims. The underlying cause is attributed to prolonged central bank monetary expansion, leading to a "debasement trade" and a flight to tangible assets.