Silver Shortage: Is This the Start of Silver’s Biggest Rally Ever? | Josh Phair CEO Scottsdale Mint

Key Concepts

• Metal War: A race for above-ground and below-ground metal, driven by geopolitical tensions and a shift away from China.
• Central Bank Demand: Primarily focused on gold, with silver lagging behind until recently.
• Supply-Demand Imbalance: Increasing buyer demand is overwhelming limited sellers in the silver market.
• Silver Market Size: Silver is a relatively small market, making it susceptible to rapid price movements.
• Geopolitical Risk: Concerns about potential conflicts and trade disruptions are driving asset diversification into precious metals.
• US vs. London Markets: Differences in how physical metal is handled and financed in the US (COMEX) versus London (LBMA).
• Leasing Rates: Significantly increased in London, making it expensive to finance metal and forcing sales.
• COMEX Vaults: Currently holding substantial silver inventory, while London's LBMA is perceived as thin.
• Refinery Bottlenecks: Refiners are overwhelmed with incoming metal and facing financing challenges, leading to delays.
• Retail Demand Shift: While some retailers are exiting the market, new investors are entering, driven by long-term price expectations.
• Gold-Silver Ratio: Silver is seen as a more affordable option compared to gold, attracting new investors.
• Industrial Demand: Growing demand for silver in sectors like EVs, solar, electronics, and military applications.
• Volatility: The market is experiencing extreme volatility, with potential for sharp price swings.
• Risk Mitigation: Strategies for managing risk in the precious metals market, including diversified sourcing and securing physical metal.

Metal Market Dynamics and Geopolitical Influences

This discussion, featuring Josh Far, CEO of Scottsdale Mint, and host Craig Hempy, delves into the current volatility and price surges in the silver market, attributing them to a confluence of factors including geopolitical tensions, shifting global trade dynamics, and a fundamental supply-demand imbalance.

The "Metal War" and Shifting Global Trade

Josh Far posits that a "metal war" is underway, characterized by a race for both above-ground and below-ground metal. This is linked to efforts by figures like Trump and tariffs aimed at hardening the US and its trade partners against China. The underlying concern is that in the event of a kinetic war, international trade could cease, necessitating a move away from reliance on China. This geopolitical backdrop is seen as a catalyst for nations and entities to secure physical assets.

Silver's Lag and Emerging Demand

While central banks and institutional players have been aggressively acquiring gold for an extended period, silver was perceived as being "left behind" earlier in the year. However, Far anticipated this shift, stating, "I think what we're seeing also at the same time is like when when you have and I've talked about it as well all year is you've really only had pretty much I'd call it the central banks and the huge institutional players that have been clam clamoring for gold. No one's really messed around with silver yet." He now believes that the market is entering a phase where buyer demand is beginning to overwhelm seller supply, particularly in the silver market, which is relatively small and thus more susceptible to rapid price movements.

US vs. London Market Dynamics: A Tale of Two Vaults

A key point of discussion is the contrasting situations in the US (COMEX) and London (LBMA) physical metal markets. Far highlights that while COMEX vaults have seen significant silver inflows and are at recent highs, the LBMA is perceived as "thin." This disparity is explained by the different operational models:

• London (LBMA): Operates more as a "banker's market" heavily reliant on leasing and trading. When physical metal becomes scarce, it puts pressure on those who have leased it out. Leasing in London is described as a "big pool of assets" rather than a direct ownership of specific metal.
• US (COMEX): Leasing is not as prevalent. Banks must physically acquire metal and remove it from COMEX to lease it. This process is more transparent and directly tied to physical inventory.

The narrative suggests that a significant amount of material is moving away from London, with BRICS nations and China actively acquiring metal. This aligns with the adage, "go where you are treated best," applying to assets as well as people.

The Refinery Bottleneck and Financing Challenges

The conversation then shifts to the operational challenges faced by refineries. Far explains that refineries are currently overwhelmed with incoming metal, particularly "random secondary 10 bars, 100 bars" and old coinage. This backlog means they are operating with lead times of "two to four months." Compounding this issue is a lack of financing. Refineries are "tapped out" due to several factors, including the need to finance the influx of metal and the general tightening of credit.

The Shift from a Seller's Market to a Buyer's Market

Historically, the market has been characterized by a "selling state" where retailers have been exiting silver and gold, perceiving prices as too high. This has led to an abundance of metal flowing to refineries. However, a significant shift is occurring:

• New Investors: A new class of investors is entering the market, looking at the long-term potential of silver, especially when considering inflation-adjusted highs from the 1980s. This increased demand creates competition for available silver.
• London's Need: Entities in London require silver and are no longer willing to lease it out at previous rates. This has led to a dramatic increase in lease rates, with annualized rates now ranging from 40% to 100%, compared to the historical average of 1-2%.

The Impact of High Lease Rates and Financing Costs

The exorbitant lease rates in London are forcing companies to sell silver to banks to release it, rather than pay these prohibitive interest costs. This effectively pushes more metal back into the London market. Simultaneously, industrial consumers (e.g., semiconductor manufacturers, medical equipment producers) may choose to reduce their inventory purchases due to high rates, further influencing metal flow.

Physical Metal Movement and "Gridlock"

The situation has escalated to the point where physical silver is being pulled from COMEX vaults and flown to London. The cost of transporting and financing this metal is estimated at around $75,000 for 300,000 ounces. This movement is driven by the expectation that the cost of acquiring this silver in London will be less than the price they can obtain for deliverable silver there.

This complex interplay of factors has resulted in "gridlock" at manufacturing companies and refineries, particularly those heavily financed by banks. Companies like Scottsdale Mint, which have secured physical metal and operate with different financing structures (e.g., lease facilities in Europe), are better positioned to navigate this disruption.

Signals of Market Resolution

When asked about signals indicating a resolution to the current market tightness, Far suggests looking for a combination of factors:

• Narrowing Gap: A narrowing of the gap between futures and spot prices, and between US and London prices.
• Decreasing Lease Rates: A return to more normalized lease rates in London.
• Reduced Borrowing Costs: Lower borrowing costs for entities using instruments like SLV as a flywheel.
• Tightening Spreads: A reduction in the bid-ask spreads in the physical metal market, indicating decreased volatility and risk.

Long-Term Outlook and Risk Mitigation

Far believes that while the immediate situation might be resolved in a few weeks, the underlying structural issues suggest a longer-term trend. He emphasizes the importance of risk mitigation, drawing from his background in risk management. This includes:

• Redundancy: Having redundant equipment and processes to ensure customer service continuity.
• Diversified Sourcing: Procuring metal from multiple, reliable jurisdictions to avoid reliance on single sources.
• Securing Physical Metal: Never selling product without having secured the physical metal beforehand, a strategy that proved successful for Scottsdale Mint during COVID-19.

The Evolving Role of Silver and Retail Investment

The perception of silver is also evolving. While historically viewed more like copper, its rising price is prompting a shift in how people in other economies perceive it, increasingly as a precious metal. The gold-silver ratio is highlighted as a factor, making silver appear as a "deal" compared to gold. This is attracting new investor populations, particularly from emerging economies.

For retail buyers, Far advises purchasing from reputable companies with a long track record, such as Spotmoney.com and Scottsdale Mint. He suggests that despite potential price pullbacks, the current supply-demand fundamentals are different from previous market peaks like 1980 or 2011. Therefore, any dips might be opportunities to "add to their stacks" rather than reasons to sell.

Conclusion: A New Era for Precious Metals

The conversation concludes with a sense of cautious optimism and a recognition that the precious metals market is undergoing a fundamental transformation. The confluence of geopolitical instability, evolving global trade, and increasing industrial and investment demand for silver suggests a new paradigm. While volatility is expected to persist, the underlying fundamentals point towards a potentially sustained upward trend for silver, driven by factors far beyond speculative trading. The discussion underscores the importance of understanding these complex dynamics for anyone involved in the precious metals market.