The big question is, what would it look like?
I wanted to start this piece off with a little about me – I’m not a precious metals expert, but I do write about them, and have for 18 months or so. So you could say that I’m a writer. But, that’s my part time gig. In my “real-world” job I am an IT manager managing 50-80 employees in desktop support, networking, cyber security, server administration, and system administration. In this line of work, you must understand complex systems and how they work together.
Often, things break. You could claim you’re a genius and say you know how to fix everything, but the truth is – often diagnosing complex problems means isolating issues and trying to determine what is NOT an issue. I don’t want to bore you with my exciting career in IT. I bring this up because those that are newer to precious metals – I want there to be no confusion between me and a lot of the experts you see on YouTube. I like to write about a lot of this, and some of the pieces I wrote got a lot of attention.
I find every day there’s new things to learn in PMs, and I like to take you on this ride of discovery with me. Many of you posed questions to me I had NO idea what the answer was. It was awesome. You then put your researcher’s hat on and dig in. Another part of my background is the six years I spent in graduate school on 2 different disciplines – which helped me learn how to write a prolific amount of words – but to also be very careful about sourcing.
I also want to add a little element of mystery and discovery for the reader. Andrew Maguire is an expert with the PM markets, but he’s also an expert at captivating his audience – and he could read his local phone book and make it sound like a thrilling murder mystery. So he does bring an entertainment element to this. And I wish to as well. However, with entertaining – you have to be very careful about sources. What I’m about to write below is sketchy with sources, and NOT ready for prime time mainstream media. There could be explanations for a lot of this. However, I will take an angle on this to show what a run on the banks CAN look like.
Fractional reserve banking
The genesis of this is understanding what a fractional reserve banking system is. I don’t think you need a Harvard MBA to at least give a high level understanding of the concept.
A bank has $1 in its vaults, and it is permitted to lend out $10. The idea is that the bank can lend up to x amount of its assets. Your deposit is their asset. We saw in the Great Depression in in movies how bank runs happened. While a bank may have had $1 million in the vaults, the bank account holders had deposited much more than that – and the banks had lent out most of it. IF everyone comes for their cash at once, there’s a problem. What you see in other countries is they may ration how much you are allowed to take out of YOUR account daily. This restricts the outflow of cash, and keeps the bank solvent until it may be able to order more cash to the location.
Overall, the concept of fractional reserve lending is to LEVERAGE an asset to then multiply it. This concept has done wonders to grow the western countries over time, but if this leverage becomes too much (say 30x like I heard, actual number not important here) AND the credit worthiness of those you lend to is suspect, you now have problems structurally in the system.
10x with GOOD credit customers = HAPPY
30x with BAD credit customer = SAD
The above sort of shows you the structural issues with the housing crisis in this country, and why Michael Burry and others bet against (shorted) this system.
Fractional reserve and metals
There are a ton of ways to invest in precious metals. I’ll give you a few here, but this is not all-encompassing.
- futures markets – you are betting on the price of silver to go up or down, and you CAN take physical possession.
- physical metals – buy at a dealer and put in your hands
- ETFs – you get exposure to price of silver, but not actual ownership. Some ETFS DO allow taking metals out, if you have a sizable account
- Vaulted – unallocated versus unallocated – some vaults claim to put your metals in a box with your name on it, while others have a warehouse of metal and just say you can have some of those bars if you want your money in metals.
Edit on vaulted with allocated/unallocated. I wanted to add information a reader passed on to me to update the information here. His information passed to me….
I had some understanding of the above, but when you fire out 40,000 words and you have a limited understanding of THAT specific item, you gloss over it and try to give the highlight reel. My overall point was that there were degrees of ownership to point out that the situation in Perth MAY be happening to the lowest class of that grouping. I felt this is something to look at in other unallocated stores on the planet.
Keep the above in mind when seeing any of my writing below where I may have been inaccurate in terminology.
In all but holding physical the buyer has some risk. But some of these products have significant exposure to fractional reserve types of situations. Where you THINK you bought metals, but you could find yourself standing in line to get them, and they run out. Despite you having a slip of paper saying you own it. More on that below.
Let’s look at some of the fractional issues, by type. But first – I have to give a LOT of props to James Anderson at SD Bullion. All of the work he does on videos and reporting issues has helped educate me. He won my business from Apmex because I support the messages and the outreach he has done to educate me and others.
He shared this link, which he says take a look at the 15:20 mark. He posted the clip on his page. I guessed that they operated this in a fractional reserve yesterday, but it seems this video confirms it.
Futures markets – this is where a lot of money goes to money heaven. Currently, you have 161,530 contracts for silver in Open Interest (OI). Each contract is 5,000 ounces.
Each contract has a LONG and a SHORT. Someone is BUYING and someone is SELLING. To buy or sell a futures contract, you need to meet the margin requirements. I don’t know what it is offhand, and I’m too lazy to look this up at this very second, but I think it’s around 10%. Additionally, there are position limits where you can only have a position of 1500 short or long in a month – which either just changed to 3000 or is about to. So you could sell 30,000 contracts in a day, but each week I think these positions need to be squared, so as long as you perhaps buy 28,500 you would have a net 1,500 short. So for me or you, the most we could be is 7.5m oz bought or sold. But the banks also have not only their accounts, but many accounts for their account holders they act on. So maybe they have 100 bullion dealers in 100 accounts who want to hedge. Each one of those accounts may have a 1500 contract limit. Point is, the big banks have almost unlimited firepower whatever direction they want to take.
With this 161,000 contracts, that’s the equivalent to 805,000,000 oz – or 1 year of mine supply they are promising to sell someone. Additionally, on this chart you see volume of 55000. Or, roughly 280m oz were bought/sold yesterday. Remember, mine production for a year is 800m or so, so just yesterday alone, 34.7% of all yearly production was sold. And that was an AVERAGE volume day. The highest volumes I’ve seen were 2.5x all mine production in one year.
The point is, everyone knows most of these contracts are just paper bets. It’s like determining the winner of the super bowl by who bet more on it. In this case, as I stated in my video, it’s like “people who don’t have the silver or want to give it up selling to people who don’t want it or want to take delivery of it”. In this respect – this is the most egregious of the leverage on silver.
What happens….when the percent of the people buying this “paper silver” actually want to remove it from the vaults? Literally, there are 805m oz in open interest. The COMEX has been drained 26m oz this past month alone.
I wish I could find that video of the guy talking about if only 4% took delivery, that price would sort itself out. If anyone has that – please send to me and I will edit in here. Edit – thank you to two Twitter commenters for getting the me the Kyle Bass video link. Blanked on his name, must have seen this like 5 times. Dude is a boss.
Physical metals – While this class has no counterparty risk, there are some risks involved. Security, for one. But what about the ordering system? What if you are looking at weeks or months delays – or even cancellation of orders?
ETFs – I’m going to break this into two types. One is a type like PSLV, which everyone trusts has the metals and you can redeem. Audited by the Royal Canadian Mint. The other is like SLV/SIVR, which buys metals, but recently changed their prospectus to say, essentially, “that all of the metals may not be here”. Maybe, they cannot source more metals to add? Maybe you see difficulty in getting metals? Maybe you see SLV outflows of 90m in a month as reported by several different sources?
Vaulted – with the vaulted category, we are going to look at both allocated and unallocated. If you have ALLOCATED, it means bars are titled in your name. These are yours. With unallocated, you are led to believe there’s a stockpile and you have a share of that stockpile. However, the risk here is the fractional system above. It has been reported that the Perth Mint has DEFAULTED on unallocated silver accounts. With sourcing here – let’s be careful. We have no statement from them that they defaulted. However, on the interwebs, we are seeing many reports of people (and their family/friends) are trying to redeem their unallocated silver, only to be told they would be put on a wait list and it could be a year before they see their metals.
Tying it all together
In my most famous post about Eric Sprott and 4d chess, I laid out how all of this would unfold. A few days later I wrote a similar post but made it structurally more palpable for a newbie to understand the phases of this. I felt the second half of March is where all of the fireworks would start, and I kinda/sorta nailed it. The 16th of March, the first day of the second half of March, there have been reports of the Perth Mint defaulting on unallocated. I have not nailed price yet – BUT I did mention in one of my pieces that the 10yr was a threat to price in the short term. I then made mention yesterday that I felt the silversqueeze movement has kept price perhaps $5 more than it should be due to the 10yr moving up to 1.75% from .91 in early January. Silver’s remarkable strength has been a symptom of underlying supply/demand issues. I believe this +$5 price from perhaps where it should be is a LOT of evidence. Most of you just see the price from the last 2 months as the same. But you are not taking into account what the price SHOULD have been with the 10yr at 1.75% if this supply shortage was not present.
In my 4 phases piece, I outlined 4 steps to get silver to go to the moon.
Phase 1 – buy out retail. Get publicity. Get interest.
Phase 2– when retail is out, or premiums too high, buy PSLV. They will buy 1,000 oz bars. PSLV has bought nearly 30m oz the past month.
Phase 3 – tightness will be revealed and industrial users will lay the hammer down on orders.
Phase 4 – The shorts will start to cover, and price goes ballistic.
My belief is, we are WELL into phase 3. Perhaps close to the end of phase 3. I believe this “draining of the metals” is exactly what I was predicting as a predicate to silver prices doing a moonshot. I believe at the VERY end of phase 3 is media coverage of this, which then leads to the stampede – but many will be far too late on the retail side, and those well positioned industrial users have been the ones doing the draining of unallocated stores. As the stories pick up of defaults of unallocated – I believe THIS is what pushes many to the futures to then collect their metals as the only source of “available” stores on the planet.
And remember, they are a fractional reserve at 6.32x their stores. So even if those late to the party crowded into futures, this is the visual you see when a bank run is happening. And THAT is what causes the shorts to scramble to close out all OI as quickly as possible, as to not be on the hook to hand out hundreds of millions of ounces. They will simply…offer cash. And, that in itself is a default, despite what Jeffrey Christian likes to say. If I go to the store to buy eggs, and there’s a slip of paper where the eggs are, and I take that slip of paper to the register and hand them my money, and they hand my money back, that is a default of service. And it is very near…..
Let’s investigate phase 3 above…..
- We are clearly seeing tightness in the 1,000 oz bar market.
- Unallocated accounts in vaults may have been start to be drained. This is not evident to retail investors until they go to get their bars. NO ONE IS TELLING THEM THE VAULTS ARE RUNNING BARE.
- Retail is out most places, all the time, or premiums are sky high. This is a constant, steady, relentless drain
- We are seeing issues with supply chains with chips and semiconductors in Ford, Tesla, and Toyota in the last few days. This tells me that manufacturers will be looking to absolutely ensure their supply chains are taken care of. “Just in time” delivery fails during COVID and trade wars. Maybe some of these customers had bars in unallocated vaults and have been draining the vaults for the last few months without us knowing.
- COMEX down 26m ounces
- SLV drained 90m oz.
- SLV/SIVR change prospectus to state they cannot guarantee all of the silver is there.
- Goldman takes 15m oz from SLV and hands over in March deliveries immediately, indicating risk departments of big banks are now leery of unallocated vaults with claims on them.
- Perth Mint may have defaulted on unallocated accounts.
- Order cancellations from bullion dealers taking your money, then either not being able to deliver and cancel your order, or providing massive delays in getting you product
- Mints stopping order taking
- CNBC marching “muppets” out to say you cannot squeeze silver, don’t bother trying
- Media conflating the futures bump up and down in one day with a “failed silver squeeze”, and either not paying attention to the ACTUAL physical squeeze or being dishonest and trying to demoralize you.
- PSLV adding 30m oz and having problems finding bars.
If I wanted to chart this, so see what the risk factors are – and what me or anyone else can observe? This is what it looks like. This is what all of you out there can observe for yourselves.
So what are we seeing????
I put together some evidence around the interwebs for your viewing pleasure. My assertion is, again, that we are WELL into phase 3. Where I was wrong was I thought this would supremely affect price right now. I wasn’t REALLY wrong – because as I mentioned above the 10yr rising up over the last 2 months has hidden, what I believe, to be a $5 move up in silver that was obfuscated by the 10yr. Had the 10yr not risen, my belief is we’d be seeing $33 prices right now – and that is VERY similar to what I was talking about where things start breaking.
Let’s review some observations…shall we?
COMEX down 26m oz
Problems with getting product ordered?
I heard the mint mentioned below is NOT the mint of Poland – but a more minor mint. Still showing lots of buying power..
Defaults in unallocated?
ETFs terminating agreements?
Mints out of silver?
PSLV having problems getting metals?
SD Bullion discussing Sunshine Mint stopping orders until Sept 2021….very important note. These guys supply a whole bunch of mints with blanks. So there goes retail for a few months. Meaning, perhaps more buying in PSLV.
Silver shortages in Mexico…
Analysis from Schiff Gold that silver squeeze seems to be working…
Turkey Running to gold…
So – if some idiot like me is seeing reports from everywhere of stress, high premiums, defaults, inventory issues, delays, etc. How much longer do you think it is until mainstream media picks up on this?
I see this traveling through the alt-media for a few weeks. Zero Hedge reports things that tend to linger for a week or two before WSJ or other MSM picks it up.
What I think it’s clear to see is this…that the retail investor, if they look closely enough, can find signs of significant amounts of metal being drained from any and all sources into industrial and investment users.
The questions then become, for timing purposes…
- What other juicy stories are out there?
- How much unallocated has been drained worldwide, and how much could be left? I see a Ronan Manly article on unallocated metals, coming to a theater near you.
- At what point do mainstream media sources start to piece this together?
- At what point do those industrial users wanting to ensure their supply chains are solid, start to see this silver drain and decide they need massive orders to ensure 1-3 years of product is in their possession?
- At what point does the 6x leveraged futures market with a depleted inventory of 20% this past month, start to see more long futures contracts with people wanting to take it while they can?
- At what point are those on the short side of those leveraged futures contracts decide they need to get out, NOW.
- At what point do we start to hear of more defaults of unallocated stores?
- At what point could Yield Curve Control be put in place to cap bond rates?
- At what point does “dinner table inflation” make the news and have people rushing to gold and silver by lining up around the city blocks?
- At what point do people realize the only escape from a falling dollar is to put this money into precious metals, real estate, and other durable commodities like copper?
- At what point to people realize that the only way out of our debt is to inflate it away, and this means that those on pensions and social security will see ever-diminishing value from the paper currency provided to them?
Those questions are the backbone of what will launch price into orbit. Many talk of silver to the moon. I’m thinking somewhere like Jupiter or Saturn.
This is unfolding slowly with reports rolling in, but price will react swiftly and violently. At some point, the Rubicon is crossed from ONE of those questions above, and that’s the day you wake up to silver being $5 more per ounce. And then the rest of the questions get answered….very quickly…which may lead to many days of multiple dollars up, per day.
This story is rapidly unfolding, and this is telling me we are approaching the end of phase 3.
I will be watching futures very closely. Why?
It seems it will be the exchange of last resort to get metals. When that ballgame starts, who knows. Could be already in progress. What if…..400m of that 805m plans to take possession of the metals?
What I would expect would be to see less shorting into rises in the future. Open interest to whittle down, but at the same time, buying will be more in control. I’d expect to see less OI, inventories continuing to drop, and more reports of illiquidity in unallocated stores.
It’s coming folks….be patient…