This is not clickbait. This is a mechanism to get supply that very few understand and do not realize what kind of chokepoint this is. This potentially then leads to silver ETF liquidations in a few years and a silver price crash with this.
I wrote about this concept last week when I was writing about the silver supply shocks. I think we need to talk a little more about scrap silver as a supply. The numbers looked funny to me and I wanted to dig in.
When I was researching my supply shock column last week that took many hours to write, I dedicated a section to the supply that I believe is overlooked and should be its own standalone article.
Above, you see the top red line with the amount of scrap (recycled here), and below, you see the price of silver for the year. You would think at $50 silver that gobs of silver would flood to the refineries and dull price. That’s what I thought would happen. But you might be wrong. I don’t know when I heard this, but I had heard that when silver last got to $50, that coin shops, refineries, etc stopped buying scrap silver. Why? Refineries were backed up weeks, and had to turn it away. If you are hedging your buys – you buy at $38, short it on the futures to lock in the price. If you are NOT hedging your buys, it’s terrifying to buy this at $38 and it could go down to $30 the next day.
If you look at those numbers, you can see that generally speaking, with a higher price, you get more recycling – in total volume. The highest up there I see is just over 200m (price was $38) and the lows are in the 160s when silver is in the $15-$17 range. What this sort of tells me though is there’s a correlation – sort of – until you get to a certain price point.
Look at the green. You see that pretty much for the price of silver, you get about 10oz per dollar of silver price. As the price rises, you’d think that the volume of scrap would go up proportionally as more people are enticed to turn on things around the house. They hear about $30 silver and remember their aunt’s silverware set they inherited, times were tough, so they turned them in.
However, none of the years here are “recession” years also – so times weren’t SOOOO tough for everyone that a year or two might stick out. What we see is interesting. Yes, more people turn in their aunt’s silver as price rises, but it’s a declining number as price gets higher. You would think higher prices might correlate more closely to a ratio with the price.
If you look above and see the price when it is $15.70, you see supply of 166.5m. Yet price at nearly DOUBLE in 2021 has only a 20% move in supply? That doesn’t pass the eyeball test. Which is why they you can look at 2012 where the price WAS double, and supply was still only 25% more.
Remember above about the refineries hedging? IF you were buying at $38 and hedging to keep value, there’s no harm in building a bit of inventory to chew through. The problem may be storage – and they may not be able to hold the volumes in storage, so it is easier to just turn it away. IF these guys are turning away when they are reaching capacity, it is telling me three things:
- Price can run higher and refineries could not keep up with all who wanted to sell. This shows the lower ratios above.
- When price runs higher, it’s not the scrap at refineries that are shorting the price lower. What’s interesting here is those who may short (naked – not banks selling metal into the market) into higher prices BETTING on lower prices to come may be betting on refineries taking in so much silver and then hedging that – and their hedges would bring down silver. So the futures bet here to short is anticipating refineries shorting – that won’t.
- Refineries most definitely have a capacity they reach. OR, you would see a much closer correlation from price to oz. This is what this looks like on a dot plot.
Above is my original work. You would expect this to be all more or less near a ratio of 9-10. Instead, what you see is, as price goes up, there’s a slowing down of supply being produced by the recycling at refineries. You see at this report, it’s mostly jewelry and silverware being scrapped.
Now, we go and look at most LIQUID supply out there in great numbers – that I can tell – is COMEX silver. Apparently, this used to NOT be a “delivery” mechanism, but it was highly used for betting and speculating on the price. However, it SEEMS supply in the markets have become tight to a point this has now really become a delivery market.
When I first got involved with all of this two years ago, I also got the bug of “the COMEX will break”! This just isn’t true, but rather when it is in trouble, prices will rise. I believe the COMEX here is your canary in the coal mine of when imminent death is coming to the markets. And, I believe, it’s not entirely far away. Thanks to learning a lot over the last 18 months by listening to tons of people, you tend to learn that those who trade silver CONTRACTS are mostly paper traders. Us silver bugs convert the volume of trading into ounces and cannot understand how half of mine supply trades in a day, and no silver leaves the vaults. This last week or so has been pretty weak, but you can see some of those peaks are around 130,000 – or roughly 650m oz traded in a day. The futures guys don’t think like that – they see contracts.
How else can you see 1 billion of silver traded in a day, but not one ounce of silver leave a vault? What you find is that when the delivery month comes and you don’t have the silver, you’re out – you roll it over to the next month. IF you have the silver and want to sell, someone can then claim these to stand for delivery. The next problem though is actually getting the metals out of the vaults. We’ll save that conversation for another day.
I never thought the COMEX would “break” in the traditional sense. My hypothesis has been that a massive wave would come in and those bidding on SPOT large quantities could bid the price up in a hurry, and catch MANY shorts off guard. They would either have to double down on a losing position, or lose hundreds of millions, or billions, in a short period of time. I also documented how this SHOULD have happened, and the banks simply changed the rules AS this was going on. In my first Palisades interview, I spoke essentially of these massive shorts getting caught offsides. And, they were. What I could not comprehend at the time – was that a bank would lie about buying 110m oz and putting it into their vaults WHILE at the same time changing a prospectus to say they “may” not have all of the silver.
This time, it seems a little different in that from what I’ve been hearing, the banks are now set to let price run and are not standing in the way – in the form of massive shorts.
If you look at the last time we were around this area, look back in October. What you see is a massive run through October.
Let’s look back though at the last 4 times the position was where we are now over the last 2 years…
In 3 of those 4, we had really strong moves which the banks then short into. The one there didn’t have a great run up. What this would suggest is we have some weeks to run higher here as banks will increase their net shorts and we rinse and repeat the whole damn thing again. And – we are working on a legit double bottom here so we might have a run up to $28 here…
I have also documented the beat down and recovery for the last 16 months. THIS month broke pattern, as what we saw was that we normally leave the beating, and recover over about 9 trading days. This usually starts after a big green candle right after opex, like you see above. This time, however, the big green candle after opex never really happened – and I bought my monthly trading positions of options and so far have been dinged about 10%, but these are longer term options and the price recovered well.
The point is, this month looked to flush EVERYTHING out of the market – there was no real recovery until we hit $21.44 as a double bottom.
Anyway – as the silver market looks poised to run, those who are critical of the silversqueeze movement wanted to point out the failures:
- The shorts ARE the ETFs
- Retail can’t move the price of silver
- Silver apes know nothing about the market
If you look at the above, I tried to point out item one as well. IF you are a big entity and want to hold silver, it’s easy to deposit it with a silver ETF, then you can hedge it. Perhaps you lease it out? If I am Samsung and want silver, and my supply guy is having a hard time finding me silver, can’t I just buy 100,000 shares of SLV and take it out when I want? You have to be an authorized participant, but maybe a Samsung works with a Bank of America to do this to secure their silver supply for the next 2 years. IF they want to get out of the position if the market softens and they can just buy spot, they may want to sell their SLV. But, while they are holding this, why the hell would they not hedge to preserve the value? This is where Jeff Christian and his CPM group come in here. His job with these large entities is to provide hedging strategies. So, by definition, he has a pretty good idea of who is shorting and why.
Where I disagree with Jeff is not on the existence of supply, but two things:
- Supply AT THIS PRICE
- Readily available supply due to potential bottlenecks in getting scrap recycled
I ask you this. How many oz does SLV have? Last I saw, it was over 600m. How many of these ounces are owned by common retail? Probably a decent amount, but perhaps think about how many might be held by banks on behalf of a customer like Samsung.
You hear Andrew Maguire talk about how silver in quantities is sold out until mid 2022. But, I also ask, if you are a Toyota and you NEED 500,000 oz, how do you get it, immediately? Couldn’t you buy SLV shares and then pull out the oz? Why haven’t you assumed many of these companies haven’t already bought in to SLV?
Where the risk comes is re-hypothecation with an SLV, and what is the level of trust that people have in SLV having the metals? Remember, in SilverSqueeze, 110m oz were supposedly bought by them and added to the trust. It was later found out that they changed to prospectus to say “all the silver might not be there” and we later saw the accounting scandal where 110m oz was “accidentally added in error”.
The point is, if you are Samsung, where are you getting mass quantities of silver?
- The OTC. I don’t know a lot about this, as Andrew Maguire reports on this. He continuously claims you cannot get orders in size here and have to scour the earth for silver.
- The COMEX REGISTERED I’m staring at 92.9m oz just sitting there that can be bought at today’s price, today. IF we were that short on silver, wouldn’t we have less? Well, if you look back – I believe we all took about 70m out of the COMEX since silversqueeze. Don’t quote me on this, but it’s in that ballpart.
3. Scrap. Capped at 200m or so. IF price runs, this can’t go much above 200m unless they want to build more refineries
4. ETFs. To me – this is where companies could be buying to secure their silver they can no longer get from the 3 above. And, this makes sense – perhaps – if 1,000 companies have all worked with the banks to buy in to SLV trust – and then worked with CPM group to hedge these positions. But what really happens if the metal isn’t there, as they stipulate now? That seems to be a huge risk to a Samsung?
5. Mines. I think there are problems with increasing this much. We may have a Discovery, MAG, and Bear Creek coming up in the next 2-3 years, but all of the existing mines are running out of LOM and base metals producers are not spinning up silver production. BASE metals are roughly 90% of where all of the silver mine production comes from. You have a Hecla, PAAS, and First Majestic – all of them combined might account for 10% of yearly silver production.
Jeff Christian also likes to point to gobs of silver out there. If you look above, he’s right – to an extent. But it is limited to essentially pulling metals out of ETFs and buying COMEX/OTC at bidding prices. Where he seems to fail with his argument is the 25B in candlesticks/silverware. While the supply MAY be there, at issue is that the refineries cannot boost production to meet surging silver needs.
I think what might be VERY interesting to watch this year?
- COMEX registered. IF this continues to go down, AS this is a delivery market now, you might start to really see silver prices move up to entice silver from the eligible to the registered. I don’t care about eligible. It’s not for sale. It CAN be for sale. But I would love to know who owns that 253m of eligible?
- ETF outflows. I know Jim Forsythe and DTDS track things like this. I’m wondering if you can track major outflows to specific customers, which is doubtful. It might be of interest to see if when these outflows happen, if open interest drops a bit if their hedges come off.
I spoke with Garfield Refining in Philadelphia and have some questions out to them to see if they might assist in my understanding of some concepts. They weren’t able to help me right away with my questions, so I sent them an email and hope to hear back. If I do, I’ll add this to an update later.
With 25b oz that are sitting on the sidelines, this means that the chokepoint to get this supply is the scrap recycling – and I have showed that as price goes up, it appears there are issues keeping up. This means to me that we have to look at the available stockpiles closely and with this, keep an eye on COMEX registered and PSLV for where industrial and mints may start taking from these piles.
All signs are pointing that we are heading to at least $28 in the next bigger leg up over perhaps a few months. But what if….what IF you start to see some ETF outflows of SLV while the COMEX registered starts heading towards 60m? We drained I believe 70m oz from the COMEX in 10 months. And there’s 92.9m left as I’m writing this. While Andrew Maguire is saying silver of size cannot be sourced until mid 2022? Is the table not set here to have this then run over $30 for the 3rd and perhaps final time before a punch up? To me, the Achilles heel here is PSLV sucking up 1,000 oz bars and depriving this from the market. Sort of like SPUT with uranium, if you are sucking up all loose bars, this may put tremendous stress on the system. The wildcard I believe is the ETF on the supply/demand numbers. The 2021 numbers above have this at 150m and 2020 at 330m – but to me, this is silly talk with how much PSLV added this year as well as the big push from WSS and silversqueeze. It is hard to think that ETF demand is half as much, but this would tell me you have institutions out of this. I don’t think they invest much in silver ETFs as it is – but if so, $30 silver in 2022 could bring that demand back, and quickly.
And, while a Jeff Christian points to the 25b pile of silver sitting there, I have clearly showed that as price goes up, the refineries can not keep up proportionally. Not only that – as we draw down 200m a year in silverware and jewelry, we are cranking out 225m in producing more silverware and jewelry. It is clear the two biggest piles of silver out there – COMEX registered and SLV, may only have, combined about 3 months of mine production as a buffer (counting the bank’s ownership of SLV as a guess at 150m oz) to any major move up with silver which might threaten Samsung’s supply. My suggestion here is this next leg up, that could go over $30, could see this buffer eliminated inside of the next 2-3 months with sustained buys by PSLV/Kinesis when price does rise significantly.
With the Giffen Good effect – IF we get a punch above $30, your PSLV can explode as well as your Kinesis because retail will be constantly at shortages and these outlets have you buying access to physical silver just above spot. SLV might explode as well, but we all know they may not be buying the silver they claim to be. Most in the know aren’t buying SLV, it’s more of those not in the know.
I also believe a Kinesis type of system can be buying 1,000 oz bars in droves to suck up more bars which bypasses the retail bottlenecks of supply and high premiums. This attack of 1,000 oz bars, along with a PSLV are thus directly in competition with industrial for large bars – and the refineries that may have 25b oz of silver behind them, cannot dial up production to assist – despite a Christian pointing to that pile. It’s behind a bottleneck.
We now have registered COMEX and SLV (what’s owned by banks and not retail) as the only “for sale” piles in the world of size. Eligible is there, but not for sale – yet. My suspicions are that IF price can get over $30, all hell will break loose to $50 in a short period of time. What this demonstrates then, is that supply can not simply be conjured up from recycling of the 25b oz pile. The ONLY way to keep prices from hockey sticking up is the COMEX shorting. Why would you do this? The idea is, that statistically speaking, as price rises that strong, it’s bound to go down. More and more take this bet and those who are betting actually move the price down. Without this, silver could be $200 in a year. The problem is this….when the silver inventories of registered are down in the 30m range, and those who want to stand for delivery exceed that 30m in a month – what happens? Obviously contracts will be settled for cash – but you are then seeing those who WANTED silver cannot get it – and THAT is when all of this gets interesting.
Price will have to hockey stick up on the COMEX to slow buying and entice more off of the eligible to sell in registered – but would the Giffen Good effect really have a higher price slowing the buying of investment grade silver? Remember, in 1980/2011 we didn’t have a PSLV or Kinesis to drain 1,000 oz bars – we just had punishing premiums to slow retail.
Rick Rule likes to say about Uranium – “either the price goes higher or the lights go out, and I’m betting the lights don’t go out”. What you see here is that price will have to go higher or Samsung doesn’t make anything as all of their lines will be shut down. I’m betting price goes higher. But the problem is this. It may have to go SIGNIFICANTLY higher, and quickly, to get those with 1,000 oz bars in eligible to sell. Once those are exhausted in 1-2 years – if not sooner, we then have a real dilemma on our hands with price. I wrote last week about the solar/EV demand picking up – and I can tell you, there’s a world of hurt happening by 2026.
As much as I feel in my bones the price of silver could eclipse $30 by end of 1Q 2022 and even see $50 this year, I’m caring about this because of my investment in miners. The long game here is for me to take profits from these miners and divert a portion of these profits into continuing to accumulate silver KAGs on Kinesis monthly. If every month I’m able to bank trading profits and investments to buy 100KAG there a month, that’s 6000KAG I can accumulate by 2026. IF the squeeze of a lifetime is happening in the second half of the 2020s, we might expect those $200-$300 prices then.
What could go wrong?
At some point in 2023/2024 with significant silver supply issues, my bet is that silver ETFs legally get liquidated and investors are cashed out, and silver ETFs are made illegal. THAT is the only way to keep silver below $100 when the COMEX runs into real issues. But all of those people that got cashed out – what are they doing with this cash? Buying physical – if they can – perhaps through Kinesis. This would crash silver with a few hundred million ounces hitting the markets – and may find homes in the eligible for COMEX – but that buying then via Kinesis could simply quickly rebound that price. All this does is delay, again, the silver supply issues. We then fast forward to 2026-29 when all of that is then chewed up and now we have EVs/solar tripling current industrial needs for their categories and this is when you see $200-$400 silver. There is silver. But in order to access that 25b pile, you will need a LOT more scrap refineries, and I just don’t think people are investing the millions to build these refineries unless you are seeing years of significantly higher prices and supply coming to these to melt.
If you are a bullion retailer – TODAY – I’d be drawing up plans/ideas to draw 1,000 oz bars off of COMEX, get this supply to a mint like a Sunshine Mint, and mint your own silver bullion at $3-$4 over spot. WHEN crunches happen – you will always have millions of these ready to be made instantly. I think the problem with this may then be a Sunshine Mint capacity of only so many million they can make a month. But these COMEX bar slices might be your emergency relief valve. There are now a lot of these guys taking these 1,000 oz bars and slicing them up and stamping them. You can get some serious supply augmentation from these guys when times get nuts.