Last night, I participated in an impromptu, late night Spaces on X hosted by SilverDegen and (at various times) 20-40 members of the X #silversqueeze community. At the start of the session, some folks were asking some very basic questions and it occurred to me that there are a lot of people that haven't been following this silver story as closely as I have for the last few months or years. There seems to be some confusion on the mechanics of what is happening in the silver markets as well as the goals and potential impact of a retail #silversqueeze effort.
I'm going to explain everything as clearly as I can with limited jargon and technical details. Feel free to add a comment if I missed an important detail or didn't explain something clearly enough. I welcome all feedback.
Welcome to the machine
In order to understand "the squeeze", we need to understand how the market presently works - at least at a high level. Basically, some actors (bullion banks, swap dealers, etc.) sell (short) gold and silver futures on the COMEX. Since they don't actually own the physical metal to deliver against these short sales, they go to the over the counter (OTC) market in London (LBMA) and buy spot contracts. There is normally a small price difference between these futures and spot contracts and the actors are able to make a small arbitrage profit on the pair trade. Normally the actors settle their trade with the confusingly named Exchange for Physical (EFP) process which isn't actually a physical metal exchange, but a paper settlement, because the COMEX buyers of the actor's short position generally don't request physical delivery (they just roll their position forward to a new futures contract).
So for years, the arbitrage actors are selling COMEX short and buying LBMA spot long and enjoying an arbitrage profit on the deal. They built up some massive COMEX short positions over the years and it's all possible because the COMEX longs don't actually want physical metal.
How did we get here?
The #silversqueeze story extends years back in time, but for our purposes here, important current events started happening circa November/December 2024. It was at this time that COMEX actors started taking delivery of large quantities of gold and silver from the LBMA OTC/spot markets. The COMEX short, LBMA long arbitrage actors started requesting a real physical metal redemption for their LBMA OTC/spot contract longs and having the metal shipped from London to COMEX vaults in New York.
There is a lot of speculation as to who is ultimately behind this shift in long standing market behavior, or if not who, what economic impetus is driving the action. Some relevant points in this regards include:
- On November 25, 2024, a few days before the Thanksgiving holiday here in America, newly elected (but not yet inaugurated) President Trump announced his plan to enact tariff hikes on Canada, Mexico and China. Many bars in the London vaults have a provenance originating from Canada, Mexico and China. Arbitrage actors realized that if they needed to take delivery of their LBMA OTC/spot contracts and ship them to the USA, the new tariff burden would make the effort expensive. Instead of making an arbitrage profit, they were facing the prospect of huge losses on physical settlement (a risk they always have to consider).
- The deadline for full implementation of Basel 3 regulations looms in July. Basel 3 imposes a higher Net Stable Funding Ratio (NSFR) on bullion trading desks which requires them to hold more metal to back their trading positions. COMEX shorts won't be able to play completely naked (hedged only with LBMA paper) after July.
- In February, new Treasury Secretary Scott Bessent, at a press conference with President Trump commented that he was going to "monetize the asset side of the U.S. balance sheet". Because his comment was vague, it sparked a lot of speculation about a possible revaluation of the USA's gold reserves. Bessent later clarified that revaluing USA's gold reserves was "not what he had in mind". That hasn't stopped the speculation though. It's possible this speculation is fueling some market behavior.
The technical default heard around the world
Near the end of January, the Financial Times published a report that mentioned:
Eight weeks = 2 months = 60 days. T+60 is a technical default on a spot contract that is supposed to be settled within a couple days. At T+60, LBMA spot contracts are essentially no better than futures contracts! But more importantly, COMEX actors wanting (needing) immediate delivery found that they could not get (all) the gold they needed from the LBMA OTC/spot market.Financial Times said:
The default got a lot of attention. Roughly a week after the FT report, Dave Ramsden, Bank of England Deputy Governor, was caught like a deer in the headlights when reporters questioned him about the delivery delays. From his embarrassing, stammering response, we learned that "gold is heavy", the LBMA has "a lorry in the bullion yard" and "delivery slots are booked up" (his stammering about "slots" gave rise to some fun memes about LBMA "sloths").
His performance was so bad that the LBMA broadcast a webinar a couple of days later to try and mitigate the damage. They mostly talked about gold, but near the end they talked a little silver too. The most salient point from that presentation, from my perspective, was the LBMA honchos' assertion that analysts, pundits and folks like myself who are watching LBMA vault holdings and making the effort to calculate free float - the amount of metal in the vault that is unencumbered and actually available to the markets to settle contracts - are all wrong. The LBMA's position is that every troy ounce of metal in their vaults is free float - including allocated metal owned by ETFs, central banks and anyone else. Yikes.
Signs, signs, everywhere signs
The LBMA vaults held significantly more free float in silver than with gold. While the LBMA has been T+60 with gold for a couple of months now, they still had, if you believe their numbers, a little over 5,300 tons of silver free float (5300 tonnes = ~170mn toz) at the beginning of March. The LBMA currently reports on their vault holdings once a month and their report is just a single number (total) with no detail.
The COMEX on the other hand, reports inflows and outflows of vault stock (for both gold and silver) daily. Since December, COMEX inflows have been historically ... large. By watching COMEX silver inflows, we can make some educated guesses (rough estimates) of how much silver is leaving the LBMA vaults and ultimately, how much free float they likely have left. In January, COMEX added (net) 36.8 mn toz silver. The LBMA lost ~64mn toz. The LBMA loss was roughly 2x COMEX gain. In February, COMEX added (net) ~61 mn toz silver. The LBMA claims to have lost only 34.3 mn toz. This LBMA loss is roughly 1/2 the COMEX gain. So far in March, COMEX appears to be on track to have added at least 2,000 metric tons of silver (~64.3 mn toz). On April 7, the LBMA should be reporting a drawdown of at least 34mn toz for March. I expect it's higher than that in reality (the LBMA has lied before). How long the LBMA's supposed 170mn toz free float will last until silver ends up in a delivery delay technical default like gold has experienced is an open question, but if current market forces continue, it's going to happen.
The COMEX appetite for silver isn't limited to the LBMA's vaulted stock of London Good Delivery (LGD) bars. There are reports that mints/refineries have production backlogs due to COMEX bar demand.
Additionally, SLV share borrowing/leasing rates/volume suggest that deep pocket actors may have been borrowing SLV shares in order to redeem them for London Good Delivery bars. However, as of the moment I'm writing this, SLV has actually added ~14mn toz of silver to it's London vaults since the beginning of the month. Some analysis of the SLV bar inventory suggests that SLV has been offloading LGD bars from Kazakhstan (which can be exported to USA without tariff penalty) and onboarding LGD bars from China and Russia (which either can't be exported due to sanctions or would be expensive due to tariffs). It looks like SLV is draining it's USA friendly LGD inventory in favor of USA unfriendly metal. This is a significant LBMA pressure valve blowing steam (helping LBMA to deliver LGD silver to COMEX actors).
Finally, we see some unusual intraday trading (shorting) happening with PSLV. Semper Vigilantes explains the issue:
Semper Vigilantes said:
Some deep pocket actor apparently doesn't want PSLV trying to buy more silver. When PSLV buys silver, it buys the same 1000 troy ounce LGD bars that the COMEX is draining from the London vaults (both LBMA and SLV). Seems someone is concerned about the supply situation with LGD silver bars.
Some men just want to watch the paper derivatives price suppression markets burn
So, what is the likely impact when the LBMA runs out of free float silver inventory? I expect that much like gold, they will experience technical defaults with T+## delivery delays as they will only be able to deliver silver bars as they receive them from refiners/mints. This will leave COMEX shorts exposed to high risk of not being able to cover short positions. Either the COMEX shorts will have to find unobtanium or unwind their shorts. They are likely to get squeezed.
Silver squeeze is happening with or without you
A real #silversqueeze is happening right now - being driven by tidal forces whether economic or political. Retail investors, even institutional investment via ETFs, are not driving the bus. The London drain that exploded circa December last year is ocurring on the back of roughly four years now of a structural deficit (global production < global demand) largely due to industrial demand. Above ground vaulted inventory (free float) has masked (made up for the difference in) the structural deficit like a balloon slowly losing air. But now the balloon is loose and flying around the room.
#silversqueeze retail movement goals
Given that retail interest has had near zero impact on the present state of the market, it's reasonable to wonder what the point of a retail #silversqueeze movement might be. What is anyone hoping to achieve? There are several possible answers:
- Buy physical silver while it is still cheap - This is an asymmetric investment bet - low risk and high upside potential. Retail should ride the wave for fun and profit. Folks shouldn't have any illusions that buying retail silver is going to have any appreciable impact on squeezing the LBMA/COMEX though. When the physical wholesale markets run low, premiums will start rising and folks should understand that at that point, you might want to be more judicious in your accumulations.
- Buy PSLV - Increase the buying pressure to break the intraday shorting, allowing premium to NAV to rise. This allows PSLV to issue new trust units and then buys more LGD bars, putting maximum demand pressure on the global free float of LGD silver bars. This can have a direct impact on squeezing the LBMA/COMEX trade.
True price discovery
What is a fair price for unobtanium? There are probably some math wizards that can figure out what the implied price of silver would be if the COMEX short positions were reduced to a level 100% backstopped by physical silver. I haven't attempted those gymnastics.
I did however, publish some musings about a year ago on the possibility of a real silver squeeze and it seemed reasonable to me that when the paper markets break down and true price discovery for physical silver is at hand, silver is likely to see huge gains - potentially 10x or more. I don't have a crystal ball for predicting when or how much, but I am confident that it will happen soon and it will be spectacular.
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Today was a big WIN!
