Their Market Actions Speak Volumes
By David Jensen
With a global physical silver shortage driving an estimated 265M oz. market deficit in 2024, it should be expected that supply/demand fundamentals will drive prices higher until a market balance is achieved.
However, given the fact that silver is a Giffen Good where price increases initially drive increased demand, a much higher price for silver should be expected before markets balance-out.
Given also our analysis indicating that bullion banks hold a 5B to 8B oz. silver short position in the London physical silver spot (or cash) market (see: https://jensendavid.substack.com/p/an-estimate-of-bullion-bank-exposure), this potential for a rapid, large price rise and increasing metal shortage would not be good news for these bullion banks.
In fact, silver losses could be of an existential level for the bullion banks and signal loss of the paper price-setting system used in London to set global silver prices since 1987.
Recognizing that the vast majority of this bullion bank short position in London consists of un-backed promissory notes for immediate bar delivery in the cash market that constitutes ~ 90% of daily London trading, the potential for cascading market defaults by bullion banks is very real in a market beset by physical shortage when demand for physical delivery on these cash contracts arises.
The London silver market is largely opaque with no data provided by the London Bullion Market Association (LBMA) on market participant positions however we can see an interesting market signal in the much smaller NY / COMEX silver futures market.
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COMEX data indicate that since February 2024, as silver has risen in price from $22 /oz. to $31 /oz., bullion banks (also called Swap Dealers) have increased their COMEX net short positions in silver from initially flat to now short 217M oz. of silver, as can be seen below.
Instead of mitigating losses or even profiting, over 4 months bullion banks have increased their losses by scaling their COMEX silver net short position to 43,400 contracts or 217M oz. (as each contract constitutes 5,000 oz.) in the latest Commitment of Traders (COT) report.
While this apparent loss-seeking activity by bullion banks may seem counter-intuitive, it does make sense if bullion banks have a short position in the London silver market that is an order of magnitude, or more, greater.
In this case, it would induce bullion banks to sell claims into the COMEX market in order to mitigate the price rise and looking to mitigate an increase in physical demand from the investors and hoarding users from the Giffen Good effect as the price rose.
In essence, bullion banks appear to be accepting much smaller losses in the COMEX market to prevent a potentially existential loss in the London physical silver cash market.
Not all market participants are sleeping however and this strategy could instead signal to the market that the bullion banks are hopelessly trapped short in the global silver market that is beset by shortage.
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David Jensen, P.Eng., LL.B., MBA, is a Professional Engineer with a degree in Engineering from the University of Waterloo in Canada (1987). He worked through 1993 on the F-5 Fighter Overhaul program and the Bombardier Regional Jet programs. Mr. Jensen then graduated with a LL.B. degree in corporate and commercial law from the University of Calgary (1997) and an MBA from Univ. of B.C., majoring in Logistics and Supply Chain Management (1999). Returning first to aviation then, after reading Austrian School Economics, Mr. Jensen transitioned to the mining industry from the aerospace industry in 2004 first through his mining industry consultancy, then as Vice President of Corporate Development for Western Copper Corp., and most recently as President and COO of Skyline Gold. Mr. Jensen currently serves as President and COO of a private mining company and provides strategic, operational, risk assessment, and precious metals consulting services through his consultancy, Jensen Strategic.
