Gold & Silver Shortage Explodes | David Jensen

Craig Hemke (00:00)
I'm your host, Craig Hempke, and joining us is my old friend, mining executive, market analyst, and all around great guy, David Jensen. David, whose camera is not working today. So David, I can't say nice to see you because I can't see you.

David Jensen (00:55)
Nice to be with you. Morning, Craig.

Craig Hemke (00:57)
Hey, just to remind you, it has been a heck of a month. We'll go over the numbers in a second, but a new month starts ⁓ right away on Wednesday and it's going to be another full month of information from Sprout Money. So make you, make sure you check that site. You bookmark, you subscribe, whichever channel you get all their information and check Sprout Money regularly for great deals on precious metal. But again, all this content comes from SproutMoney.com. Be sure to keep an eye on their site so you don't miss anything. Coming up in October. It has been a crazy September. David and I record this here in the last day of the month. A few hours to go in the trading session. Gold is up 11 % on the month. Silver's up 16 % on the month, pushing toward all time high. Gold already well into all time high territory. A lot of folks out there wondering about, this, you know, are we just going to roll back over again in October? Well, David's got some thoughts on that. That's how I want to speak with him. Again, David on before. If you don't know David, you should definitely follow him on his sub stack. ⁓ Jensen, J-E-N-S-E-N David, just all one word Jensen David, that's sub stack. You can find him ⁓ regularly posting there almost daily. So you make sure you ⁓ bookmark that side as well. ⁓ David, what else did I miss? Anything else we should add to your intro?

David Jensen (02:17)
Nope.

Craig Hemke (02:18)
Then let's go. He's a man of few words. Let's roll. ⁓ David, you have been ⁓ particularly proficient here ⁓ at the end of the month, ⁓ citing all kinds of interesting details that if you look, you can find coming out of London, which is the primary physical pricing hub, ⁓ remains that way, at least for the precious metals. Let me just kind of start here with your 39,000-foot view of the precious metals markets as we end September, I mean, on a real heater with prices moving higher.

David Jensen (02:52)
Yep. Well, I guess the key indicators ⁓ to me of the state of the market is that, and to understand or to have perception of what's going on that's true, we have to look at signals outside of the price action. Although, I mean, the price action has been tremendous this year. You know, it's started the year at 29 and I think we're 47 right now, right? So what's that like 60 % increase in the price of silver in 12 months. So tremendous, but you know, this market is dominated with price setting in the UK and in London. And that's a promissory note, cash or spot market. You don't have to have the metal to sell immediate ownership of metal to somebody else. And

That's led to, you know, scary numbers in terms of the open interest and the, you know, the number of claims standing in the market and the trading volumes. mean, London in 2011 did a survey of, of, ⁓ of traders and, and, you know, getting 60, 62 % of traders responding. They said that, you know, our actual volumes are 10 times higher than the numbers that we've been posting, ⁓ you know, since I think 97, they started posting their volumes. And so that meant that they were trading like, you know, a billion and a half ounces of silver every day. And, you know, if you use a two to three times multiplier of trading volume versus open interest, that meant that there was, you know, three to 4 billion ounces of claims for silver in the market. Now that's just, that's just, that's just overboard, right? That's just insane. When you look at a market where

Total mine supply is like 825 million ounces a year, right? It's clearly a paper market. And so we have to look to indicators outside of the price action and the numbers, you know, they basically just push a few crumbs under the door in terms of data that they release there every month. But what we can see is things like price backwardation, which is the spot price versus the futures price.

And we can see now that the price, we've got price backwardation where the spot price is higher than the futures price all the way out to 12 months. And that means that there's a demand for metal right now. We want that, you know, we're happy to pay more for the metal despite the cost of storing it for 12 months. If you look at a 12 month cost of storage, they're willing to pay more for it in the spot market than they would be to buy a futures contract.

So that and also the lease rate that the lease rates, pardon me, are now ⁓ over 5 % all the way out to 12 months as well. So that's signaling distress in the market. Those two numbers there alone are signaling there's a physical market distress in the market. And I think it's been going on long enough now over like we've got three years of 800 million to a billion ounce deficits. ⁓

Craig Hemke (05:59)
Dad?

David Jensen (06:10)
And then, before that, it extended for a couple of more years. But the available physical supply has been eaten up over time. And we've now got the tightness to the point now where the the market, the promissory note market in London is being, is being squeezed so badly by the physical shortness that you can't, you can't let, know, the old thing about slamming the market with, with shorting the market with paper promises. Well, it doesn't work.

When what people want is physical metal. And if you try to slam the market by selling notes into the market for delivery, people say, well, we'll take the metal and then you face default.  That's what's terminated that game, Craig.

Craig Hemke (06:53)
always described it as the fractional reserve and digital derivative pricing scheme. And that ⁓ unallocated metal is kind of the bane of our existence, but also of the precious metals markets and the market relies upon that hypothecation, rehypothecation. you know, our friend Chris Marcus has done a lot of work trying to figure out what is the actual size of the available free float for silver at the LMA. He thinks maybe it's only 150 million ounces. Do you have any thoughts on that?

David Jensen (07:28)
Yeah. Like since, since May, the portion and you have to trust, I mean, this is assuming that the numbers that were being given are correct, but the vault holdings of silver in London have been, that aren't owned by, held by ETFs have remained basically constant since, since May of this year.

Craig Hemke (07:38)
Right, right.

David Jensen (07:55)
And that's despite the fact that there's a global shortage of physical silver bars in these exchanges. So what I'm taking, so there's that's that's been shown at 140 million ounces, Craig, since May, and it's not moved. And so the issue is though, is that you go, wait a minute, the lease rate is shooting through the roof and we've got back rotation in the market and we've got a global deficit this year, you know, 300 million ounces in a billion.

Craig Hemke (08:08)
Hmm.

David Jensen (08:24)
ounce market, why is that vault stock not being drawn down? And the conclusion I've come to is that that's not available to market. That's held in the vaults, but that's held by private owners. And they're not providing that metal to the market. If they were, that would be drawn down to meet the global demand. so what I'm and then, sorry.

Craig Hemke (08:48)
Are they just hand to mouth? Are they just hand to mouth at this point, David?

Are they just hand to mouth at this point then? Just ⁓ readily, gotta have it next day kind of thing?

David Jensen (08:55)
Yeah. Right.

So all the ETFs we've seen a growth in ETF holdings in London, but all of that has been with imported silver into the London vaults. given that, and then also that the COMEX, you know, the vault stock has gone from round numbers, like 350 million ounces to 550 million ounces, but it's now been static for a while. I think very little of that metal is available to market either.

And so Craig, mean, we talked, we talked about, I you and I talked about six, eight months ago. And at the time I was saying that I thought very little metal, you know, was, available to market. I, think like people are saying, well, 140, 150, 200 million ounces available to market is air quotes a free float. My argument is like that 140 million ounces in London that's not held by ETFs. That's a float. But the free float, which is the portion that's available to market, I think is next to nothing.

So I think that the amount of silver bars in the 1000 ounce format, you know, of the correct purity that are truly available to market right now are measured in the tens of millions of ounces. And that is why we're seeing the backwardation, the surging lease rates and the price starting to go parabolic now.

Craig Hemke (10:19)
In terms of those ETFs, I want to talk about that for a second too. That's part of the problem. For 15 years, I've urged people, got to have it your own two hands. It's got to be in your name only. None of this unallocated account jazz that some of these bullies run and none of these ETFs like the SLB, they give you price exposure, but if you think you own the metal, you don't. Can we just dial back a few years? You'd written about this.

David Jensen (10:34)
Indeed.

Craig Hemke (10:46)
either today or yesterday, and everybody can find it at your substack. Again, Jensen David is the address. I remember during that silver squeeze in February of 2021, Jeff Curry, the head of Goldman Sachs Commodity Trading, came on and said, there's this almost unlimited amount of silver in London because the banks will short sell, they'll sell short and lease out the metal in the ETFs.

David Jensen (10:56)
Yep.

Craig Hemke (11:15)
And I'm like, wait a second. One, I don't think the prospectus says they can do that. And second, why would they do that? Because they're acquiring metal for that ETF. Investors in the ETF expect the metal to go up and the metal, if they're selling, they're selling against it. Is that, do you think that's really, is that how they really operate? And if that's the case, could this scheme continue until even the ETFs are run dry?

David Jensen (11:31)
Right. Well, yeah, so I mean, maybe starting with what Curry said. Yeah, he was saying that the, he said retail investors will never move the price of silver. He said, because retail investors buy ETFs and the ETFs buy and vault the silver and then immediately short that metal into the market. So it's rehypothecation, and it's illegal. Right? That 's what Curry was saying: these ETFs will act illegally, and they are acting illegally and are selling client metal into the market, creating claims or rehypothecating it into the market. The backdrop to that was that at the time, the ETF holdings ⁓ for iShares ⁓ SLV ETF is Larry Fink, that's the BlackRock ⁓ asset, that's Larry Fink's ⁓ machine there.

The silver holdings had gone from roughly 17,000 to 21,000 tons of silver in London. had gone almost straight up in a matter of weeks. And then Jeff Curry came out and said that, and then that silver holding by the SLV ETF immediately collapsed. so I think what Curry was doing was he was trying to, he was trying to stop a run on silver. And to back up one step is the reason that the banks don't want silver and gold to go parabolic in prices, a historically driven interest rates higher. And the banks are leveraged up to their eyeballs in debt and bonds, which do very poorly when you have sudden moves upward in bonds and in loan rates, because you start getting default on the loans and you get the bonds are devalued. And I guess the third issue is that people, if the price of silver goes high enough, Craig Hemkehave a source of private money and can start using it for exchange. They don't need to participate in, you know, the government garbage currency market, as I call it, which is created for free by the banks when they make loans, right? So that is why they don't want to see it go up. I think that, ⁓ you know, Curry, don't know what his intentions were, but what he said had very real meaning. And it appears to have had a very real effect on the markets because you know, that four or 5,000 ton increase in the amount of silver that SLB had in London immediately dropped down again. So it was like a, it was like a three or four month round trip. And then, and by the way, in the middle of that, that was the silver squeeze time. So in the middle of all that, ⁓ the LBMA came out and said, by the way, we've got to tell you that we overstated the amount of silver in London by a hundred million ounces, right? Oops. Right. Accounting error. So.

Craig Hemke (14:36)
Right, right.

David Jensen (14:40)
You know, we accidentally added too many zeros or something. anyway, so back to the point is, are they doing it? It would be unwise, but it wouldn't surprise me if they were doing it. And so I think what we've seen since then, Craig, is that now in the last 12 to 18 months, you know, we've had the price of silver has run from, you know, roughly ⁓ about 20 bucks an ounce to, you know, 22 bucks an ounce up to 47 bucks an ounce. And the ETF holdings in London have barely gone up at all. The SLV ETF holdings in the vaults in London. So I don't think that there's less interest for the ETFs. I think the silver is not available in the market. And that is supported by the fact that we've seen this surge in the lease rate for silver going over 5 % and the backwardation in London.

The price backwardation in London, where the spot price is so much higher than ⁓ the futures price. And then also at the same time now we're starting to see the borrow fee for the SLV shares. The borrowing fee is the amount you must pay to borrow it. Now, if you're an authorized participant, which is a bullion bank essentially, you can take those shares, 50,000 ounces at a time and turn them in and get physical silver in your hands if there's a shortage.

And now we're seeing that, you know, that's that borrow rate for the cost of the SLV shares has gone from half a percent up to 3 % in just ⁓ in September alone. So I think we're seeing indicator indicators here that are increasing intensity of physical metal shortage in London. And it is swamping out the ⁓ unallocated promissory note, pro trading system they have there where they sell immediate ownership of silver in the form of paper, which is unbacked.

Craig Hemke (16:39)
And it's not just silver. You've been following platinum as well. ⁓ The amount of available gold to cover all of their obligations. We can talk about the free float there too. I guess ultimately, my question for you is go around predicting something that's never happened before, which I try to avoid too, right? The old adage, you don't want to predict the end of the world because it's only going to happen once, right? ⁓ But we sit here near all-time highs.
Silver blasted through a pushing $4,000 an ounce for gold. A lot of folks are worried that, you you're to get this May Day massacre type smash again in silver like we had the last time we're at these levels. And the paper market, this digital derivative market continues. How, just reading the tea leaves, Dave, because you've been doing this a long time. And I, you know, I've been talking about breaking this system for as long as I've had a TF Metals report. ⁓

David Jensen (17:24)
Yep.

Craig Hemke (17:36)
How close are we? Like I said, I hate to put you on the spot with a question like that because it's like, I don't know. But do you sense that this is really starting to get stressed across the board, across the metals markets?

David Jensen (17:50)
Well, I think if you look at the fundamentals, if we start there and we say, you know, we've got five or six years of ongoing silver supply deficits and, and, you know, the, the deficit this year is of the order of, think 200 million ounces or 250 million ounces. ⁓ we see the surging lease rates now, and then we see the price backwardation, like all those three things are supportive.

Craig Hemke (17:58)
Right. Mm-hmm.

David Jensen (18:18)
Of the fact that there is a true market shortage for silver. And then again, if we look at the float in London of silver and the fact that that has not moved now since May, indicating that that metal is not available to the market, we say, well, the silver has to be imported, and what are your sources? Well, the refineries and the mining companies, but I mean, that metal was already spoken for when you looked at the ⁓ supply-demand structure for the year ahead. And the fact that many of the industrial users, you know, they buy through metals brokers who have contracts with mining companies, and they've secured the metal, right? So I think fundamentally speaking is that we see this building tension in the market and the fact that it's been building, you know, for half a decade now really in intensity ⁓ tells me that this is not a speculative paper market artifact that it's something created by supply demand imbalances and that physically available thousand ounce bars as are needed for trade settlement in the markets are not available in the size required to meet the market demand. So, I think the market, and also if you look at the parabolic price movement now, in conjunction with this physical metal shortage, suggests that there is something true in the market.

which needs to be addressed by higher prices. ⁓ know, short, nothing solves higher prices than solves it better than higher prices, right? So, ⁓ but the issue is again, that, you know, silver is a gift and good as is gold. And as the price moves higher, it increases demand and you need ⁓ higher prices for a long period of time in order to resolve the price, the price and the, the, the high price and the supply ⁓ demand imbalance. So,

I I just, if we throw into it on top of that, Craig, the fact that there's, you know, from what I can see, there's well over a billion ounces of these unbacked claims in the London market for silver standing is that you've got a situation here where, you know, we can have extraordinary price moves now. And this comes.

you know on the end of of you know this market was starting in nineteen eighty seven the lbma was formed nineteen seventy seven by the bank of england uh... to trade promissory notes and it it is uh... system which will always fail in the end uh... because these structures are abused people sell things that they don't own and then when you do have when you do have true shortage they blow up so how long is it take i don't know but what i can see is a confluence of events now

physical shortage, lease rates, ⁓ price movements, price structure in terms of backwardation, illiquid London market, the world's biggest market. So it's all coming together now. these factors are all meeting at an apex. And ⁓ at some point, we're going to see a repricing of the metal in fiat dollars. And it's going to be multiples of where it is now.

Craig Hemke (21:36)
As I mentioned, I've been trying to warn people for years. ⁓ If it's not in your two hands or at a safe, stored facility like what Sprott Money runs, it's not yours. And you don't want to be, if it's a, we're talking about a fractional reserve system like your local bank and just like a bank run, ⁓ you don't want to be the last guy in line at the window hoping to get your cash. ⁓ So.

David Jensen (21:57)
Yeah.

Craig Hemke (22:04)
For me, the regular investor should be ⁓ moving out of the ETFs, out of unallocated accounts, into the actual physical metal while you can. For the regular investor, David, what do you think will be the most telling things for them to watch now as we move into the fourth quarter?

David Jensen (22:23)
Well, I just say the fact, I mentioned, in terms of the physical shortage, and we're now starting to get price response, which is actually reflecting, you know, the price discovery process is now reflecting the shortage because paper is not solving the problem that we have, right? It did for decades because there was excess supply available and price movement higher got smashed lower. So I'd say the price movement, along with the price structure in terms of backwardation, is the lease rate in London.

Craig Hemke (22:25)
Yeah.

David Jensen (22:53)
And the really static vault holdings of silver that's apparently available to market tells us in the face of this global ⁓ deficit and shortage of silver this year that there's very little physical silver available to the markets.

Craig Hemke (23:10)
Well, and the best way the average person and the listener can do that is to follow David on Substack. Because David, you keep track of that for us, right? You find this information. That's what you write about, like I said, almost a daily basis. ⁓ As we wrap up, tell everybody again, I have you give the address and then what else you can find there.

David Jensen (23:31)
Yeah, jensendavid.substack.com is the Substack location. And I'm trying to make the most of the tools I have. We don't have access to a lot of data from the LBMA, but we do our best to scour through the available data. Yeah, I see a market now that's becoming distinctly physical. And I think this is the end run on the system, which was created in 1987 by the Bank of England. And one of the byproducts of that is they've blown a series of financial bubbles with low interest rates now since 87. Serial bubbles, the green span put, right? We'll blow a bubble and blow it up and then we'll blow you a bigger one. And the problem is that when you have gold and silver running as hard as they're running. We know from the 70s that a breakout in metals prices like this led to a breakout in interest rates. And you know, the banks are leveraged to their eyeballs holding debt. They hold very little cash and it's going to ultimately, it's going to bleed into the banking system as a problem and into the real estate market as well. The surge in interest rates is going to accompany this. So I see that the trend for the next decade is going to be selling debt selling bonds and buying real things. that's when we find out what the true inflation is. Inflation was historically defined as an increase in the outstanding money. And, you know, the central banks were able to say for decades, there's no inflation because they referred to price inflation. But the true meaning of inflation is the increase of money, which temporarily goes into various assets, but always washes out into real asset prices like food and commodities.

And I think we're going to very quickly find out what the central bankers have been doing in terms of inflating money and that we could see very, very rapid increases in the cost of food, the cost of the basic things that we need to sustain ourselves, as well as the cost of the currencies as the interest rates spike higher. So rough ride, but you know, bullion in the hands of the owner outside of the system offers a safe haven, think, ⁓ in terms of protection from the deleveraging of this financial system that's been created.

Craig Hemke (26:03)
Right on, my friend. I want to thank you. Just always fascinating to visit with you. And again, couldn't have been more timely to have you on here to wrap up September. So thank you, David. I very much appreciate your time and all the wisdom you share.

David Jensen (26:17)
My pleasure. Thank you, Craig.

Craig Hemke (26:19)
From all of us at Sprott Money, SprottMoney.com. Again, we're at the end of the third quarter, but we have 90 days left to go, and boy, it's going to be a wild ride. Be sure to check Sprout Money on a regular basis, like or subscribe to the channel where you've been watching this content. There's a lot more to come for you as soon as we get into October. Thank you for watching, everyone. We'll see you again soon.