Last week something quite intriguing happened. The LBMA, who are long associated with unallocated gold and silver, made what they called “An accounting error” and actually have 3,300 tonnes less of physical Silver than they thought. Quite incredible.
Their exact statement on the mishap is as follows:
"A data submission error led to the publication of an incorrect aggregate figure for the total silver held in London vaults in March”
Staggering how you can be wrong on such huge volumes, however, before we throw the book at the LBMA (and quite rightly so) we don’t have to delve too deep to discover some of the names that report into them with figures. You guessed it, JP Morgan and the almost equally as infamous in the silver market, HSBC. Two of the big eight said to hold huge short positions on the white metal.
The LBMA’s latest disclosure would leave approximately 35,557 tonnes of silver in their holdings. This is a significant figure, however we have no idea of how much of this is allocated vs non allocated. It is highly possible that due to the naked shorting in the market, that the total contracts held will outweigh the physical available. Nothing to surprise anyone at all there after all, this isn’t exactly news. What it is though, is a huge wake up call for anybody that holds silver or gold for that matter through the LBMA to have a serious think whether their investment is in jeopardy – or worse, even exists. The biggest fear I would have if I held a position through the LBMA would be a retort from the bank when you tried to call it in if they were to collapse. Imagine this scenario: “Unfortunately we have made an error and cannot deliver your physical, however here is your money back at the price you paid in December 2008 at $9.80/oz, plus a good will gesture of 10% for the inconvenience.” I have no doubt they have the audacity to try something like that. And with unallocated Silver, that’s the risk you take as you are essentially a creditor to the bank who can even use it as collateral if they were to fall over.
The timing of this “accounting error” release has rightly brought into question the authenticity of previous data releases. The SLV doesn’t audit or publish bar figures, hence the anger towards them and their secrecy. What I also find as intriguing as I do hilarious is Jeff Christian, Managing Partner of the CPM Group who said this error doesn’t really make any difference and won’t move price. I mean come on. He has been playing down the Silver Squeeze movement for months and still maintains there is no Silver shortage. I wonder which of the eight banks he has interest in with short positions. Some of these voices that come out in the media must really think the end user is stupid. Well I’ve got news for you Jeff, there is a shortage, and nobody believes you. These figures only go to reinforce this even further.
The CFTC, an organisation that should be looking into manipulation is believed to have short positions on the silver futures market, as reported by Chris Marcus of Arcadia Economics who has several law suits against certain players in the silver market. So is it possible to break the years of big players “managing” the silver market? How long has the LBMA got before its time runs out and it breaks? We have already seen evidence in the last couple of weeks of positions being dumped during the day’s thin liquidity trading hours. Prices slammed down and instantly bought back. Huge short covering in other words. The LBMA is scrambling to exit their naked and unallocated short positions. We know the ratio of paper vs physical, we know the banks could be in serious trouble if they don’t handle this situation well, and we know the LBMA is in disarray.
The question remains how much time will elapse before they run out of physical and prices explode to the upside. I would always rather be on the long side of a market that is manipulated short, as when it collapses – and they all do – justice occurs in your favour.
The bottom line is the banks never expected this level of physical demand in Silver, and they now have a problem. The LBMA has an even bigger one. Once the market exposes the lack of physical to back up the paper traded then the fireworks begin.