Silver Squeeze Continues

Silver Squeeze Continues

Friday, 9 April 2021

Metals have been steady this week with encouraging signs that the recent support level of USD $1,680 has held for gold, silver is tracking sideways at $25 USD, despite the unprecedented demand for physical metals by retail investors. Just like clockwork gold has managed to hold trendline support on the longer-term daily chart and continues to form a base above $1,700 which is positive.

So, it seems there are two opposing markets in precious metals right now; the physical market is seeing a huge increase in demand in both February and March this year, whereas gold and silver ETF investors have been dumping their positions, putting pressure on the price for now. The main story to cover this week is the lack of availability of physical silver bullion investment products globally as bullion dealers and refineries and struggling to keep up with both demand and a new phenomenon of accelerated requests for physical delivery from storage or pool accounts.

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A big movement in the silver community of late has focused on investors standing for delivery out of pool and unallocated accounts. We have indeed seen a big increase in clients that have either barred their pool products from other dealers, or asked for physical delivery to store in their own segregated safe deposit box here at Guardian Vaults, particularly in large silver shipments. There is an old saying when it comes to silver ownership, and that is ‘if you don’t hold it, you don’t own it.’ Something we believe in strongly, as often investors will be unaware of the type of product they buy and get caught out when they stand for delivery. Luckily, not an issue for our investors at Guardian Gold, as everything we do is physical product stored in individual safes and deposit boxes, with no offering of synthetic products that simply track the spot price.

Despite the run on physical precious metals leading to very tight supplies here in Australia, there is also a lot of misinformation being circled online, with many investors maybe being a little confused over what is happening in the market currently. We will try to break the situation down as we see it.

Firstly, lets look at why the spot price of gold and silver has been under pressure of late. Investors would be hearing about a huge increase in physical demand and mints selling out of metal, but are scratching their heads as to why the price is not reflecting this apparent demand. The answer lies in ETF holdings. Generally, there are two types of gold investors those that want to hold the physical metal themselves and those who are happy to buy the metal via an online exchange or platform, and simply capture the spot price movement without ever taking delivery. The ETF market for gold today is absolutely huge and there are many gold-backed ETFs to choose from that charge various different fees, but on average they might charge around 0.50% of the value of the holding as an annual management fee. One can see on the chart below the very high correlation with the total combined holdings of gold ETFs with the underlying spot price. ETF investors may include a lot more short-term speculators than the physical market, so we can see them start liquidating at a rapid pace at times, which can impact prices.

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Total ETF gold holdings peaked right near the top of the market in August of 2020 and since then the ETF market as a whole have been net-sellers of gold since then. To put it into perspective, just in 2020 alone there was a record USD $48 Billion worth of inflows into gold ETFs globally, and this obviously had a big impact on prices rising throughout the year. The recent sharp liquidations in ETF markets are obviously one of the main causes for the weak price performance of late. My take on ETF liquidations is that the ‘weaker hands’ that were long gold ETFs for the first time in 2020 were merely trying to profit on the back of the covid crisis, and now probably have flipped back out of gold and into equities. I expect ETF holdings to start rising once the weaker hands have left the market and more longer-term investors start entering gold positions as a hedge against the coming rising inflation in the US.

The flip side of this is the physical bullion market, which as per the headlines below, is seeing very strong demand globally, but not enough to outweigh the volumes being sold on ETF markets.

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Physical bullion investors are clearly happy to buy at these current prices and it may help the market to find a bottom above $1700 US for gold. We have seen very strong physical demand in Asia at these lower prices and everything is combining to give us a picture of longer-term focused physical investors currently in a battle against the ETF speculators that are liquidating.

In a recent article with Kitco News, I covered why I think gold could still double in an environment where interest rates and bond yields rise, as it all depends on how far inflation spirals out of control in coming years. Inflation is one of the black swan events that could severely disrupt financial markets in the years to come, and arguably, given the severity of the rapid increase in the global money supply in 2020, the risk of inflation rising is higher than any other time in the last 40 years.

Inflation expectations could be a big driver for gold demand from not only individual investors, but Central Banks. Central Banks may be one of the first to increase gold exposure if they think inflation is on the horizon, and just this week we saw the central bank of Hungary announcing it has tripled its gold reserves. Central banks were net buyers of gold in February with Hungary’s purchase being one of the largest in decades, raising its gold holdings to over 94.5 tons. The Central Bank of India added 11 tons in February and the Polish Central Bank governor Adam Glapinski said last month they may buy at least 100 tons in the coming years.

 

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Back to the silver squeeze movement and we will cover a perspective on what is happening. It is true that the Perth Mint largely remains sold out of most investment products and we are being gradually allocated metal for our investors to buy through Guardian Gold. Keep an eye on our website as product availability is changing daily. There is a lot of online speculation around physical silver storage, but one of the main problems is that investors over the years have probably not read the terms and conditions of the products they have invested in. With physical metals stored in individual safe deposit boxes, it is nice and easy; everything you buy exists in physical form, exactly how you would expect. It is when you delve into ‘pool’ or ‘unallocated’ metals that it starts to get confusing.

With pool allocated metal you would need to read the terms and conditions of the company or refinery that is offering the service. One key difference with a pool allocated holding is that it is often an asset on the company’s balance sheet, which means it could be at risk in the event of liquidation; but again, you would need to delve right into the terms or ask them in writing to find out. Physical metals stored in a segregated and allocated safe deposit box or safe, is not an asset on the balance sheet, so doesn’t have the same third-party risk as some of these other products out there.

Due to physical forms of gold not being listed as a financial product in Australia it is not under the same scrutiny from ASIC regulators as listed products would be. So, these ‘pool’ or ‘unallocated’ gold and silver products should warrant some extra caution and significant investigation by investors to know exactly what service they are getting.

The other inconvenience with these products is that there may exist a long position in a paper equivalent to back your holding, and not a physical bar sitting in inventory. This can mean you can experience large delays in actually getting your metal if you ask for delivery during a time of heightened demand. You cannot buy a ‘pool’ or ‘unallocated’ product and expect to always have preference on getting your physical metal without any delays, at all times. If that refinery is sold out of its inventory of smaller bars, then it could be a big delay in taking larger bars (1,000oz for example) and converting them into many smaller 1 kilo bars. It doesn’t necessarily mean that your holding is not 100% backed by something, but it can mean that if everyone were to stand for delivery at once, there could be some very long delays. But this is the downside to holding a product which does not charge you an annual storage fee.

What we are seeing globally at the moment, is an increase in physical demand running bullion dealers dry, combining with a big movement of retail investors standing for delivery out of pool/unallocated storage. But it should be no surprise that you cannot always get immediate delivery out of these types of products, and in fact most of them would probably mention something of that nature in their terms. If you are happy with never taking delivery, then you might find a pool product of ETF suits your needs. However, if you definitely want physical metals, it is quite simple: buy physical gold or silver bullion and store it in a safe deposit box. It is relatively inexpensive to do it all yourself, in fact, we can store for clients based anywhere in Australia for as little as $272 per annum for a 20-kilogram capacity safe deposit box. Everything can be arranged remotely if needed, and it is not a huge cost for complete piece of mind.

With the movement gaining traction it could mean that many mints or refineries have difficulty with supplying retail investment products for some time, and many might narrow their product range to focus on just a few key items to speed up the refining process. We will aim to keep investors up to date with availability as best we can.  

Until next week,

 

John Feeney

Guardian Gold Sydney

If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au

Or on Twitter @JohnFeeney10

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