PAPER vs. PHYSICAL: The Amazing Amount Of Leverage In The Silver Market

While many precious metals investors realize the massive amount of paper trading leverage taking place in the gold market, they should see what is going on in the silver market.  In a previous article, I provided data showing that an amazing $9.8 trillion of notional gold paper trading took place on the world’s exchanges in 2016 versus $42 billion in actual physical gold investment.  This was a paper to physical ratio of 233 to 1.

However, the amount of paper trading leverage in the silver market is much higher than that.

But, before I get into the specifics of the paper silver market trading leverage, let’s take a look at the pathetic amount of physical silver investment versus Central Bank asset purchases.  According to the data in the recently released 2017 World Silver Survey, total physical silver investment for 2016 came in at a whopping $4.4 billion:

That’s correct.  When we add up all the global silver investment demand last year, it adds up to a measly $4.4 billion.  It was nearly ten times less than all physical gold investment in 2016.  The analysts who wrote 2017 World Silver Survey, arrived at the $4.4 billion figure by using the following data:

Global Silver Investment 2016 (in million oz – Moz):

Physical Bar Investment = 83.6 Moz

Official Coins & Medals = 123.2 Moz

ETP (ETF) Inventory Build = 47 Moz

Grand Total Silver Investment = 253.8 Moz

By adding up total Physical Bar investment of 83.6 Moz, Official Coins & Medals of 123.2 Moz and ETP (ETF) Inventory Build of 47 Moz and then multiplying it by the average silver spot price of $17.14, it totaled $4.4 billion.

Even when the silver price reached a high of $49 in 2011, total global silver investment was only $6.6 billion.  Looking over the market in the past six years, the total $32 billion of silver investment from 2011 to 2016 is nothing when we compare it to the staggering amount of Central Bank asset purchases.  According to a recent Zerohedge article, Why “Nothing Matters”: Central Banks Have Bought A Record $1 Trillion In Assets In 2017:

A quick, if familiar, observation to start the day courtesy of Bank of America which in the latest overnight note from Michael Hartnett notes that central banks (ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.

Now, if we look at the chart above, Central Banks purchased $7 trillion (that was made public, could be higher) from 2011 to 2016.  If the Central Banks purchased $1 trillion in just the first foru months of 2017 versus the $7 trillion from 2011-2016, something seriously wrong must be going on in the markets.

Regardless, $7 trillion is a lot of money when we compare it to the pathetic $32 billion invested in silver over the same period.  If we just took $100 billion of that $7 trillion and placed it in silver, it would have quadrupled the amount of global silver investment from $32 billion to $132 during that 2011-2016 time period.  A quadrupling of silver investment demand, would have pushed the price of silver, WAY ABOVE the peak $50 price.

By the Central Banks propping up the STOCK, BOND and REAL ESTATE markets, the value of silver (or gold) is being severely depressed.  And of course, to keep investors from finding out about SILVER’S HIGH QUALITY STORE OF VALUE, the price continues to be capped by the massive amount of paper trading leverage.

So, how much paper trading leverage is in the Silver Market?  Let’s look at the following chart:

Again, according to the data put out by the 2017 World Silver Survey, total paper trading silver volume on the world’s exchanges was 159,000 Moz, or 159 billion oz in 2016.    Thus, the exchanges traded 180 times more paper silver in 2016 than the global mine supply of 886 Moz.

If we look at the ratio of global notional paper silver traded last year compared to actual silver investment, it was more than double that of gold:

By multiplying the 159 billion ounces of paper silver traded in 2016 by the average spot price of $17.14, we arrive at a staggering $2.27 trillion of notional paper silver traded versus $4.4 billion actual silver investment.  Thus, the paper notional silver trading ratio to physical silver investment was a whopping 517 to 1… double the 233/1 for gold.

Now, this 517/1 notional paper trading ratio to physical silver investment in 2016 does not take into account any of the huge OTC market where a lot of silver is traded and there are no quantifiable statistics to the amount or degree.

Currently, the crypto-currencies are experiencing huge gains over the past several months.  It doesn’t matter if an individual agrees with owning Bitcoin or one of the many crypto-currencies, the important thing to understand is that the tremendous price increases in many crypto-currencies are likely due to concern to the massive amount of Central Bank $1 trillion in asset purchases in the first four months of the year.

Furthermore, crypto-currencies are a likely a GOOD INDICATOR of what will take place in the gold and silver market when investors realize most STOCKS, BONDS and REAL ESTATE values will continue to implode as the U.S. and Global Oil Industries disintegrate.

The gold and silver prices are being capped because paper contracts can be added as more funds move in.  However, crpyto-currencies do not have this problem because the amount of Bitcoins, as an example, are limited.

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22 Comments on "PAPER vs. PHYSICAL: The Amazing Amount Of Leverage In The Silver Market"

  1. “the huge OTC market”

    the otc market is “huge”?

    • gman,

      Yes, the OTC Silver Market trading volume is huge. Here is an excerpt from the 2017 World Silver Survey on the OTC MARKET:

      The challenge of presenting a reliable overview of the
      silver OTC stems from the fact that there is limited public
      data available. The transfers and turnover on the LBMA,
      however, present a good gauge of activity but only
      capture part of the whole story. They do not, for example,
      encompass activities in other OTC markets and neither
      differentiate between pure investment flows and other
      forms of activity, as they also capture other physical market
      movements.

      In order to gauge an overview of the silver OTC market we
      use the following methodology, starting by dissecting the
      LBMA clearing statistics, which refer to transfers in the
      market and not the overall volume. A broad rule of thumb
      is that LBMA loco London volumes are roughly twice the
      transfer numbers and that in order to estimate the global
      OTC volume we need to assume that loco London accounts
      for approximately 70% of the total. Interestingly, until only
      a few years ago loco London accounted for roughly 90% of
      the global OTC market, but the shifts in the geographical
      distribution of the market means that we are now looking
      at around 70%.

      Using this methodology suggests that implied OTC traded
      annual silver volumes increased 26% last year, reaching
      124 billion ounces.

      If the analysts estimate that OTC Silver Trading Volume is 124 billion oz, that is HUGE in my book.

      steve

  2. More great information Steve!
    What continues to concern me is that we are now have 17 years in a row of silver supply deficits compared to demand…averaging about 10% per year less supply than demand. How long can the paper silver market suppress physical silver’s value?
    I think the answer is: As long as they can continue to short the paper market while supplying the physical silver needed to offset the yearly supply deficit, the manipulation will continue unimpeded.
    What’s your take on this Steve?

    • crayfish,

      The 17 years of DEFICITS have been fed by previous decades of SURPLUSES. According to the data, there is about 400 Moz out there yet to be used to fill in the HOLES. However, there is now 2.5 billion oz of silver held in Central banks, Private Vaults and Investors.

      But, I don’t really pay much attention to that amount. It is still peanuts when we factor in the $393 trillion STOCK, BOND & REAL ESTATE MARKET.

      Pay attention to the OIL INDUSTRY & MARKET. As it disintegrates, it will destroy the value of most STOCKS, BONDS & REAL ESTATE. Thus, the movement of funds out of those assets and into physical gold and silver will be the BIGGEST TRANSFER OF WEALTH IN HISTORY.

      steve

  3. Excellent data Steve
    That chart has A LOT OF PAPER to cap those prices is absurd.
    When the flood gates start to open and a mad rush of people trying to protect their wealth out of fear when the oil industry comes apart and starts moving there wealth from one asset to another asset will be indeed the BIGGEST TRANSFER OF WEALTH IN HISTORY.
    Sad so many people still wont open their eyes to the truth of whats coming by the time they find out it may be too late.
    Good job Steve

    • “BIGGEST TRANSFER OF WEALTH IN HISTORY”

      not in the least. almost all that “wealth” is leverage and anticipated rent, and will not transfer anywhere but simply will disappear.

      heh. what WON’T disappear is all those guns and all that ammo. those will be around for centuries.

      • DisappearingCulture | May 16, 2017 at 6:54 am | Reply

        gman that’s a good distinction.

        Much of what is considered wealth will disappear; not transfer. Physical possesion of useful hardware from shovels to firearms may be the wealth if there is an area/time without the ability to sell metals for a functional currency.

  4. I have lost count of how many ways it can be said “The Emperor has no clothes.”

  5. But it would seem that the Emperor is either an exhibitionist or a nudist and he doesn’t care either what you know or what you think?

    • I suppose that depends on whether one is viewing the true Emperor or just the court jesters.
      If one recalls in the story the Emperor (govt.) had many in his court fooled.

      • This Emperor also has the vast majority of the people fooled. For those who aren’t, his manipulation of the garments has become so outrageously in-your-face, that he is telling you he doesn’t care what you think because you can’t do anything about it anyway. He has sovereign immunity and it is he who appoints his court, including the “Regulators”. In other words, he doesn’t care if you can “see through” the illusion. He’s in control.

        • Yes, I agree, but one of the morals of the story was that the citizenry can regain control by all of them joining in the truth.

  6. Hi Steve,

    I remember reading a Ronan Manly article discussing LBMA gold trading. Apparently in 1st quarter of 2011 the LBMA surveyed LBMA members to provide more detailed data on gold trading. The total volume of LBMA gold trading CLEARED on a daily basis was around 600 tons (1.5 million tons annually) and total volume traded on a daily basis was about 6000 tons (10.5 million tons) annually) or ten times higher. I guess this would be even worse with LBMA silver trading.

  7. Another great work….thanks Steve.

  8. I know this is probably more appropriate for the article that references the large and increasing gold exports to Hong Kong (51) tons. However, it appears that Hong Kong is opening up a physical gold exchange denominated in both Dollars and Yuan sometime late summer. HKex also runs the London Metal’s Exchange. Could be why we are seeing more gold flow to Hong Kong.

    https://www.metalbulletin.com/Article/3715515/LME-ASIA-WEEK-2017-HKEXs-dual-currency-gold-contract-is-benchmark-Asia-needs-HKEX-says.html

    HKEX announced on May 5 that it plans to launch a physically settled CNH (offshore Chinese yuan) and US dollar gold futures contract – the first such pairing on the same exchange platform anywhere in the world. The contract is still awaiting regulatory approval from the Hong Kong Securities and Futures Commission. “We hope that the supervising department will make a decision on the contract in May. Once it gets approval, we will be ready to launch within one to two months,” Zhang said.

    • A physically settled gold futures contract? Why don’t they just sell a “physically settled” ounce, one in my right hand, and one in my left? Let them choke in their nonsense.

      • Not so fast. Any and all initiatives (SGE, ABX and now this) which can slowly chip away at the dominance of Comex and LBMA with their infinite supply of paper Gold, can only be a good thing. On top of that, anything which starts to consolidate the pricing of Gold based on physical transactions in Asia, where all the real demand is located, is another good thing. We aren’t going to get any miracles but it is important to keep chipping away at it. IMHO.

  9. Stocks, Bonds, real estate are levered up in price, while silver is levered down in price. If silver levering reverses and flips to being levered up, then the ratio swing move will become multiples higher than the 517/1 or whatever it currently is. All levering is manipulation. Manipulation can go either direction.

  10. The supply of silver to the market has relied on the demonetised silver that was in above ground vaults from the early 1900s.. When America was building its Spires, and Towers in the 1920s and 30s, they needed all the silver they could get their hands on, (including 50 million ounces they effectively purloined from China in 1929), to fund projects like the Empire State Building, the Sears Tower, The Chrysler building, Huge Car and Aeroplane factories, new roads, and trans-continental roads, bridges and railway engineering projects as the population was exploding.

    AFTER, the Bretton Woods agreement, and the ‘Mericans had control of the printing presses (and especially post 1964, and then 1971, that monetary silver was no longer needed, so the 5 billion ounces they had in vaults, used in Silver Dollars, Silver Half-Dollars, (and all the other world currencies that reduced silver content from circa 90% to 50%, to 40% to 0 over that time frame…) nickels and dimes, meant that demand was just about available mine supply and circa 100-200 million ounces per annum, from those above ground supplies. Back in the early 1990s, the US also closed the facility it built for the Manhattan Project, which had stored 2.5 billion ounces of silver to produce the enriched Uranium, and that facility was closed freeing up that silver for the markets, just as demand was rising for electronic products worldwide, and more and more silver was needed (remember all the world’c computers were replaced with 32bit versions). That 2.5billion ounces lasted merely 10-12 years before it essentially was used up, and that is why the price rose from circa $4.00ish to $8.00 from 2005/6 – 2008. The crash caused a fall off in demand, temporarily, but by then, the smartphone was on everybody’s Xmas shopping list, and 500 million phones later were using huge amounts, driving up demand further, so that took us to 2011 taking the price temporarily to $49.??… After that they just used paper to keep a lid on the price…

    We baby boomers are not that bothered about the latest tech (my phone is now about four or five years old) and the kids haven’t got the wherewithal, or a need for the Samsung 8, or latest Apple (Watch 2.0?) or the VR headsets… YET?

    Investment in physical silver was negligible, except for a few idiots like me, who have been buying in dribs and drabs a coin here, and a chain there… When inflation REALLY takes off, the price will go mental. Apart from the JPM hoard (circa 600m ounces I hear) THERE IS NO MORE… 20-50m ounces in vaults? Time for investment demand to ramp up, and steal it from under JPMs nose.

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