Episode 20 – The Truth about the so-called Silver Squeeze

SILVER SQUEEZE! The precious metals blogosphere has been lit up with the #silversqueeze story. Building on the momentum of the Reddit-born retail trade warriors made famous by squeezing the shorts in GameStop, a Wall Street Silver channel was created. And silver became the next main “squeeze”… if you will. This all started in late January, and for a moment, it looked like it had some legs. It was getting national press coverage, but eventually fizzled out due to the price losing momentum and reversing direction.

Nonetheless, a group maintains the silver squeeze isn’t over. Rather, it’s only just beginning with another “squeeze” attempted earlier this month. This time feels different, with allegations and accusations being leveled at notable precious metals companies, not just the big banks. What’s going on? As always, Keith provides some answers in this latest episode, which covers:

• Is there a really a global shortage of silver as many claim?
• Why did no one cover the toilet paper ponzi scheme?
• What do coffee shop lattes and 1oz Silver Eagles have in common?
• The difference between unallocated precious metals account and fractional reserve banking

Additional Resources

• The Truth about the Silver Squeeze

Episode Transcript

John: Hello again and welcome to the Gold Exchange podcast. I’m John Flaherty and I’m here with Keith Wiener, founder and CEO of Monetary Metals. In today’s episode, we are going to discuss a topic that has dominated the precious metals headlines in recent months, namely the so-called silver squeeze. The Internet is aflame with accusations of fraud and deceit aimed at some of the world’s largest institutions in the space, including, and probably most notably, the Perth Mint. A few members of our audience, concerned by the severity of these claims, wrote to us to get Keith’s take on the situation.

In response, Keith wrote an article entitled The Truth about the Silver Squeeze. There are also three other articles that touch this subject, which date back to the end of January and early February when all of the fun got started. We’ll, of course, link to all of this content in our show notes. So let’s start with the accusations, Keith. As I understand it, the basic claim is that people are calling into places like the Perth Mint or other institutions where they have gold on deposit and are requesting delivery of their metal.

And when they are met with responses that include significant delays on their delivery times, they are naturally a bit upset. And then the word “Ponzi” starts to appear in the headlines. So you start your article, Keith, by invoking the eighth grade sniff test, as it were. Please walk us through that.

Keith: The first thing I just wanted to say, a year ago, people walked into the grocery store and expected delivery of toilet paper and didn’t get it. Did anybody think that toilet paper was a Ponzi scheme? So, sometimes it’s possible to overwhelm, overload a retail distribution system and that doesn’t mean it’s a ponzi scheme. It just means the capacity of the retail distribution ecosystem from manufacturing to retail has a finite capacity. And then if demand spikes temporarily, then it can’t service that, which is what happened with toilet paper. The Sniff test is something I’ve always had as a software developer many years ago, my company, we had a client and server and we shipped a new version of the software to a customer. And it turns out that particular version, refused to connect with that particular version of the server with a client. So the client emailed me and said, what the heck is going on with you guys? Don’t you even test this stuff. And of course, we tested it extensively, but the server test was in its own silo and the client test was in its own silo.

And so I coined the term. I called all the engineers into the conference room and I coined the term sniff test. From now on, before we send anything, we’re going to give it a basic sniff test. And that includes making sure that version of the client is compatible with that version of the server. So broadly, I think the sniff test is just a simple litmus test. Does this make any sense? Is this sane or insane. The claim is that there’s this incredible shortage of silver and yet the price falling. I mean, Economics 101 says if there’s shortages, then price is rising, so how do you get to the price is falling. Which it was from the time those rumors really started to circulate, the price was falling and has actually been falling, I think, and then continuing to fall. It doesn’t pass the sniff test. So that was my comment about that.

John: Right. So, Keith, you’ve got lots of connections in the space. And so naturally, you picked up the phone and made a few calls in preparation for your article and spoke to a number of these folks that deal in silver bullion. Can you give us the highlights of those conversations?

Keith: I was going to say, sometimes the commentary in the gold and silver space as analysts are saying, you know, my peeps, I’ve got a guy. I love that. “I’ve got a guy.” I’ve got a guy in London, I’ve got a guy in Beijing. And that’s how they create or traffic in rumors. This particular case, obviously, Monetary Metals, being an institutional player in gold and silver markets. We’ve got a network of other companies we do business with. So we spoke to a number of these companies and said, is there a shortage of thousand ounce bars?

I totally get there’s a shortage of retail. If you want to buy one ounce even today, if you want to buy a one ounce Silver Eagle, you’re going to pay, if you can find it at all, you’re going to pay an enormous premium to get that because there is a shortage of retail product. But the global silver commodity market operates on thousand ounce bars. So I called around and a lot of retail dealers don’t necessarily deal with thousands of bars. It’s not something you necessarily want to take home. So and this needs to be said is that you don’t want to take it home because then it loses its provenance and then to be accepted back in is going to need to be re-assayed and all that so it loses some liquidity for doing that. You know, the other thing is silver, it’s not as heavy as gold, but it’s pretty darned heavy.

A thousand ounces is like, what is that, 60 pounds? Something like that. And it’s the size of a small loaf of bread, like a pretty small loaf. That’s hard to handle. It’s hard to carry. It’s not something most people want to take home. So. Not all dealers deal in it, especially the ones that are really oriented to the retail trade, but we spoke to a number of more commercial or institutional and financial companies and said, is there a problem with thousand-ounce bars? And the answer we got back was, “how many do you want to buy?” As many as you want. So I think in the article I said, you know, anybody who is concerned about this and wants to buy thousand-ounce bars, we will sell as many as you want. How many of you want to buy? We will sell them to you. We’re not even in that business. We don’t normally deal in metal. But to allay a concern or to make a point we’ll put that out there

John: And any takers so far?

Keith: Nobody has, which is actually kind of ironic. So maybe it’s more fun to traffic in the rumors than that people are actually that desperate to get their hands on the silver.

John: So you alluded to earlier the distinction between the retail silver market, which is the coins, typical products offered at the dealer level and the sort of institutional silver market, which are these thousand-ounce bars. You’ve often drawn an analogy using the coffee market. Why don’t you walk us through that parallel?

Keith: Yes. Let’s say you live in a generic city. You work in the downtown area, and the city is just busy imposing regulation after regulation, after regulation. They said, well, you can only load between 2:00 and 3:00 a.m. and then they have a labor ordinance that says, well, after midnight you have to pay workers double time. And there’s some other ordinance that says, well, you have to have a minimum of three workers on shift. And then something else about the size of trucks that’s allowed. And then pretty soon for your local coffee shop to be able to get their supplies, it’s costing them thousands of dollars a day in an expense to load something that previously would have cost one hundred dollars or the truck would show up. There’d be one guy opening the back door. OK, put the pallet here, OK, we’re good. And then let’s say on top of all that, there’s aggressive zoning and food and fire and health and safety and all these different things. And now we’re closing down two-thirds of the coffee shops and then the few remaining ones have a line out the door.

So the price of coffee, if you want to buy a double mocha, latte, whatever trendy drink that you prefer, you find that the price has gone to whatever fifteen dollars. You say, oh my God, inflation! Well, that’s a whole separate topic. And then if somebody were trading coffee market the way they think of the gold and silver market, somebody would say, well, there’s a shortage of coffee.

John: So, Keith, I think the main feature of these accusations has to do with allocated versus unallocated silver in the fear that there are innumerable claims on allocated silver. Will you please define the difference between educated and uneducated and shed some light on that concern?

Keith: Yes, I would say they misconstrue certain terms. So they don’t quite understand what unallocated is. Then they pivot or segue to fractional reserve, which they don’t understand either. And then somehow end up one plus one equals seventeen point two three five seven nine. They somehow end up with every ounce has been fraudulently sold one hundred times over. Now, fractional reserves is a concept that applies to banking and whatever one might argue about that, it isn’t about selling. It’s not like you have inventory that you have fraudulently oversold.

So that’s a confusion there. But in a mint or refiner, they often have unallocated accounts. And the advantage to the retail customers, of course, you don’t pay storage fees. Otherwise, you’re paying. There’s a loss of zero point seventy-five percent or one percent per year. And that adds up, especially if you’re holding for a long period of time. Unallocated means you’re not paying fees, so there’s an attraction to doing it. What does unallocated mean?

Well, if you think about the business of, let’s say, take somebody vertically integrated like the Perth Mint, although I don’t really want to speak specifically to them. You have a full vertically integrated operation that’s buying doré. So that’s the concentrated metal that comes from the miners. And then you’re melting it and you’re dissolving any chemical reactions. You’re putting it through all these processes to produce grain and then you’re melting the grain again and casting it into bars and then the bars go through whatever processes, especially if they are being minted, they have to be precise weights and so on. And so all of your production processes, there’s a certain amount of gold that’s always there.

I mean, every day you’re buying more doré, every day you’re shipping finished product. But there’s always a certain amount of pipeline in between and unallocated is that metal. It’s not that there isn’t metal to back the claims of those unallocated account holders. It’s that the metal is not in the form of a bar with a serial number sitting on a shelf. Your metal is anywhere, somewhere between doré and liquid being cast into bars.

Or if you’re a mint, you’re then taking the bars and you’re squashing them under rollers to flatten them and polish them. You’re stamping out circles, go through more polishing and whatever. And then ultimately you’re taking that disk, that coin blank and then stamping it and the dye to produce the coin and then the inventory is there before you sell it. So the unallocated metal accounts are the owners. They’re providing the funding in the form of ownership. They’re owning all that metal that’s work in progress.

And whether or not you like that as a deal, as an account or depositors, is a whole different story. That’s one of those pivots between, is that the type of account that you want? Maybe yes. Maybe no. It has advantages. It has risks. But they pivot from that to saying essentially nobody should have it. That it’s an invalid thing. It’s a fraud, it’s fractional reserve banking and then they’re back off to the races again.

So, going back to my coffee analogy is, suppose you went to Jakarta, Indonesia, where there’s an awful lot of coffee comes to market. And I think the commercial lot size for coffee is thirty five thousand pounds, something like that. And you find that the price of commercial lot hasn’t budged at all. So what do you conclude? Is there a shortage of coffee? Or is there a shortage of coffee retailers in that particular central business district because of the regulators and the taxinators and the health inspectors and the labor unions and everything else? And so it’s an analogy to silver. There’s absolutely a shortage of silver coins and minted bars and smaller sizes, one ounce, five, 10 ounce.

I don’t think even kilo bars in silver are particularly short. So by the time you get to that size, you’re getting a little bit out of retail and a little bit more into investment grade as an institutional type product. And I don’t think there’s even really much of a shortage in kilo bars, but certainly, in the thousand-ounce bar size there isn’t. And so that was the analogy, the coffee analogy.

John: So, Keith, I’m curious, why does this theme of manipulation and fraud and conspiracy and apocalypse marketing continue to surface? We see the faces change. The alleged smoking gun morphs and changes, but this continues to bubble up to the surface and grab headlines space. How do you account for it?

Keith: I guess there are probably several factors. One is the old media adage. I think this goes back to the 19th century. If it bleeds, it leads. A sensational story. Man bites dog, I think is another one of those analogies. It was exciting and interesting and the story of the dog biting the mailman isn’t particularly interesting because that happens every day, presumably. So that’s the first thing is, it’s sensational. It’s exciting. It’s dramatic. I mean, just think, the banks are on the brink of collapse any moment now. All you have to do is buy silver.

It’s kind of interesting. I was looking this morning at Twitter and one particular promoter of these conspiracy theories. You have this thing where he quoted the, I get a little bit ahead of myself, but he quoted the LBMA description of unallocated gold and silver at the bullion banks. And first of all, he’s treating them as a revelation, which isn’t. It’s a bank credit, nothing more, which is a different thing entirely from unallocated silver, let’s say at the Perth Mint or some other refiner or commercial company in the silver, gold or silver business.

But anyways, reading the comments, half of them were like, “oh my God, what an incredible fraud!” And the other half were like, “yeah, that’s going to collapse the entire banking system and destroy the US economy. Bring it, man!” And all these people all these bros are like high fiving each other. I’m like, seriously?! You want to bring about the collapse of civilization and you’re cheering and you think that’s a good thing?? So I think there’s a little bit of that like the Joker in Batman, some people just want to see the world burn. But I think probably the sweet spot in the middle is people who get this idea. And every day there’s a new group of people that come to gold and silver for whatever reason, their buddies have been bugging them or they see what the Fed is doing. The Fed isn’t going to raise interest rates or whatever. And then they think, OK, it’s time to buy some.

And a funny thing happens along the way, they get caught up in the casino action. They come thinking that, OK, this is a solution, an antidote to the dollar. And then they buy some, and what do they want? They want it to go up. And so they turn to find the sources that promised them. Oh, yeah, it’s going to go up. I’m here buying silver today. Sure. It’s only twenty-seven bucks. But let me tell you, it’s going to be twenty-seven thousand dollars next week. And people are making investment decisions based on this, which I just think there’s a lot of good reasons to buy gold and silver. But expectations of getting instantly rich is not one of them.

John: So would it be a fair question that anyone is bringing these accusations if they’re affiliated with a bullion dealer or some other retail type outlet, that would sort of question, let’s say, their credibility?

Keith: I see the point there. And obviously, they’re making a self-serving argument because they’re saying buy our product, you’re going to get rich. And obviously it needs to be said. And the elephant in the room here in this podcast is that I’m the founder and CEO of Monetary Metals. So anybody can say, well. You too are talking your book, or your comments are self-serving, although if you drill into that. Wait a minute. It’s self-serving to me to say to people that gold and silver are not going to go up necessarily very much. I’m not sure that would be self-serving, but I’d rather shy away from the argumentum ad hominem. Well, you’re wrong because who you are, you’re wrong because your job and then just focus on the merits of does this pass the sniff test number one? Number two, some interesting things you can observe if you take a step back and look at the pattern. These people have been saying exactly the same things for at least twenty to twenty-five years. Any day now, the cartel is going to be broken.

They use the term signal failure and they make up these terms. And what does that even mean? The fractional reserve, fraudulent, oversold. And they stack up all these terms on top of each other and create this weird soup that doesn’t even necessarily make any sense. They piece one and one together and they come out with seventeen point three seven nine two five, like how did you, what’s your math on that? They misconstrue things. So, for instance, they’ll take a look at the amount of gold that’s registered in a Comex warehouse for delivery, and they’ll compare that to the number of futures contracts and they’ll say, well, see there it’s been oversold. They do all these things, this innuendo. It’s I’ve got peeps in Beijing promise me that this has happened and the innuendo of juxtaposing all these non-sequiturs together, they end up with the story. There’s a lot of things you can see. This doesn’t really feel like science or journalism. It has the feel of something that’s promoting a narrative or promoting an agenda. And that’s what it is ultimately.

John: OK, so, Keith, as with most of your articles that address manipulation, you always bring it back to the basis. How does the gold or silver basis debunk these conspiracy theories?

Keith: So the basis is simply the difference between futures and spot. It’s literally spot minus future price. It’s a little more technical than that, but people don’t really often people don’t ask the question, what is it that keeps the futures price so closely connected to the spot price? They’re so close that there’s almost nobody has any reason to make a distinction between the two. If I say the price of gold today is whatever, seventeen hundred eighty dollars, it’s actually I think it’s over eighteen hundred today. If I recall looking at my screen earlier, nobody has to care whether that’s futures or spot because they’re so close.

So what keeps two price so close together, well it’s arbitrage. That is if one price is higher than the other, somebody is going to buy the lower and sell higher. So imagine if Google shares are traded in New York and in London at the same time. I don’t know if that’s the case or not, but just for instance, if the price of a share is ninety-nine in New York and one hundred and one in London. Then somebody is going to buy New York at the same time, instantaneously or concurrently sell London and pocket a two-dollar spread. Now that very act of arbitraging that spread is of course pushing up the price in New York as there’s buying in New York and pushing down the price in London because they’re selling in London and that they’re going to keep doing that trade until New York is pulled up to about one hundred and London is pushed down to about one hundred.

At some point the spread gets so thin it isn’t worth anybody’s while to play around with anymore. So imagine if a Brinks truck carrying not dollar bills, but I don’t know, let’s say pennies or nickels and dimes and quarters crashes on the highway. You’d have a whole crowd of people gathering up nickels, dimes and quarters. Right. It gets to the point where maybe there’s a few left in the weeds in the ditch, which is a little swampy with dirty water.

Most of the people would probably go home maybe even a few kids may be crawling in the ditch looking for it. But most of the people go home because the bulk of the profit of the bulk of the money has been taken already. And the same thing is true in any financial arbitrage. So that spread is a very small number. The prices are very close, but changes in that spread are very meaningful. Spreads tend to be stable unless there’s a change in market condition.

So if you see the price of the future rising relative to the price of spot, and there can be two different mechanical causes for that. But if the price of futures rising relative to spot, what does that mean? Well, that means that spot is either being pushed down so the price is falling or the future is being pushed up by buying, the price is going up because the buying is being driven or being led by the futures market. And so these conspiracy theories generally involve the banks are supposedly selling massive amounts of paper short.

So if the price of silver drops three dollars in a day, it’s like the banks just whacked it. If you sold enough paper to push down the futures price by three dollars, but you don’t have any silver, which is the allegation. So you can’t sell spot down, you can only sell the futures down. Then there would be a three-dollar gap between spot and futures and that three-dollar gap would be seen as the basis and cobasis would go completely haywire.

You’d have a three-dollar positive cobasis and three dollars for the next delivery month. So what is that July? So we’re in May right now. So June, July, two months three. What is that, at twenty seven dollars, is 11 percent for two months. Sixty-six percent. Something in that vicinity, 60 to 70 percent backwardation. I mean, if that happened, Monetary Metals, I, we would be getting up on the rooftops, jumping up and down, bellowing that there’s a giant 60 percent backwardation and silver, but we wouldn’t be the only ones.

I mean, that would not go unnoticed. A lot of people would be talking about that. That would make CNBC and Bloomberg. That would make Fox business probably. Everybody would be screaming about that. That would be an unprecedented harbinger of something. And the point is, it isn’t happening. It’s the Sherlock Holmes, it’s the dog that did not bark in the night. And so that’s a longer explanation of what do I mean by look at the basis and you can see that the conspiracy theory isn’t quite right.

John: Well, that’s all the time we have today, Keith. As usual, we appreciate your insights on this murky topic with a lot of chatter to sort through on the Internet. Thank you again for joining us on the gold exchange.