Former Head of Precious Metals at JP Morgan Robert Gottlieb says that physical silver bullion has begun flowing BACK to the US, as the US has now become in more desperate need of physical silver than China after the Red Dragon RACED to import 40 million ounces of silver over the past few months:
“Silver is beginning to make its way back into the U.S. as the July CME silver EFP has moved above comparable OTC forward rates.
Silver OTC forward rates in London remain firmly in contango from 1 month out to 5 years, with the 1-month lease rate now below 1%.
At the same time, according to a recent post by Hugo Pascal, combined Chinese silver inventories (SHFE + SGE) have climbed to a 7½-month high of 1,864 tonnes (59.9 million ounces), with SHFE holding 956 tonnes and SGE 907 tonnes.
India is also trading at a discount following the recent increase in import duties.
One thing I’ve learned over the years is that silver flows to where it is most needed.
We’ve seen that dynamic play out repeatedly over the last year as metal moved aggressively into the U.S. when EFP economics justified it.
Given today’s market structure, it should come as no surprise that silver has stopped flowing out of CME warehouses.
With the July EFP currently yielding more than 4%, the economics now favor shipments into the CME rather than out of it. As of Friday, 711,000 ounces were reported delivered into CME warehouses.
For those expecting another wave of large-scale silver shipments into the U.S., the EFP will likely need to move substantially higher before the arbitrage becomes attractive enough to trigger meaningful inflows.
While silver has recently outperformed gold (See Watchgold.org 1 month Silver/Gold chart below) and the longer-term supply-demand deficit story remains intact, I believe a genuine resolution to the Iran crisis may be needed for gold to decisively break out to new highs, and for silver to follow with conviction.
Major Takeaway: The physical silver market currently appears well supplied.
Chinese inventories are rising, India is trading at a discount, lease rates remain low, and EFP economics are encouraging silver to move back into CME warehouses.
The market may need a new catalyst before the next major leg higher.
Major Question: If silver remains in a structural supply deficit, inventories are building, lease rates are below 1%, and metal is now flowing back into the CME, what catalyst ultimately tightens the market again and drives silver through its previous highs?
Will it be stronger industrial demand, a surge in investment demand, lower interest rates, a geopolitical resolution that unlocks risk appetite, or something else entirely?
Views are my own and provided for informational and educational purposes only. This is not investment advice.”
