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London Squeeze Raises Silver Price
By Patrick A. Heller
September 04, 2012


The world’s largest venue for trading physical silver is operated by the London Bullion Market Association. It is an over-the-counter market where buyers and sellers negotiate contracts directly with each other.

Memberships include most major central banks, refiners, bullion banks and their major customers. Contracts are for 1,000-ounce bars refined to a minimum purity of .999 fineness (it was formerly .9999 fineness). Generally, the minimum size contract is for 50,000 ounces.

This exchange is where heavy-duty buyers and sellers of silver trade. In theory, contracts executed there are for prompt delivery of physical metal.

When the price of silver topped $30 about 10 days ago, demand on this exchange surged. The best information I have is that at least two purchases were made then, each in the range of 5-10 million ounces of silver. The sellers simply did not have that much physical silver immediately available to fulfill these contracts. However, the LBMA insisted that delivery of physical silver must be made on the exchange rather than by possible chicanery that could happen if the contracts were settled outside of the exchange.

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The latest reports I have received is that there is basically no physical silver available for immediate delivery in London. In fact, the estimated time for delivery is further into the future than some traders have ever experienced.

To top this off, I also understand that JPMorgan Chase last week raised the price up to $31 that it was willing to pay to purchase physical silver. JPMorgan Chase is widely presumed to have huge short positions in the physical silver market. If the bank is paying as much as $31 per ounce, this is a sign the bank expects short- to intermediate-term prices to exceed that level.

So, if there is such a large supply squeeze for physical silver from the major players in the market, why aren’t premiums rising on the bullion-priced coins and bars? That’s an excellent question, but easy to answer.

Contracts traded under the auspices of the LBMA are priced at a much lower premium than almost any other form of physical silver. Therefore, the demand for immediately available physical silver is for the forms that the refiners can purchase enough below the intrinsic value of the metal that it can profitably be melted, purified and delivered in the form of 1,000-ounce bars to London.

What that means is that forms of physical silver that trade wholesale at or above the spot price are not wanted. Coins such as the U.S. silver American Eagle, Canada’s silver Maple Leaf, Austria’s silver Philharmonic and others won’t help fill the supply shortages.

United States 40 percent silver coins, the Kennedy half dollars struck from 1965-1970, do trade wholesale significantly below melt value. However, refiners are less enthusiastic about processing coins of such low purity because their refining capacities are limited. They can only melt so many tons of raw material per day, so the purer the silver content they start with, the greater number of ounces of pure silver they can produce and sell. Processing lower purity silver during a time of peak capacity operation would reduce profits for the refiners, unless they were able to purchase such silver at a significant discount to silver value compared to what they pay for purer forms.

At present, fabricators are able to keep up with demand for production of 100- ounce and smaller size bars and rounds, for which the manufacturers receive a higher premium than they would be paid for 1,000-ounce bars going to London. So, for the time being, there is no shortage of the smaller bars and rounds.

The largest marginal impact in the near-term supplies of physical silver comes from the wholesale price of U.S. 90 percent silver coins, the dimes, quarters, and half dollars struck up into 1964. If these coins trade far enough below melt value, refiners can purchase them to melt down to make 1,000-ounce bars. If the wholesale market is paying very close to or even above melt value for these coins, the refiners can no longer profitably tap this huge source of physical silver.

Late last week, wholesalers raised their buy prices for 90 percent silver coins so high relative to melt value that refiners can no longer afford to purchase this form of silver. In fact, the ask prices of all major wholesalers were above melt value.

In the short term, there may be slight premium increases in bullion-priced physical silver coins and bars. For a time, supplies will continue to be available with little or no delays. However, the real supply squeeze for 1,000-ounces bars in the London market will divert some physical metal away from the manufacturers of coins and smaller bars and rounds. As time goes on, look for premiums to rise and also for higher spot prices.

The spot price of silver rose 13 percent during the month of August. In my judgment, we haven’t seen anything yet.



Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.



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