Silver Market Needs 150 Million Ounces to Normalize, Warns Bullion Bank Insider | Bob Gottlieb
Summary
Market Volatility: The precious metals market experienced significant volatility, with gold testing critical support levels and silver reclaiming previous price points amid contradictory narratives.
Institutional Thesis: JP Morgan's report suggests a structural shift in investment strategies, questioning the reliability of traditional stock and bond portfolios and highlighting gold as a potential hedge.
Central Bank Activity: Central banks continue to accumulate gold as a diversification strategy away from the dollar, with 75% planning to buy more in the next five years, indicating strong fundamental support for gold prices.
Silver Market Dynamics: The silver market faces a physical drain with significant outflows from Comex vaults, suggesting a need for 100-150 million ounces to normalize market conditions and address liquidity concerns.
Geopolitical and Economic Factors: Economic uncertainty, geopolitical tensions, and inconsistent US policies are driving central banks and investors to diversify into precious metals, particularly gold.
Arbitrage Opportunities: Banks are capitalizing on price dislocations between London and US markets, moving silver to exploit arbitrage opportunities, which impacts market liquidity and pricing.
Future Outlook: The market's future hinges on US policy decisions, central bank buying patterns, and potential tariffs on critical minerals like silver, which could further influence market dynamics.
Book Release: Bob Gottlieb's upcoming book, "Mastering Gold and Silver Markets," offers insights into bullion banking operations and the role of precious metals as a safe haven asset.
Transcript
I'm Jeremy Saffford. Welcome back to Kicko News. Well, it's been a turbulent week for the precious metals market. Spot gold successfully tested the critical $4,000 psychological support level just overnight and has since staged a pretty powerful rebound, now trading in a range between 4,100 and 4150 an ounce on the spot side. Silver, too. I mean, it's mirrored that volatility and it's uh reclaiming that 48 $49 level. Now, this price action is set against two powerful narratives that seem to be quite contradictory as well. First, a new institutional thesis from JP Morgan arguing for a structural shift that could see gold's price double. And second, a massive physical drain from COC silver vaults. Now, to make sense of this, you need to speak to someone who not only understands the system, but who broke part of the story open. Our guest today is uniquely positioned to connect these dots. Robert or Bob Gotautlip is a former executive at JP Morgan's Boolean Bank, the very center of the system. He's an expert in precious metals and he has a new book coming out called Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader. A must readad for our audience, I must say. Welcome to the program, >> Jeremy. Thank you for having me. I'm a fan of KitKo. >> Oh, thank you for saying that. It's guests like you, Bob. we get the insights to our wonderful audience and I appreciate you making the time because we got to start with this week's selloff. I mean what a what a what a almost felt like an episode of something I mean to watch. I mean obviously we saw gold collapse more than 200 and then rebounding silver drop sharply and then the volatility across the metals complex hit levels we haven't seen since early 2020. I mean we've seen some recovery here but um let's get into the you know the who, what, where, when and why. I mean what triggered this move? Was it a pure algorithmic liquidation? Was it the market telling us something deeper about liquidity and leverage? What are your thoughts? >> Yeah, it's it's a great question and um you know, I think everybody that follows me knows that I don't believe that anything goes up linear and uh we've had a tremendous rally. I mean, even after the selloff, gold is up uh 57% or so since the beginning of the year, silver up 69%. I I believe what has happened is so in the last month or two a lot of pundits have come out and uh advocated for gold. You have Jeff Gunlac, Elaran, Ray Dalio and many others and matter of fact Jeff Gunlack uh mentioned on a competitor network that gold has become a momentum trade and uh that retail investor is just getting on the radar screen with gold. I think what has happened is that a lot of retail investors in the last two months just got involved in gold. I will call them weak longs. And uh in addition to that, you know, when we started stalling out around the 42 4,300 level, uh many people came out stating, well, maybe we've hit the top, maybe it's a bit frothy. You had one uh investment bank uh recommend a 60 2020 uh portfolio where 20 would be% being gold which I think is extremely high. Uh on the day of the selloff that same investment bank and different individual mentions have we hit a bubble. So, with all this news out, I I wouldn't put it past a a hedge fund that saw the weakness at an all-time high and stalling and take on a short position. And with that, uh people don't really look why why are we coming off, they just know we are coming off and I need to get out. So, trend following funds like CTAs, uh week longs that obviously can't take certain amount of pain. they just got in and they're out $200 in in a week or two. Uh I think they all exited and I think it's extremely healthy for the market to have selloffs and uh as I said nothing goes linear, but I believe that we're in a long-term rally still. >> Interesting. Okay, so a bit of a we had a guest on earlier this week. They called it almost a meme stock moment, right? I mean all the all of a sudden the mainstreams talking about this story that we've been talking about for years. I mean, the data didn't really line up with panic selling by long-term holders. ETF outflows were limited and physical premiums barely moved, it seems. So, you know, was this a was this really a future-driven event? Maybe that margin call cascade inside the paper market rather than, you know, the fundamental rejection of gold itself. >> Yeah. No, I I I I believe that, you know, what you have to look at is who are the holders of gold and who are the biggest holders. First the central banks and 18% of whatever has been produced from day one in this world to now is held by central banks and they are major accumulators with very deep pockets. I mean I've dealt with central banks over over decades and not one central bank ever said I am buying or selling because of the price today. They make they make a policy should I buy should I sell and then they stick to that policy. If you take a look, the World Gold Council recently did a uh uh survey on on central banks. 75% of the central banks said, "I'm going to continue to buy gold for the next 5 years." So, the deep pockets and we have a strong fundamental base. But like you said, uh the meme stock part was is that's the momentum trade, that little extra froth that uh was not very positive for the market and and got away with itself. And I think that's what we've seen in in the correction recently. >> Interesting. I got to talk about the institutional thesis and kind of its credibility. I mean on the JP Morgan report that I talked about off the top, the core of their argument is that the 6040 stock and bond portfolio is broken. Uh was what was the final straw? I mean why after decades of functioning has the market's trust in government bonds as a reliable hedge completely evaporated? Yeah, this again goes back to uh general economic and geopolitical uncertainty. I I guess you could say it started initially with Ukraine or I mean we started getting a bid and actually um certain ECB central banks started buying gold especially like Poland and so forth right after the Ukraine war. So, it's not shocking. And I I believe that um if you take a look uh at the ECB for instance, uh they just announced that the number two holding in their reserves is gold and surpassed the euro. So, if you think about that, they hold more gold than they hold their own currency on the ECB central banks. If that doesn't stream by gold, what does? >> Yeah. Yeah. And I mean, you know, I I hate to keep bringing up your former employer, JP Morgan, but it it has a long and complex history in the precious metals market, including paying nearly a billion dollar fine for manipulation just a few years ago. I'm curious because the audience kind of wants to view this as this hyper bullish report as a genuine research call and and not just as a strategic positioning piece, but what do you think it is? I mean, could they just be talking their own book, setting the stage for for their clients before a major move? Yeah, I mean I really can't get involved in that. I mean research was was independent of and always should be independent of trading. So they put out their own uh thesis. I don't believe it's connected to to the trading desk and uh I also haven't been at JP Morgan in over 10 years so I can't really even a job on behalf of JP Morgan. >> Yeah, on that math I mean the the allocation shift from that 2.6 to 4.6% for gold. Uh I'm curious you know I mean from a from a from a boolean desk perspective is the is the physical market infrastructure you know the refineries the vaults the logistics even capable of handling that scale of reallocation from the multiundred trillion dollar bond market without you know complete and chaotic price reset >> in gold it definitely it definitely is uh in silver this is what's created uh um part of the tightness um if you take a look the the other The other part of why gold is where it is is it's not just the ECB is uh diversifying. The entire central bank world is diversifying away from from the dollar and and they're doing that via gold. Gold has become not just a safe haven asset that it always was but in my mind it's now the ultimate safe haven asset in this world. And you see uh China and Asia um uh bolstering their gold reserves. Uh China is trying to become the third hub, international hub in gold. They've done so many different things. Uh they're allowing their top 10% of insurance companies to invest 1% AUM in gold. Uh that estimates almost $25 billion. Uh they're they're uh relaxing rules and trading on the SGE and the Shiffy. They're opening up vaults. They're trying to attract um uh central banks which I don't think they'll be uh successful in storing gold there. But if you take a look at the regions uh Asia, Middle East, Europe, you know, all the central banks in the world are diversifying away. And it it it to me is more economic uncertainty than geopolitical in the sense that um since uh President Trump has come in uh and I won't get involved in say uh given an opinion on the administration other than that they're quite inconsistent in flip-flopping uh tariffs tariffs no and uh aggression as far as polit uh um uh military so forth. So I think a lot of countries around the world are quite nervous and therefore we this rally is not different than any other rally we have ever had because there's a structural change in in in the investment in gold and that's with central banks who are very deep pockets and uh and that's why I believe that uh we will continue with uh the uh the US administration not being a uh uh clear on what they want to do and and with that I think that this continued diversification uh will happen. >> I wonder, you know, we were chatting about central bank buying and you obviously you've talked to many of these central bankers in the past and and they're not really price sensitive. No one's looking at the price of gold. I'm curious you do the central banks I wonder if they're going to start looking at the price of silver. I mean there's always talks on X and there's all these mmings about India starting to pick up some silver for their central banks but is that ever discussion that's ever crossed nearer or something you've heard of? >> Yeah, I I've spoken to several central banks and and you have the one-off central banks that that will look at uh all types of investments, you know, uh outside of the normal. But the bottom line is I think that uh they consider gold uh the international uh it's a it's a not a non fiat currency you know so it's not the faith of any country and I think that's what they look upon as gold I don't think you can say that with silver so I don't believe that uh central banks will will buy uh silver however I do believe that institutions will buy silver especially uh pension funds and and institutions that miss out uh or are in the gold and they don't want to buy more gold at this all-time high. I think they'll they're starting to look at silver. I had a uh very large pension fund uh contact me for my opinion on on on on purchasing silver and how to go about and so forth and I don't think they'll be the only one. >> I wonder how how do you go about that? You know, I guess it brings us to the physical market. We can kind of transition here, Bob, because obviously it's the plumbing of the market itself. Because if hedge funds are leaning short while central banks are still taking delivery, I guess the real question is is is where where's that physical metal coming from? I mean, you've been tracking what looks like an unprecedented drain from the Comx vault system. More than 27 million ounces of silver gone in just 2 weeks. Is this simply metal moving to meet delivery demand overseas? Is it is it the exchange facing a genuine liquidity crunch? >> Yeah. So I mean again this is much more silver related than gold related because >> the bottom line is uh the bullion banks and bullion banks are uh the intermediary for for the gold industry. I mean they're the ones that finance uh mining companies. They finance fabricators, refineries, end users such as uh uh jewelry companies like Tiffany's and so forth. They lend metal to them and so forth. So I I think that um there's enough gold in this world that if they needed gold, they can go to central banks to borrow gold. However, that's not the case in silver. There is no lender of last resort. And that's what that's that's the problem we've seen. Prior to uh the threat of tariffs, there was roughly 250 million ounces of silver in the CME warehouses. Then all of a sudden uh initially I believe uh President Trump put uh tariffs on Canada and me and Mexico. Mexico was the Mexico is the largest producer of silver in the world and that's what started this whole process of uh premium of silver uh premium of the US over uh the rest of the world. If there was a 10% tariff at today's price of $50, you you would have to pay $50 to buy the silver and then $5 to import it. So therefore, you started this location of $55 silver in the US and $50 rest of the world. So what happened was um first banks lost money because the EFP uh drastically moved and then there the spread continued so wide that banks were able to make back some of that money by taking delivery of silver in London selling by by a mechanism called the EFP where you buy spot London and sell futures and if you're going to sell buy London and sell futures at a yield way above the cost of money and way above the cost of borrowing metal. You're then just going to take that delivery of London, ship it into uh the US and lock in a pro profit because you have a huge differential. And that's what happened. We went from 250 million ounces of silver in the CM warehouses to 530 million a few weeks ago. And arbitrage is something that goes two ways. So then with uh the price coming off and then with lease rates going to 150% for overnight uh 25% for two and 3 months uh the EFP for silver went the other way where spot London became a $3 premium to December futures. Now December futures should always be higher than spot London because you there's a time difference. were in October and December futures obviously starts you know the 1 of December. So what happened was banks were able then to take sell spot uh sell spot London buy back their short CME position take delivery of the CME and start shipping it over. And that's what we've seen in the last 2 weeks. We went from 530 million ounces to approximately 501 million today. So that roughly 29 million ounces of silver has been shipped out of the states. Uh I don't know yet if it's all gone to London. I doubt at all. Some has probably gone to terminal markets like India as well. But uh this concept of the arbitrage reversing itself has put in the minds that that the market should self-correct. I believe that we need another 100 150 million ounces physically in London for us to normalize. And the reason for that is if you take a look at uh Dan Galia at TD did an amazing um uh study. I think you've probably had him on before. >> He he's the one that came up with this. Is this the uh silver squeeze worth buying into? And he was 100% right. I was with him 100% of the way uh since November. And what happened is he analyzed free floating silver. So the simple explanation of that is you take a look of how much silver is in the London warehouses and I think it's approximately 800 million ounces of silver physically in the London warehouses of of of the banks. However, a portion of that is allocated and can't be used. So the question is how much free floating unallocated silver there was when he did the study. was 305 million ounces of free floating stock. To give you an idea what that means, the daily trading volume was probably around 250 million ounces. So if you have 305 million ounces and there's 250 million trading, you have enough silver and therefore things going to be liquid and uh silver forwards were close to money because of that. Then all of a sudden you got drained with uh silver going to the CME. You got drained with uh silver going to India. You got drained with silver going into ETFs. And that free floating stock went from 305 million down to maybe 125 million. >> And the daily trading volume that was maybe 250 million probably went closer to 275 285 million ounces. And that has what's created this entire uh uh tightness is because there weren't basically it wasn't enough silver to trade on a daily basis to satisfied all the deliveries and uh eventually whoever was lending into this market uh eventually had to uh cover and other banks had to cover and there was panic and I'm sure compliance and risk departments came into the banks and said hey you We saw what happened in co we saw what happened earlier in tariffs get out. So um we that exasperated it. Uh banks started taking less risk started widening their quotes and that also funneled it. So like if for instance a two-mon silver was quoted at 50 basis points wide now they started getting quoted 10% wide and if you and if somebody borrowed at 10% wide then you would shift that market another 10%. So this is what explains why the silver market panicked and also with the amount of ri risk that was taken which wasn't much why we got to what I call the market broken. >> Right. Right. Okay. Well I mean one of the one of the things I heard you say there's London it needs about 100 to 150 million ounces just to kind of function smoothly. That's not a trading issue. I mean that's a synthetic shortfall. Does that mean we're at the point where the pricing mechanism itself could break unless that metal appears? >> No, I don't think it has an impact in price pricing as much as it has an impact on uh on liquidity in the forward market in the leasing market. >> Okay. >> I I believe that um eventually that liquidity come back. Another way banks are have uh recently uh developed some liquidity is they borrowed uh they borrowed the SLV the uh the ETFs and uh they borrowed the stock paid a fee to borrow the stock then took that stock that uh is aloc that has allocated metal. For those of your customers that wonder is there really allocated mentally, yes there is. And banks have actually borrowed the stock, redeemed the stock for physical and that also has helped inject a little liquidity into this market. Except for I still believe that if we're going to normalize to uh where we were a couple of months ago, I still think that we need that free floating stock to equal the daily trading. So that's why I come up my number of if if and I'm not the expert on how much is free floating. I've been going off of Dan Gali's numbers, but let's say make up it's 125 million and there's 275 million trading on daily basis. You really need to get to that number of uh free floating in London for it to become liquid and normalized. the price obviously um will will fundamentally uh be supported by this shortage as well because if you can't finance by leasing metal, you're going to have to go out and outright buy it. >> Yeah. Yeah. So interesting. I mean, if if it sounds like the futures market becomes the only release valve left. I mean, how much real liquidity is actually left in the futures market at this point? We're seeing thinner books, wider spreads. Some brokers are even talking about reduced delivery capacity. Is the, you know, is the paper market still functioning as a true hedge or is it now just a placeholder for for metal that isn't there? >> No, I mean it it it works because you're still hedging. I mean, obviously the dislocation's constantly changing. Uh uh I mentioned the EFP. the EFP could move 50 cents at a clip and the price can move 50 cents at a clip and that's what's created this uh uh this volatility and volatility brings large sell-offs. So I I think it's a self-fulfilling prophecy but I think that things can normalize. Uh the big question in my mind on silver is the 232 analysis that's coming out. Um it the 232 analysis is a critical mineral analysis on silver and the difference between silver and gold is that silver is used uh much more on an industrial basis uh you know solar PVs AI EVs data center microchips uh so the if the US puts a tariff on silver then all of a sudden the silver will stop moving because you're not going to sell you're not going to move silver that's uh $5 more in value to a market that's $5 less. So all the shipments will stop. Uh so the key is one will tariffs be imposed and and if they are then then that's a problem. the the issue with putting tariffs on silver is one it's a monetary metal and two if you look at why the US wants to put tariffs on for instance I understand why they may want to put a tariff on uh Chinese automobiles because they want to foster more US production and if you put a tariff on autos coming out of China then that will foster more production in in the US for automobiles However, if you put a tariff on silver, it will not produce 1 ounce more of silver. In the United States, >> for instance, um 30 less than 30% of the silver mines are dedicated silver mines. So, where you would go in and extract actual silver, the rest is made by byproduct. So, 70% of the silver mines are byproduct. So you're not going to uh increase uh the me that production for a byproduct. So not one ounce of silver will be increased. So the the analysis of putting a tariff on a critical mineral will only do a disservice to the United States because as I mentioned how many different industries in the US require silver as as as a critical mineral. So I'm going to assume that they don't put uh a tariff on it. until this analysis comes out and unfortunately the US government is closed. So we don't know if it will be coming out because it should be out it should be out by today. >> Yeah, I was reading reports today about section 232 and that critical minerals analysis. They might they're saying maybe early as next week, but you talked a little bit about why that review is so important. But if silver is form formally designated as a critical mineral, I mean what does that actually change for the market? Does that mean that the US government could move to secure domestic inventories or restrict exports in the name of national security? >> I mean, I I I would be surprised if they did that. I mean, but I I I I don't really know what's, you know, behind the thought process of the government when it's coming to tariffs these days. Uh but I I would think that as a monetary metal that, you know, silver would would not be tariff. But uh I I really you know it's anybody's guess what what will happen if it is tariffed. >> Yeah, I was going because I mean you know that kind of classification would effectively pull silver out of the normal supply chain and kind of force exchanges like COMX to coordinate directly with Washington. It feels like at this point I mean it seems like bigger bigger stories here. >> Yeah. No, I I it it I I think you know um like I said, all eyes is on the um on the analysis and hopefully uh we get clarity. >> Yeah. Yeah. Well said, Bob. Um okay, let's switch over. I mean, we established that there's that price sensitive, insensitive, I guess we could call buyer in London. Who's the seller? I mean, who's standing on the other side of this trade willing to give up physical metal during a historic uh drain? I mean, is it just the arbitrageers or or are there entities perhaps funds and those margin calls a little bit that we were talking about who are being forced to sell that physical metal into the tightness to raise cash? No, I I I think it's I think it's much more the opportunistic uh uh profit motive of of banks to I mean, if you're going to if if you could sell London spot silver at $3 over December futures and uh then you could go in and let's say borrow the metal for the time that takes to physically deliver it. It takes uh most silver is first of all done by boat. Uh, and the reason for that is the the weight and the density. Uh, but you can ship silver by plane. The only thing is you're limited to 250 to uh 500,000 ounces or so. And so you can't move large volumes by plane. But as that spread widened, it made sense. Even I I think it's if from my old days, it's like 8 to 10 cents by boat and maybe 15 to 18 cents by plane an ounce. So a a as it widened out, it it allowed you to move the uh silver physically by plane and as well as boat. So if you could sell silver at $3 premium spot to futures in London and let's make a number up and say uh with with cost of shipping, the cost of borrowing the metal for the time it takes because you're selling spot silver that you don't have. Now you have to go and borrow that silver. And that's what happened with the uh that's why the OTC got also got so tight is because all these banks were taking advantage of this arbitrage and more and more borrowing came in. So uh if you're able to do that and let's say for instance make a dollar an ounce uh on a million ounces that's that's a million dollars. If 30 million ounces move that's $30 million. So now you understand the economics of why the banks would do this. Yeah, >> I mean good good ROI on a little bit of a I guess just a little bit of a delivery thing there. Uh Lou, you're talking about London. Let's turn to London because the LBMA's new chairman Peter Zolner is is floating a the idea of reviving a London gold futures contract to compete with Comx and in his words restore liquidity to the system. I mean you had a little bit of a a post here Bob I was reading on LinkedIn but talking about maybe this not being the solution. what that what London really needs is for CME depositories to be approved inside the London's clearing network. Explain why that structural change not another futures product would actually solve the liquidity problem. Yeah, I first of all I we don't know how successful I mean we've they tried several times the LME tried to put up a uh a futures exchange and it failed because uh comx uh uh the CME I should say uh you know is quite liquid and and and people are used to it and and trading on it. So why reinvent the wheel and start a futures exchange and and have a great chance of failing when the fact is it's the physical movement of metal that and I suggested during uh covid times they were looking at it as that would be the uh when refineries closed and and um uh airlines stopped flying I I suggested to the CMA and to the LBMA uh that you should and I was trading during that time that you should open up depositories in London under uh where the CME would open up a second contract. It would be a 400 ounce bar contract versus a 100 bar contract because London trades 400 ounce bars. >> And so therefore, there would be a slight uh uh premium difference to the 100 bar contract, but it would immediately inject the liquidity you need. You wouldn't necessitate these physical shipments back and forth. uh and and I think the market would uh react a lot more orderly. >> Okay. So So you explained it there. I mean COMX and LBMA they almost operate like separate islands and if CME approved vaults were integrated in London metal could flow directly between these two hubs instead of being arbitrageed through paperwork. So would that single change and these chronic dislocations, you know, end these chronic dislocations that we've seen between spot and futures? Yeah, I think it it it would it would greatly reduce the uh these dislocations. Again, you would probably have a difference between a 100 ounce contract versus a 400 ounce contract. But once people started trading that 400 ounce contract and it became liquid, then then you had uh the CME depository metal co-mingled or next to uh the London regular OTC metal and then it just becomes a a physical book transfer between where where it's being stored for. >> Yeah. I got to ask you about uh the plaques. I don't know if you've been keeping an eye on it, but now that I have you, Bob, and we don't get you often, I just want to ask you about your thoughts because I mean, we got these new sanctions targeting Russia's energy giants. And given that Russia is a critical supplier of platinum and palladium, I'm curious about what your thoughts are here. We've also seen some of these discussions about um kind of a squeeze in the platinum market, if you will, as well. Are you seeing any tightening there? You hearing any mumblings? >> Yeah. Um I I haven't been focusing as much on uh uh platinum and platium, but yes, platinum >> I mean platinum and palladium are significantly less liquid than gold and silver. So it it's much easier for the uh dislocation. The the other thing that I've been advocating uh for several several months now is that the London precious metals uh the platinum market uh the organizations they become a little more transparent just like uh the LBMA and they announce on a on a monthly basis what actually is in the warehouse. For instance, uh the LWMA puts out statistics on how much gold and silver in the warehouse, how much trade every day. We don't have any statistics in London on on how much platinum and padium is there. I believe that at least would that transparency would help somewhat. And the question is why are they doing that unless the situation is a more little more dire than it was in the gold and silver market. >> That's interesting. uh is it just to create a little price uh price a little upward trend here? I mean these little squeezes they saw how easy it was with the silver market or how hard. Yeah, I I think that you know the fact is you know the PGMs are less liquid because there's you know less available and uh and also as you mentioned you know South Africa and uh Russia are are critical to the um to the liquidity and if you take out uh Russia that will have some impact on um on on further liquidity. >> All right. Uh just a fascinating story. We got to have you back on. Let's I mean we could do it this way. I mean if we put all of this together, Bob, the physical drain, these institutional motives that we've been talking about, and then of course adding on the geopolitical pressure, is the Western paper price becoming a lagging indicator? I mean, is the true price now simply the physical cost to source and deliver a bar in Shanghai and Mumbai? >> Well, um I mean that's a good question. I I believe that you know first of all uh specifically China I mean their agenda is much bigger than just accumulating gold. uh as I mentioned all the reasons you know earlier in the segment uh I believe that you know they're they're trying to uh bolster their presence one to have uh I think the far east want to have more of an a impact on the price because right now the the price is determined by the London spot market and the US futures market. So they are trying to open up uh more to have also become the third international hub and impact the price as well because of that. uh and why are they doing all these things especially China I believe they're trying to do this to bolster the renimbe and uh you know they also have probably a bigger agenda to uh u surpass the dollar and weaken the dollar by uh becoming a stronger hub in gold and uh having the rest of the world uh central banks do the same. >> Yeah, fascinating. I wonder, you know, I mean, besides what we kind of know about the Far East situation, what are those concrete levers that China's pulling to move precious metals price discovery out of London and New York? I mean, is it custody and involing in region? Is it more of those warm settled contracts or exchange linkages um outright control of refining and logistics? >> Well, first of all, China is the biggest supplier and uh demand in the world. meaning that the big biggest supplier because they're the biggest producer of gold in the world and the they're the biggest demand uh you know between all the uh public buying and the ETF buying. Um one one of the reasons why gold is so important to a country like China is because there's not many financial assets that that people can turn to. And uh that's another reason why we've had the rally we had in the last uh year or so is traditionally when for instance the dollar gets stronger gold comes off and in this last rally if you take a look when the dollar got stronger China came in buying why because it was a hedge against their currency and other countries also that have weak financial markets and weak currencies uh are buying gold when when the dollar gets stronger against their currency And then on the opposite side when the dollar gets weaker you have the west central banks that uh have been buying gold uh to divers away diversify away are also accumulating gold. So, it's been a unique rally and different than any other rally because we've never seen it uh where when the dollar gets stronger, gold has been getting stronger and um so I I think the dynamic is clearly that Asia had Asia, China um and the rest of the world have um are looking to plant the uh the dollar with with gold and uh with the rest of their economic policies around the world. >> Yeah. Are we are we seeing that in in the persistent kind of Asia time bids and the spot futures dislocations that you've been tracking? I mean, practically what would flip the switch? I mean, a deep deliverable contract in Shanghai with transparent vault data or maybe Chinese banks offering, you know, term financing and leasing that undercuts London. >> Um, I don't really think that's that that's that's the answer. I think gold, first of all, is deep enough market that it doesn't have any it really is not having any issues price-wise. the the EFP is much more normalized. Uh uh initially you know we had that tariff threat and there was what happened with gold was there was a tariff threat and there was a tremendous amount of gold moved and the banks went to borrow gold from uh central banks and the problem was the bank of England holds the c holds all the gold and there was a bottleneck at Bank of England and while lease rates went from 0 to 1% to 2% and were on like 20-year highs All the central banks wanted to lend the gold to the bullion banks because they wanted it to uh enjoy this uh income on a non-interestbearing commodity such as gold. The problem was Bank of England's not a commercial fall and a bottleneck happened and uh the they couldn't get the gold out of Bank of England in physically into the uh custody of the uh clearing members in London and that created a bottleneck that went from 2 days to 2 to 3 months and uh that that that's what initially created that uh problem. we're at that that market has now quieted down and and liquidity has come back. But um that's the issue what we obviously we're having in silver. >> Man uh we could talk all day, but of course our time is almost up. Let's finish with what you're watching now, Bob. I mean because after everything we've seen this quarter, I mean the next few months could be decisive for both the metals and the broader financial system. Uh what are the key signals that you're kind of tracking between now and year end? Is it the COMX vault movements, Asian buying patterns, lease rates, or something else that kind of will tell us where the market goes next? >> Right. Well, I I believe that um uh a couple of things are important. One is obviously the uh policies of the United States. Um, for instance, another thing I forgot to mention that one of the things that might have triggered the selloff the other day was President Trump mentioned that there would be a uh good resolution to China trade at the end of the month when they had those meetings and uh basically what that translated into well there's less economic uncertainty if in fact you know they resolve all the trade issues. Uh I don't believe that's will ever happen because obviously China has a big agenda and uh and also I'm not sure that you know the US will ever get into an agreement with China. But that's clearly something that's uh that you want to look at is the US economic policy is the uncertainty uh the relationship with China. Um I I think that those are very paramount. Um uh a lot of people are discussing you know the FOMC uh cutting rates being favorable to uh uh the price of gold obviously and finally uh what I mentioned before uh the central bank survey according to the world gold council 75% of central banks said they're going to buy gold over the next 5 years and I believe that should continue and as long as we see that continue we're going to see a slow steady offtake at with from deep pockets that will be fundamentally supportive uh to the price. >> Yeah, well said. And I guess bottom line, I mean, where do you see gold and silver finishing this year? Do you expect this rebound to kind of hold and evolve into a sustained bull phase that we've already seen or or are we in for another round of force liquidations before the next leg higher? >> Yeah. Uh well, I don't really get involved in in forecast per se. And I certainly don't give uh get involved in forecast on a time basis. Mhm. I >> I'm basically friendly to both gold and silver long-term. Uh but the problem is you never know why you have the moves. For instance, uh the the first run up in in 2020 was because of CO. I don't think anybody in the world could have ever forecasted CO and then obviously we've had this uh uh craziness uh with with tariffs and the economic uncertainty of the US. I don't think we could have forecasted that as well. So I'm not really in the in the role of coming up with those forecasts because I don't believe we ever can. uh but what I do believe is that as long as you know the US administration uh is going to flip-flop and uh also won't be able to be pred predict their behavior and and I believe that the rest of the world is nervous of that and they're going to continue that diversification away from the dollar into gold. So I think that's what you need to to focus on is that th those patterns still continue. >> Yeah. fundamentals haven't changed here. All right, Bob, a fascinating, incredibly timely discussion. Your breakdown of the physical market mechanics, the policy triggers, and the structural shifts give our viewers a perspective they won't find anywhere else. So, we appreciate this. And for those who want to dig deeper into your research, your upcoming book, The Invisible Vault, uh let's let's talk about this this book that you have coming out. I mean, where do you get it? It explores the market. I think it's out in February, you know. >> Yeah, it's not out till February. Um uh it's on uh Amazon and uh Barnes & Noble and several others for pre-orders. So I'd be thrilled if uh everybody uh uh look in the audience to uh buy it because it it it's a good uh it's first first half of the book is uh somewhat of memoirs of all my trading involving with central banks and uh other organizations. But it also explains how truly how uh bullion banks operate and uh dispels some of the uh uh uh uh rumors of uh like paper gold and so forth like that and and how how the markets work. And then the rest of it is on an educational basis. Uh why why gold? Why why individuals the central banks buy gold? uh demand supply factors, what products are available and so forth. And it ends with uh my uh ultimate safe haven asset being uh gold. >> Gold. You heard it here. All right. I appreciate it. Bob Gotib, thanks for joining us today, sharing your insights. Uh come and see us soon. Okay. I mean, we just got into that topic. We hardly even touched a lot on gold. We were talking about silver majority and I'd like to talk to you more on that side, too. So, we'll see you soon. I appreciate this. >> No, I appreciate it. And uh uh thank thanks for the plug. >> Yeah, of course. All right, gold, silver, now platinum, too. Three markets moving under pressure with policy shifts and liquidity stress redefining how investors think about risk and of course value. Now, we're going to keep tracking these developments and the physical flows driving them. For all of us here at Kitco News, I'm Jeremy Saffron. Thanks for watching. Heat up here.
Silver Market Needs 150 Million Ounces to Normalize, Warns Bullion Bank Insider | Bob Gottlieb
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Transcript
I'm Jeremy Saffford. Welcome back to Kicko News. Well, it's been a turbulent week for the precious metals market. Spot gold successfully tested the critical $4,000 psychological support level just overnight and has since staged a pretty powerful rebound, now trading in a range between 4,100 and 4150 an ounce on the spot side. Silver, too. I mean, it's mirrored that volatility and it's uh reclaiming that 48 $49 level. Now, this price action is set against two powerful narratives that seem to be quite contradictory as well. First, a new institutional thesis from JP Morgan arguing for a structural shift that could see gold's price double. And second, a massive physical drain from COC silver vaults. Now, to make sense of this, you need to speak to someone who not only understands the system, but who broke part of the story open. Our guest today is uniquely positioned to connect these dots. Robert or Bob Gotautlip is a former executive at JP Morgan's Boolean Bank, the very center of the system. He's an expert in precious metals and he has a new book coming out called Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader. A must readad for our audience, I must say. Welcome to the program, >> Jeremy. Thank you for having me. I'm a fan of KitKo. >> Oh, thank you for saying that. It's guests like you, Bob. we get the insights to our wonderful audience and I appreciate you making the time because we got to start with this week's selloff. I mean what a what a what a almost felt like an episode of something I mean to watch. I mean obviously we saw gold collapse more than 200 and then rebounding silver drop sharply and then the volatility across the metals complex hit levels we haven't seen since early 2020. I mean we've seen some recovery here but um let's get into the you know the who, what, where, when and why. I mean what triggered this move? Was it a pure algorithmic liquidation? Was it the market telling us something deeper about liquidity and leverage? What are your thoughts? >> Yeah, it's it's a great question and um you know, I think everybody that follows me knows that I don't believe that anything goes up linear and uh we've had a tremendous rally. I mean, even after the selloff, gold is up uh 57% or so since the beginning of the year, silver up 69%. I I believe what has happened is so in the last month or two a lot of pundits have come out and uh advocated for gold. You have Jeff Gunlac, Elaran, Ray Dalio and many others and matter of fact Jeff Gunlack uh mentioned on a competitor network that gold has become a momentum trade and uh that retail investor is just getting on the radar screen with gold. I think what has happened is that a lot of retail investors in the last two months just got involved in gold. I will call them weak longs. And uh in addition to that, you know, when we started stalling out around the 42 4,300 level, uh many people came out stating, well, maybe we've hit the top, maybe it's a bit frothy. You had one uh investment bank uh recommend a 60 2020 uh portfolio where 20 would be% being gold which I think is extremely high. Uh on the day of the selloff that same investment bank and different individual mentions have we hit a bubble. So, with all this news out, I I wouldn't put it past a a hedge fund that saw the weakness at an all-time high and stalling and take on a short position. And with that, uh people don't really look why why are we coming off, they just know we are coming off and I need to get out. So, trend following funds like CTAs, uh week longs that obviously can't take certain amount of pain. they just got in and they're out $200 in in a week or two. Uh I think they all exited and I think it's extremely healthy for the market to have selloffs and uh as I said nothing goes linear, but I believe that we're in a long-term rally still. >> Interesting. Okay, so a bit of a we had a guest on earlier this week. They called it almost a meme stock moment, right? I mean all the all of a sudden the mainstreams talking about this story that we've been talking about for years. I mean, the data didn't really line up with panic selling by long-term holders. ETF outflows were limited and physical premiums barely moved, it seems. So, you know, was this a was this really a future-driven event? Maybe that margin call cascade inside the paper market rather than, you know, the fundamental rejection of gold itself. >> Yeah. No, I I I I believe that, you know, what you have to look at is who are the holders of gold and who are the biggest holders. First the central banks and 18% of whatever has been produced from day one in this world to now is held by central banks and they are major accumulators with very deep pockets. I mean I've dealt with central banks over over decades and not one central bank ever said I am buying or selling because of the price today. They make they make a policy should I buy should I sell and then they stick to that policy. If you take a look, the World Gold Council recently did a uh uh survey on on central banks. 75% of the central banks said, "I'm going to continue to buy gold for the next 5 years." So, the deep pockets and we have a strong fundamental base. But like you said, uh the meme stock part was is that's the momentum trade, that little extra froth that uh was not very positive for the market and and got away with itself. And I think that's what we've seen in in the correction recently. >> Interesting. I got to talk about the institutional thesis and kind of its credibility. I mean on the JP Morgan report that I talked about off the top, the core of their argument is that the 6040 stock and bond portfolio is broken. Uh was what was the final straw? I mean why after decades of functioning has the market's trust in government bonds as a reliable hedge completely evaporated? Yeah, this again goes back to uh general economic and geopolitical uncertainty. I I guess you could say it started initially with Ukraine or I mean we started getting a bid and actually um certain ECB central banks started buying gold especially like Poland and so forth right after the Ukraine war. So, it's not shocking. And I I believe that um if you take a look uh at the ECB for instance, uh they just announced that the number two holding in their reserves is gold and surpassed the euro. So, if you think about that, they hold more gold than they hold their own currency on the ECB central banks. If that doesn't stream by gold, what does? >> Yeah. Yeah. And I mean, you know, I I hate to keep bringing up your former employer, JP Morgan, but it it has a long and complex history in the precious metals market, including paying nearly a billion dollar fine for manipulation just a few years ago. I'm curious because the audience kind of wants to view this as this hyper bullish report as a genuine research call and and not just as a strategic positioning piece, but what do you think it is? I mean, could they just be talking their own book, setting the stage for for their clients before a major move? Yeah, I mean I really can't get involved in that. I mean research was was independent of and always should be independent of trading. So they put out their own uh thesis. I don't believe it's connected to to the trading desk and uh I also haven't been at JP Morgan in over 10 years so I can't really even a job on behalf of JP Morgan. >> Yeah, on that math I mean the the allocation shift from that 2.6 to 4.6% for gold. Uh I'm curious you know I mean from a from a from a boolean desk perspective is the is the physical market infrastructure you know the refineries the vaults the logistics even capable of handling that scale of reallocation from the multiundred trillion dollar bond market without you know complete and chaotic price reset >> in gold it definitely it definitely is uh in silver this is what's created uh um part of the tightness um if you take a look the the other The other part of why gold is where it is is it's not just the ECB is uh diversifying. The entire central bank world is diversifying away from from the dollar and and they're doing that via gold. Gold has become not just a safe haven asset that it always was but in my mind it's now the ultimate safe haven asset in this world. And you see uh China and Asia um uh bolstering their gold reserves. Uh China is trying to become the third hub, international hub in gold. They've done so many different things. Uh they're allowing their top 10% of insurance companies to invest 1% AUM in gold. Uh that estimates almost $25 billion. Uh they're they're uh relaxing rules and trading on the SGE and the Shiffy. They're opening up vaults. They're trying to attract um uh central banks which I don't think they'll be uh successful in storing gold there. But if you take a look at the regions uh Asia, Middle East, Europe, you know, all the central banks in the world are diversifying away. And it it it to me is more economic uncertainty than geopolitical in the sense that um since uh President Trump has come in uh and I won't get involved in say uh given an opinion on the administration other than that they're quite inconsistent in flip-flopping uh tariffs tariffs no and uh aggression as far as polit uh um uh military so forth. So I think a lot of countries around the world are quite nervous and therefore we this rally is not different than any other rally we have ever had because there's a structural change in in in the investment in gold and that's with central banks who are very deep pockets and uh and that's why I believe that uh we will continue with uh the uh the US administration not being a uh uh clear on what they want to do and and with that I think that this continued diversification uh will happen. >> I wonder, you know, we were chatting about central bank buying and you obviously you've talked to many of these central bankers in the past and and they're not really price sensitive. No one's looking at the price of gold. I'm curious you do the central banks I wonder if they're going to start looking at the price of silver. I mean there's always talks on X and there's all these mmings about India starting to pick up some silver for their central banks but is that ever discussion that's ever crossed nearer or something you've heard of? >> Yeah, I I've spoken to several central banks and and you have the one-off central banks that that will look at uh all types of investments, you know, uh outside of the normal. But the bottom line is I think that uh they consider gold uh the international uh it's a it's a not a non fiat currency you know so it's not the faith of any country and I think that's what they look upon as gold I don't think you can say that with silver so I don't believe that uh central banks will will buy uh silver however I do believe that institutions will buy silver especially uh pension funds and and institutions that miss out uh or are in the gold and they don't want to buy more gold at this all-time high. I think they'll they're starting to look at silver. I had a uh very large pension fund uh contact me for my opinion on on on on purchasing silver and how to go about and so forth and I don't think they'll be the only one. >> I wonder how how do you go about that? You know, I guess it brings us to the physical market. We can kind of transition here, Bob, because obviously it's the plumbing of the market itself. Because if hedge funds are leaning short while central banks are still taking delivery, I guess the real question is is is where where's that physical metal coming from? I mean, you've been tracking what looks like an unprecedented drain from the Comx vault system. More than 27 million ounces of silver gone in just 2 weeks. Is this simply metal moving to meet delivery demand overseas? Is it is it the exchange facing a genuine liquidity crunch? >> Yeah. So I mean again this is much more silver related than gold related because >> the bottom line is uh the bullion banks and bullion banks are uh the intermediary for for the gold industry. I mean they're the ones that finance uh mining companies. They finance fabricators, refineries, end users such as uh uh jewelry companies like Tiffany's and so forth. They lend metal to them and so forth. So I I think that um there's enough gold in this world that if they needed gold, they can go to central banks to borrow gold. However, that's not the case in silver. There is no lender of last resort. And that's what that's that's the problem we've seen. Prior to uh the threat of tariffs, there was roughly 250 million ounces of silver in the CME warehouses. Then all of a sudden uh initially I believe uh President Trump put uh tariffs on Canada and me and Mexico. Mexico was the Mexico is the largest producer of silver in the world and that's what started this whole process of uh premium of silver uh premium of the US over uh the rest of the world. If there was a 10% tariff at today's price of $50, you you would have to pay $50 to buy the silver and then $5 to import it. So therefore, you started this location of $55 silver in the US and $50 rest of the world. So what happened was um first banks lost money because the EFP uh drastically moved and then there the spread continued so wide that banks were able to make back some of that money by taking delivery of silver in London selling by by a mechanism called the EFP where you buy spot London and sell futures and if you're going to sell buy London and sell futures at a yield way above the cost of money and way above the cost of borrowing metal. You're then just going to take that delivery of London, ship it into uh the US and lock in a pro profit because you have a huge differential. And that's what happened. We went from 250 million ounces of silver in the CM warehouses to 530 million a few weeks ago. And arbitrage is something that goes two ways. So then with uh the price coming off and then with lease rates going to 150% for overnight uh 25% for two and 3 months uh the EFP for silver went the other way where spot London became a $3 premium to December futures. Now December futures should always be higher than spot London because you there's a time difference. were in October and December futures obviously starts you know the 1 of December. So what happened was banks were able then to take sell spot uh sell spot London buy back their short CME position take delivery of the CME and start shipping it over. And that's what we've seen in the last 2 weeks. We went from 530 million ounces to approximately 501 million today. So that roughly 29 million ounces of silver has been shipped out of the states. Uh I don't know yet if it's all gone to London. I doubt at all. Some has probably gone to terminal markets like India as well. But uh this concept of the arbitrage reversing itself has put in the minds that that the market should self-correct. I believe that we need another 100 150 million ounces physically in London for us to normalize. And the reason for that is if you take a look at uh Dan Galia at TD did an amazing um uh study. I think you've probably had him on before. >> He he's the one that came up with this. Is this the uh silver squeeze worth buying into? And he was 100% right. I was with him 100% of the way uh since November. And what happened is he analyzed free floating silver. So the simple explanation of that is you take a look of how much silver is in the London warehouses and I think it's approximately 800 million ounces of silver physically in the London warehouses of of of the banks. However, a portion of that is allocated and can't be used. So the question is how much free floating unallocated silver there was when he did the study. was 305 million ounces of free floating stock. To give you an idea what that means, the daily trading volume was probably around 250 million ounces. So if you have 305 million ounces and there's 250 million trading, you have enough silver and therefore things going to be liquid and uh silver forwards were close to money because of that. Then all of a sudden you got drained with uh silver going to the CME. You got drained with uh silver going to India. You got drained with silver going into ETFs. And that free floating stock went from 305 million down to maybe 125 million. >> And the daily trading volume that was maybe 250 million probably went closer to 275 285 million ounces. And that has what's created this entire uh uh tightness is because there weren't basically it wasn't enough silver to trade on a daily basis to satisfied all the deliveries and uh eventually whoever was lending into this market uh eventually had to uh cover and other banks had to cover and there was panic and I'm sure compliance and risk departments came into the banks and said hey you We saw what happened in co we saw what happened earlier in tariffs get out. So um we that exasperated it. Uh banks started taking less risk started widening their quotes and that also funneled it. So like if for instance a two-mon silver was quoted at 50 basis points wide now they started getting quoted 10% wide and if you and if somebody borrowed at 10% wide then you would shift that market another 10%. So this is what explains why the silver market panicked and also with the amount of ri risk that was taken which wasn't much why we got to what I call the market broken. >> Right. Right. Okay. Well I mean one of the one of the things I heard you say there's London it needs about 100 to 150 million ounces just to kind of function smoothly. That's not a trading issue. I mean that's a synthetic shortfall. Does that mean we're at the point where the pricing mechanism itself could break unless that metal appears? >> No, I don't think it has an impact in price pricing as much as it has an impact on uh on liquidity in the forward market in the leasing market. >> Okay. >> I I believe that um eventually that liquidity come back. Another way banks are have uh recently uh developed some liquidity is they borrowed uh they borrowed the SLV the uh the ETFs and uh they borrowed the stock paid a fee to borrow the stock then took that stock that uh is aloc that has allocated metal. For those of your customers that wonder is there really allocated mentally, yes there is. And banks have actually borrowed the stock, redeemed the stock for physical and that also has helped inject a little liquidity into this market. Except for I still believe that if we're going to normalize to uh where we were a couple of months ago, I still think that we need that free floating stock to equal the daily trading. So that's why I come up my number of if if and I'm not the expert on how much is free floating. I've been going off of Dan Gali's numbers, but let's say make up it's 125 million and there's 275 million trading on daily basis. You really need to get to that number of uh free floating in London for it to become liquid and normalized. the price obviously um will will fundamentally uh be supported by this shortage as well because if you can't finance by leasing metal, you're going to have to go out and outright buy it. >> Yeah. Yeah. So interesting. I mean, if if it sounds like the futures market becomes the only release valve left. I mean, how much real liquidity is actually left in the futures market at this point? We're seeing thinner books, wider spreads. Some brokers are even talking about reduced delivery capacity. Is the, you know, is the paper market still functioning as a true hedge or is it now just a placeholder for for metal that isn't there? >> No, I mean it it it works because you're still hedging. I mean, obviously the dislocation's constantly changing. Uh uh I mentioned the EFP. the EFP could move 50 cents at a clip and the price can move 50 cents at a clip and that's what's created this uh uh this volatility and volatility brings large sell-offs. So I I think it's a self-fulfilling prophecy but I think that things can normalize. Uh the big question in my mind on silver is the 232 analysis that's coming out. Um it the 232 analysis is a critical mineral analysis on silver and the difference between silver and gold is that silver is used uh much more on an industrial basis uh you know solar PVs AI EVs data center microchips uh so the if the US puts a tariff on silver then all of a sudden the silver will stop moving because you're not going to sell you're not going to move silver that's uh $5 more in value to a market that's $5 less. So all the shipments will stop. Uh so the key is one will tariffs be imposed and and if they are then then that's a problem. the the issue with putting tariffs on silver is one it's a monetary metal and two if you look at why the US wants to put tariffs on for instance I understand why they may want to put a tariff on uh Chinese automobiles because they want to foster more US production and if you put a tariff on autos coming out of China then that will foster more production in in the US for automobiles However, if you put a tariff on silver, it will not produce 1 ounce more of silver. In the United States, >> for instance, um 30 less than 30% of the silver mines are dedicated silver mines. So, where you would go in and extract actual silver, the rest is made by byproduct. So, 70% of the silver mines are byproduct. So you're not going to uh increase uh the me that production for a byproduct. So not one ounce of silver will be increased. So the the analysis of putting a tariff on a critical mineral will only do a disservice to the United States because as I mentioned how many different industries in the US require silver as as as a critical mineral. So I'm going to assume that they don't put uh a tariff on it. until this analysis comes out and unfortunately the US government is closed. So we don't know if it will be coming out because it should be out it should be out by today. >> Yeah, I was reading reports today about section 232 and that critical minerals analysis. They might they're saying maybe early as next week, but you talked a little bit about why that review is so important. But if silver is form formally designated as a critical mineral, I mean what does that actually change for the market? Does that mean that the US government could move to secure domestic inventories or restrict exports in the name of national security? >> I mean, I I I would be surprised if they did that. I mean, but I I I I don't really know what's, you know, behind the thought process of the government when it's coming to tariffs these days. Uh but I I would think that as a monetary metal that, you know, silver would would not be tariff. But uh I I really you know it's anybody's guess what what will happen if it is tariffed. >> Yeah, I was going because I mean you know that kind of classification would effectively pull silver out of the normal supply chain and kind of force exchanges like COMX to coordinate directly with Washington. It feels like at this point I mean it seems like bigger bigger stories here. >> Yeah. No, I I it it I I think you know um like I said, all eyes is on the um on the analysis and hopefully uh we get clarity. >> Yeah. Yeah. Well said, Bob. Um okay, let's switch over. I mean, we established that there's that price sensitive, insensitive, I guess we could call buyer in London. Who's the seller? I mean, who's standing on the other side of this trade willing to give up physical metal during a historic uh drain? I mean, is it just the arbitrageers or or are there entities perhaps funds and those margin calls a little bit that we were talking about who are being forced to sell that physical metal into the tightness to raise cash? No, I I I think it's I think it's much more the opportunistic uh uh profit motive of of banks to I mean, if you're going to if if you could sell London spot silver at $3 over December futures and uh then you could go in and let's say borrow the metal for the time that takes to physically deliver it. It takes uh most silver is first of all done by boat. Uh, and the reason for that is the the weight and the density. Uh, but you can ship silver by plane. The only thing is you're limited to 250 to uh 500,000 ounces or so. And so you can't move large volumes by plane. But as that spread widened, it made sense. Even I I think it's if from my old days, it's like 8 to 10 cents by boat and maybe 15 to 18 cents by plane an ounce. So a a as it widened out, it it allowed you to move the uh silver physically by plane and as well as boat. So if you could sell silver at $3 premium spot to futures in London and let's make a number up and say uh with with cost of shipping, the cost of borrowing the metal for the time it takes because you're selling spot silver that you don't have. Now you have to go and borrow that silver. And that's what happened with the uh that's why the OTC got also got so tight is because all these banks were taking advantage of this arbitrage and more and more borrowing came in. So uh if you're able to do that and let's say for instance make a dollar an ounce uh on a million ounces that's that's a million dollars. If 30 million ounces move that's $30 million. So now you understand the economics of why the banks would do this. Yeah, >> I mean good good ROI on a little bit of a I guess just a little bit of a delivery thing there. Uh Lou, you're talking about London. Let's turn to London because the LBMA's new chairman Peter Zolner is is floating a the idea of reviving a London gold futures contract to compete with Comx and in his words restore liquidity to the system. I mean you had a little bit of a a post here Bob I was reading on LinkedIn but talking about maybe this not being the solution. what that what London really needs is for CME depositories to be approved inside the London's clearing network. Explain why that structural change not another futures product would actually solve the liquidity problem. Yeah, I first of all I we don't know how successful I mean we've they tried several times the LME tried to put up a uh a futures exchange and it failed because uh comx uh uh the CME I should say uh you know is quite liquid and and and people are used to it and and trading on it. So why reinvent the wheel and start a futures exchange and and have a great chance of failing when the fact is it's the physical movement of metal that and I suggested during uh covid times they were looking at it as that would be the uh when refineries closed and and um uh airlines stopped flying I I suggested to the CMA and to the LBMA uh that you should and I was trading during that time that you should open up depositories in London under uh where the CME would open up a second contract. It would be a 400 ounce bar contract versus a 100 bar contract because London trades 400 ounce bars. >> And so therefore, there would be a slight uh uh premium difference to the 100 bar contract, but it would immediately inject the liquidity you need. You wouldn't necessitate these physical shipments back and forth. uh and and I think the market would uh react a lot more orderly. >> Okay. So So you explained it there. I mean COMX and LBMA they almost operate like separate islands and if CME approved vaults were integrated in London metal could flow directly between these two hubs instead of being arbitrageed through paperwork. So would that single change and these chronic dislocations, you know, end these chronic dislocations that we've seen between spot and futures? Yeah, I think it it it would it would greatly reduce the uh these dislocations. Again, you would probably have a difference between a 100 ounce contract versus a 400 ounce contract. But once people started trading that 400 ounce contract and it became liquid, then then you had uh the CME depository metal co-mingled or next to uh the London regular OTC metal and then it just becomes a a physical book transfer between where where it's being stored for. >> Yeah. I got to ask you about uh the plaques. I don't know if you've been keeping an eye on it, but now that I have you, Bob, and we don't get you often, I just want to ask you about your thoughts because I mean, we got these new sanctions targeting Russia's energy giants. And given that Russia is a critical supplier of platinum and palladium, I'm curious about what your thoughts are here. We've also seen some of these discussions about um kind of a squeeze in the platinum market, if you will, as well. Are you seeing any tightening there? You hearing any mumblings? >> Yeah. Um I I haven't been focusing as much on uh uh platinum and platium, but yes, platinum >> I mean platinum and palladium are significantly less liquid than gold and silver. So it it's much easier for the uh dislocation. The the other thing that I've been advocating uh for several several months now is that the London precious metals uh the platinum market uh the organizations they become a little more transparent just like uh the LBMA and they announce on a on a monthly basis what actually is in the warehouse. For instance, uh the LWMA puts out statistics on how much gold and silver in the warehouse, how much trade every day. We don't have any statistics in London on on how much platinum and padium is there. I believe that at least would that transparency would help somewhat. And the question is why are they doing that unless the situation is a more little more dire than it was in the gold and silver market. >> That's interesting. uh is it just to create a little price uh price a little upward trend here? I mean these little squeezes they saw how easy it was with the silver market or how hard. Yeah, I I think that you know the fact is you know the PGMs are less liquid because there's you know less available and uh and also as you mentioned you know South Africa and uh Russia are are critical to the um to the liquidity and if you take out uh Russia that will have some impact on um on on further liquidity. >> All right. Uh just a fascinating story. We got to have you back on. Let's I mean we could do it this way. I mean if we put all of this together, Bob, the physical drain, these institutional motives that we've been talking about, and then of course adding on the geopolitical pressure, is the Western paper price becoming a lagging indicator? I mean, is the true price now simply the physical cost to source and deliver a bar in Shanghai and Mumbai? >> Well, um I mean that's a good question. I I believe that you know first of all uh specifically China I mean their agenda is much bigger than just accumulating gold. uh as I mentioned all the reasons you know earlier in the segment uh I believe that you know they're they're trying to uh bolster their presence one to have uh I think the far east want to have more of an a impact on the price because right now the the price is determined by the London spot market and the US futures market. So they are trying to open up uh more to have also become the third international hub and impact the price as well because of that. uh and why are they doing all these things especially China I believe they're trying to do this to bolster the renimbe and uh you know they also have probably a bigger agenda to uh u surpass the dollar and weaken the dollar by uh becoming a stronger hub in gold and uh having the rest of the world uh central banks do the same. >> Yeah, fascinating. I wonder, you know, I mean, besides what we kind of know about the Far East situation, what are those concrete levers that China's pulling to move precious metals price discovery out of London and New York? I mean, is it custody and involing in region? Is it more of those warm settled contracts or exchange linkages um outright control of refining and logistics? >> Well, first of all, China is the biggest supplier and uh demand in the world. meaning that the big biggest supplier because they're the biggest producer of gold in the world and the they're the biggest demand uh you know between all the uh public buying and the ETF buying. Um one one of the reasons why gold is so important to a country like China is because there's not many financial assets that that people can turn to. And uh that's another reason why we've had the rally we had in the last uh year or so is traditionally when for instance the dollar gets stronger gold comes off and in this last rally if you take a look when the dollar got stronger China came in buying why because it was a hedge against their currency and other countries also that have weak financial markets and weak currencies uh are buying gold when when the dollar gets stronger against their currency And then on the opposite side when the dollar gets weaker you have the west central banks that uh have been buying gold uh to divers away diversify away are also accumulating gold. So, it's been a unique rally and different than any other rally because we've never seen it uh where when the dollar gets stronger, gold has been getting stronger and um so I I think the dynamic is clearly that Asia had Asia, China um and the rest of the world have um are looking to plant the uh the dollar with with gold and uh with the rest of their economic policies around the world. >> Yeah. Are we are we seeing that in in the persistent kind of Asia time bids and the spot futures dislocations that you've been tracking? I mean, practically what would flip the switch? I mean, a deep deliverable contract in Shanghai with transparent vault data or maybe Chinese banks offering, you know, term financing and leasing that undercuts London. >> Um, I don't really think that's that that's that's the answer. I think gold, first of all, is deep enough market that it doesn't have any it really is not having any issues price-wise. the the EFP is much more normalized. Uh uh initially you know we had that tariff threat and there was what happened with gold was there was a tariff threat and there was a tremendous amount of gold moved and the banks went to borrow gold from uh central banks and the problem was the bank of England holds the c holds all the gold and there was a bottleneck at Bank of England and while lease rates went from 0 to 1% to 2% and were on like 20-year highs All the central banks wanted to lend the gold to the bullion banks because they wanted it to uh enjoy this uh income on a non-interestbearing commodity such as gold. The problem was Bank of England's not a commercial fall and a bottleneck happened and uh the they couldn't get the gold out of Bank of England in physically into the uh custody of the uh clearing members in London and that created a bottleneck that went from 2 days to 2 to 3 months and uh that that that's what initially created that uh problem. we're at that that market has now quieted down and and liquidity has come back. But um that's the issue what we obviously we're having in silver. >> Man uh we could talk all day, but of course our time is almost up. Let's finish with what you're watching now, Bob. I mean because after everything we've seen this quarter, I mean the next few months could be decisive for both the metals and the broader financial system. Uh what are the key signals that you're kind of tracking between now and year end? Is it the COMX vault movements, Asian buying patterns, lease rates, or something else that kind of will tell us where the market goes next? >> Right. Well, I I believe that um uh a couple of things are important. One is obviously the uh policies of the United States. Um, for instance, another thing I forgot to mention that one of the things that might have triggered the selloff the other day was President Trump mentioned that there would be a uh good resolution to China trade at the end of the month when they had those meetings and uh basically what that translated into well there's less economic uncertainty if in fact you know they resolve all the trade issues. Uh I don't believe that's will ever happen because obviously China has a big agenda and uh and also I'm not sure that you know the US will ever get into an agreement with China. But that's clearly something that's uh that you want to look at is the US economic policy is the uncertainty uh the relationship with China. Um I I think that those are very paramount. Um uh a lot of people are discussing you know the FOMC uh cutting rates being favorable to uh uh the price of gold obviously and finally uh what I mentioned before uh the central bank survey according to the world gold council 75% of central banks said they're going to buy gold over the next 5 years and I believe that should continue and as long as we see that continue we're going to see a slow steady offtake at with from deep pockets that will be fundamentally supportive uh to the price. >> Yeah, well said. And I guess bottom line, I mean, where do you see gold and silver finishing this year? Do you expect this rebound to kind of hold and evolve into a sustained bull phase that we've already seen or or are we in for another round of force liquidations before the next leg higher? >> Yeah. Uh well, I don't really get involved in in forecast per se. And I certainly don't give uh get involved in forecast on a time basis. Mhm. I >> I'm basically friendly to both gold and silver long-term. Uh but the problem is you never know why you have the moves. For instance, uh the the first run up in in 2020 was because of CO. I don't think anybody in the world could have ever forecasted CO and then obviously we've had this uh uh craziness uh with with tariffs and the economic uncertainty of the US. I don't think we could have forecasted that as well. So I'm not really in the in the role of coming up with those forecasts because I don't believe we ever can. uh but what I do believe is that as long as you know the US administration uh is going to flip-flop and uh also won't be able to be pred predict their behavior and and I believe that the rest of the world is nervous of that and they're going to continue that diversification away from the dollar into gold. So I think that's what you need to to focus on is that th those patterns still continue. >> Yeah. fundamentals haven't changed here. All right, Bob, a fascinating, incredibly timely discussion. Your breakdown of the physical market mechanics, the policy triggers, and the structural shifts give our viewers a perspective they won't find anywhere else. So, we appreciate this. And for those who want to dig deeper into your research, your upcoming book, The Invisible Vault, uh let's let's talk about this this book that you have coming out. I mean, where do you get it? It explores the market. I think it's out in February, you know. >> Yeah, it's not out till February. Um uh it's on uh Amazon and uh Barnes & Noble and several others for pre-orders. So I'd be thrilled if uh everybody uh uh look in the audience to uh buy it because it it it's a good uh it's first first half of the book is uh somewhat of memoirs of all my trading involving with central banks and uh other organizations. But it also explains how truly how uh bullion banks operate and uh dispels some of the uh uh uh uh rumors of uh like paper gold and so forth like that and and how how the markets work. And then the rest of it is on an educational basis. Uh why why gold? Why why individuals the central banks buy gold? uh demand supply factors, what products are available and so forth. And it ends with uh my uh ultimate safe haven asset being uh gold. >> Gold. You heard it here. All right. I appreciate it. Bob Gotib, thanks for joining us today, sharing your insights. Uh come and see us soon. Okay. I mean, we just got into that topic. We hardly even touched a lot on gold. We were talking about silver majority and I'd like to talk to you more on that side, too. So, we'll see you soon. I appreciate this. >> No, I appreciate it. And uh uh thank thanks for the plug. >> Yeah, of course. All right, gold, silver, now platinum, too. Three markets moving under pressure with policy shifts and liquidity stress redefining how investors think about risk and of course value. Now, we're going to keep tracking these developments and the physical flows driving them. For all of us here at Kitco News, I'm Jeremy Saffron. Thanks for watching. Heat up here.