And of course we’ve seen a lot of headlines, social media, chatter suggesting that the LBMA needs, and this is from a very good source, as much as 150 million ounces to clear the market. Now others have claimed less, and even though the source I’m citing is well respected and known, I’m not saying it’s incorrect. We’re just going to go through different scenarios. So the first scenario is basically this. How the system works. The LPMCL is the heart of the global precious metal settlement process, and each day it processes an astonishing 200 million ounces of silver on a net basis.

That does not mean 200 million ounces of silver bars. No, these are ledger entries. These are based on offsetting numbers between members like HSBC, JPMorgan, Standard, Chartered, ICBC. So here’s the key. When the trust tightens and the participants start demanding allocated metal, real bars, not promises, the system must deliver. And that’s where we find ourselves right now. Helmet silver is truly available. At last count, the LBMA vaults held something around 790 million ounces of silver. So that sounds like plenty until you remember. A large portion of that metal is already spoken for ETFs, industrial contracts, and central bank accounts.

So let’s look at the stress test I call it, the London squeeze scenario. So let’s run some numbers. Let’s just go with a minor shock, meaning that something around 25 million ounces of physical demand will clear the market. I’m not saying that it will. Listen carefully. I’m just going through a scenario where it’s a minor shock and rather insignificant amount of metal is required to clear everything. The system handles it smoothly. Bars move from, let’s say, the COMEX or New York. Spreads will narrow. No panic. It’s manageable. No crisis. It’s like a scenario number two, a moderate shock, something around the 75 million ounces of physical demand.

And this could happen if that’s just the amount required. But at the same time, think for a minute, it could make it worse if investors simultaneously convert unallocated to allocated accounts. And I’m going to digress here for a moment. John Adams and I have been working on something that he’s talked about fairly recently, and I won’t digress that far, but he was pretty key in getting people to understand the difference between unallocated and allocated. And upon that, about three or four speeches that he did, or let’s say talks, a lot of people that held silver in, quote, unquote, their name or in their brokerage accounts or whatever, found they were unallocated and started moving to unallocated and moved to allocated.

Actually caused quite a stir. Momentarily, it didn’t last very long, maybe a couple of weeks. So I’ll come back. If that’s to occur, the LMA immediate delivery inventory starts to thin because going from unallocated to allocated takes them out of their reach. Lease rates would probably stay high or maybe even rise. Refiners probably will get further backed up and shipping costs could also be affected. So the result would be strain on the market and probably a premium rise further. And let’s go to scenario number three. And this is using the 150 million ounces, which as I said is out there from a reliable source.

And if we look at that, imagine India’s new silver ETF, Chinese industrial users and Western investors all demanding delivery at once, while the COMEX dries down the required amount to feed London. At this level, nearly one fifth of London’s total vault stock would be required in a matter of weeks. That’s the kind of stress that would push lease rates even higher. It can halt refinery operations temporarily and possibly trigger a brief dislocation between the paper market and physical prices. The result would be serious strain, hedging becomes nearly impossible. The market would clear, but only at higher prices after the total demand has been satisfied.

So who’s on the other side? Most of the settlement actively ultimately involves bullion banks acting as intermediaries for the ETFs, sovereigns and industrial buyers. If India’s new silver ETF is accumulating inventory, it’s likely sources through a London connected bullion bank that delivers either from London vaults or via LBMA approved bars shipped to Mumbai. In short, the LBMA is clearing excess for global silver. What happens in London today sets the tone for Mumbai, Shanghai and New York tomorrow. What to watch for? Here’s what I’m watching this upcoming week. Lease and forward rates.

They stay elevated, refiners will keep throttling output. Vault drawdowns. Watch for another 10, 20 million ounce drop. That would confirm ongoing settlement stress. Third, India’s imports. Rising solar and ETF demand from Mumbai could be the silent force tightening global supply. And four, the ETFs. If new bars are being allocated faster than replaced, then the quote unquote paper market may need to reprice physical silver upward to attract new supply. So that’s something to think about. Does London really need 150 million ounces to clear the market? The system built on leverage and belief.

It could be a powerful reality. If enough participants demand their metal, even a trillion dollar clearinghouse could start to sweat. And that brings our closing thought. In the words of our favorite philosopher from a galaxy far, far away. In silver’s truth, the illusion of paper fades. Hold you must, if free you wish to remain. This is David Morgan from the Morgan report.com. I’ll be back with you next week. [tr:trw].

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