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World Silver Shortage Era in The Making

Summary

  • The fiat Federal Reserves emergency Bank Term Funding Program (BTFP) experienced the third-largest jump this week since its initiation during last year's March bank run crisis.
  • The U.S. banking system currently holds over $7 trillion in uninsured deposits, and the BTFP program lends to banks based on the full face value of underwater Treasuries, totaling over $1/2 trillion in unrealized losses.
  • With the emergency bank lending program set to expire in 35 business days, the Office of the Comptroller of the Currency (OCC) is devising new plans to address potential bank runs.
  • Michael Hsu, the head of the OCC, is discussing upcoming changes to emergency bank lending as a measure to prevent further bank consolidations.
  • The trend of bank consolidations in the U.S. has been evident, with over 4,500 bank mergers approved in the last decade and a half, resulting in fewer banks, and the top four commercial banks controlling 40% of the market share.
  • Despite the celebration of a new nominal record high in the S&P 500 index, driven by the top five largest stocks, the broader U.S. stock market, particularly the Russell 2000, is still in a bear market, down more than -20% from its late 2021 record high.
  • The current high ratio of corporate insider stock sales to buys suggests that corporate directors are cashing out overvalued stocks, potentially leading to historic valuation losses for passive investors.
  • The new nominal high in the stock market, when adjusted for high price inflation over the past few years, reflects a loss in real value when measured against gold.
  • The expectation is that gold will lead a boom in commodity values during an all-time secular inflation cycle, with the potential for the S&P 500 to gold ratio to fall below 2011 low levels.
  • In the precious metals markets, spot gold finished above $2,000 oz for the ninth consecutive week, while spot silver experienced a sell-off. The gold-silver ratio climbed to just under 90 for the week. Additionally, changes in the world's largest manufacturing and export powerhouses indicate a shift towards a more multipolar world trade order, with China doubling its exports with other large emerging markets.

This week we had the third largest jump in fiat Federal Reserves emergency Bank Term Funding Program (BTFP) which began in last year's March bank run crisis.

There are currently over $7 trillion of uninsured deposits in the U.S. banking system. 

The Fed's BTFP program lends to banks based on the full face value of underwater Treasuries they "invested" in. Last reported at over $1/2 trillion in unrealized losses outstanding.

Given that its emergency bank lending program is set to expire in another 35 business days the Office of the Comptroller of the Currency is now hatching new plans to try and get ahead of the next wave of potential bank runs to come.

The following is Michael Hsu, the head of the OCC, trial ballooning the coming changes to emergency bank lending.

This latest announced stop gap bank lending measure, will likely only continue leading to further US bank consolidations. 

The trend is clear cut. At the start of this 21st Century, there were over 10,000 US banks and thrifts, now there are under 5,000 with the largest 4 commercial banks controlling about 40% of the entire US bank market share.

Those words sound nice but mean little when we look at the Federal Reserve's own data over the last more than decade and half. An era where over 4,500 bank mergers were approved, with only one single merger denial made.

The trend towards further bank consolidations and the eventual launch of a CBDC future marches onward, yet this week that topic is beginning to make its way into more mainstream political promise points.

US stock market bulls celebrated an end this week when the broad S&P 500 index closed with a new nominal record high. 

This new record nominal price high has been driven by the top 5 largest stocks in the market.

If we look at the broad US Stock market a different more bearish picture becomes obvious. The Russell 2000 (the smallest 2,000 stocks) are still in a bear market, down more than -20% from its record high achieved in late 2021.

At the moment, the US corporate insider stock sales to buys ratio is at an all time high. Illustrating that corporate directors at the moment are cashing out and dumping their overvalued stocks onto mostly unknowing passive investors who will likely end up realizing historic valuation losses over the coming years.

As well, what is likely lost in this new stock market nominal high celebration is that this new nominal price is high on a real basis when considering high price inflation over the last few years overall, meaning yea nominally the stock market broadly is at a new high. But in real terms measured by gold it has lost value.

Looking out ahead in the coming years seeing the S&P 500 divided by spot gold price ratio again reaching one is an eventuality. Moreover I think it is conservative to suggest we'll eventually see this historic stock vs gold ratio fall below its 2011 low levels as gold eventually peaks in a manic phase in real valuation gains.

My expectation remains that Gold will likely lead a coming boom in commodity values as we go through an all time secular inflation cycle. 

More data and cutting edge information on this week in the silver and gold markets after this brief message.

The spot gold and silver markets sold off this week while the spot gold price did finish for the ninth week in a row above $2,000 oz it remains to be seen if and when we might see the spot price dip below $2,000 again.

The spot silver price fell to close at $22.79 oz while the spot gold silver ratio climbed to close just under 90 for the week. More on that important ratio in a few moments.

First a deeper look at the ongoing changes in the world's largest manufacturing and export powerhouses over the last century and a half. 

Gone is the era of the English and US Empire domination. With China having surged over the last few decades in global export market share. 

Under the hood what has been changing for China since the year 2018 has been its nearly doubling of exports with other large emerging markets. A sign that a more multipolar world trade order is coming into being real time.

Not surprisingly in a world that is forecasted to have massive deficits in silver supply versus demand by the end of this decade. Chinese traders on the Shanghai Futures Exchange were taking advantage of the recent silver spot price dip by taking some 200 metric tonnes of silver bullion out of their warehouses this week, a little over 6.4 million ounces.

Silver bullion inventory levels underlying the Chinese futures market have fallen precipitously since their 2021 high levels with some 2000 metric tonnes or just over 64 million ounces being withdrawn to low levels not seen since 2016 and 2018 respectively.

This trend of falling available silver bullion inventory levels is not China unique, as this too has been happening worldwide since the 2019 peak of nearly 1 billion oz to now a reported 437 million oz level.

As we look at the prospect of higher spot gold prices after the start of the coming Federal Reserve interest cutting cycle, 21st Century data covering the last three cutting cycles suggest an average +30% nominal price gain in the year that follows. 

That is why seeing spot gold prices over $2500 oz in 2025 would simply be 21st Century history gold price rhyming.

Adding onto the coming potential price rise momentum pile on ahead is the fact that when measuring current gold allocations in terms of assets under management, gold investment allocations are currently only 1/3rd where they were during the 2011 peak. Only 1/2% gold allocation at the moment in early 2024 compared to a measly 1.5% achieved in August 2011.

The potential runway is here for a self reinforcing swift rise in gold spot prices during both the coming Federal Reserve cutting cycle and the likely coming secular bear market for the still dominant fiat US dollar ahead.

If we have indeed already seen a top in relative fiat US dollar index, this chart argues that a coming top for the gold silver ratio on an intermediate basis is not far from now. Generally during US dollar bear markets the gold silver ratio slims as silver eventually plays catch up to gold's lead.

In perhaps still the most undervalued asset class in the world today, in terms of current assets under management data, silver investment allocations are a measly 6 basis points compared to its April 2011 top of nearly 7Xs that allocation.

Fundamentally speaking and based on trends in silver supply demand market data, the world is improperly allocated and coming silver shortages will become the likely norm without markedly higher spot price escalations to come.

That will be all for our weekly SD Bullion Market Update. 

As always to you out there, take great care of yourselves and those you love.

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James Anderson
James Anderson
Senior Market Analyst & Content

A bullion buyer years before the 2008 Global Financial Crisis, James Anderson is a grounded precious metals researcher, content creator, and physical investment grade bullion professional. He has authored several Gold & Silver Guides and has been featured on the History Channel, Zero Hedge, Gold-Eagle, Silver Seek, Value Walk and many more. You can pick up Jame's most recent, comprehensive 200+ Page book here at SD Bullion.

Given that repressed commodity values are now near 100-year low level valuations versus large US stocks, James remains convinced investors and savers should buy and maintain a prudent physical bullion position now, before more unfunded promises debase away in the coming decades...

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