The recent failure of the London metal market’s delivery system (LBMA) reminds me of my shipwreck on the Three Fingers Lake in Mauricie two years ago.
A skiff I had left on that lake had long since lost its ability to float properly, but with a good bailer, I could still use it. Unfortunately, that day, I had forgotten my bailer. Knowing that water only accumulated very slowly in the boat, I still decided to go fishing. What I had underestimated was that the more water filled up the hull, the greater the challenge would become, exponentially increasing the flow of water coming in. Focused on the five beautiful trout I had just caught, I didn’t realize that the back of the skiff was filling up at an unusual rate, and to my astonishment, within seconds, I was completely submerged up to my neck.
LBMA is taking on water
When I look at what is happening in the world’s most important metal market, the LBMA, I also see a boat taking on water—one that has always managed to stay afloat despite the leaks. My bailer is the equivalent of the metal that the London market could deliver until now, which was enough to meet demand (the water entering the boat). As long as delivery requests remained unusual, London was able to deliver without issue. But the pressure on the English vessel is immense, as there are about 100 times more outstanding contracts than metal available on demand. And metal reserves were never designed to accommodate a significant surge in delivery requests.
The LBMA’s ability to deliver metal is essential to maintaining investor confidence in the contract market. Until very recently, it was still possible to take delivery within three days, a timeframe that was extended to 60 days last month. Since doubts have emerged about the LBMA’s actual ability to deliver metals, delivery requests from contract holders have surged and are now turning against the flagship market—just like the water did in my skiff.
What are the consequences of a possible shipwreck?
In my view, the LBMA’s inability to deliver has just flipped everything upside down. It would take ten times more bullion to patch up the short-term damage. But since they likely have none left, this ship is adrift. The lack of accessible silver for contract holders is gradually pushing this market toward a collapse that will likely be just as sudden as that of my skiff. The downfall of this market, which has manipulated gold and silver prices for decades, will propel gold—and even more so silver—to levels never seen before. In the near future, the LBMA may be nothing more than a relic at the bottom of the water.
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This information has been prepared by Pascal Charpentier who is a portfolio manager and adviser for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this text comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.
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