PRATA: How Physical Shortness Is Replacing Financial Engineering and Why London It's Empty

[Igor Pereira]

The global silver market is undergoing a tectonic transformation, evolving from a system dominated by financial engineering to a real and structural physical tightening scenario. For three decades, bullion banks was predictable and profitable: maintain positions purchased (long) in physical silver in London and sell futures (short) in COMEX.

By Igor Pereira, Financial Market Analyst, Junior Member WallStreet NYSE

This arbitration allowed to collect the carry (storage costs and interest) with minimal risk, as London functioned as a flexible "lung" of liquidity to cover any need for delivery in the US.

Today, that mechanism broke. The reason is brutally simple: the buyer has changed. Before, the market accepted exposure on paper; now buyers require immediate physical metal. The result is the end of the profitability of this trade and the beginning of a short squeeze in slow motion.

London: The System Half Empty Glass

The heart of the problem lies in London. Historically, LBMA stocks were the final guarantee of the system. Now, the free float (metal available for trading) is approaching zero. Almost every ounce in London's vaults is already "compromised", either to back up growing ETFs or allocated to large industrial and sovereign customers. London, which before was the emergency stock for COMEX, was drained by two giant straws sucking the same milkshake: the accelerated demand of the US and the voracity of the BRICS block.

The Demand Clamp: USA vs. BRICS

On the American side, we see a perfect storm. Industrial demand is accelerating, exacerbated by the "tariff pull-forward" — companies like General Electric are anticipating years' purchases to avoid future tariffs, stockpiling metal now. Add to this the flow to ETFs and the potential strategic sovereign accumulation.

On the opposite side, China and India (BRICS) are removing metal directly from London without going through the futures of COMEX. They are buying for permanent physical delivery, draining the stock without returning liquidity to the system.

Checkmate in Mina: China’s Interceptation Strategy

Perhaps the most alarming point for banks is the break in the supply chain. upstream. China is not only buying ready bars; it has spent the last decade intercepting the supply at the source. Buying silver concentrate and bars doré (not refined) directly from the mines, China removes metal from the market even before it can be refined and shipped to London or New York.

When the banks call the mining companies for replacement, the answer is constant: "it's already sold". The concentrate is pre-sold, doré It's allocated. There's no extra metal to save the positions sold in the open.

Given this scarcity, banks are trying to "finance" a physical problem, rolling their positions sold (short) for future months in the hope that new offer will appear. This only postpones the problem and increases the risk in the balance sheet. Be through a squeeze immediate physical or financial collapse caused by the impossibility of scrolling, the physical scarcity will eventually dictate the price. The paper system is running out of time and no metal.

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