Short squeeze – why do you need silver in your portfolio

VAT changes - what does this mean for silver investments

Let's start with the legislative element. On 1 January 2025, the tax amendment (8 November 2024), implementing Council Directive (EU) 2022/542 of 5 April 2022 amending Directives 2006/112/EC and (EU) 2020/285 as regards value added tax rates, came into force. The underlying premise was to harmonise VAT rates across the European Union. And although the EU directive offers considerable opportunities in shaping tax policy, Poland has not taken advantage of them. Thus, as we entered new year, we welcomed VAT on silver at 23%.

Up to now, precious metal dealers have been selling silver under the VAT-margin system or by taxing the full price at 23%. Vat-margin meant that VAT was charged only on the dealer's margin. Products of white metal were also treated as collector's items, which gave room for tax interpretations. Legality of this duality was confirmed by the Ministry of Finance, among many in press release of 11 December 2024.

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From 1 January 2025, however, above rules have changed and dealers will not be able to benefit from the special margin scheme for collectors' items where the taxpayer has personally imported these goods or works of art from creators, successors in IP etc. For silver investors, this means that VAT will be charged at a rate of 23% on the full price of the coin (spot) or ingot and not, as before, at a reduced rate on the dealer's margin.

This means that, for silver investments, another window of opportunity for cheaper purchases has closed. Lower margins (resulting from the application of VAT-margins) meant that, for a while, silver was offered in Poland cheaper than in neighboring countries, which attracted the interest of both domestic investors and our neighbors, across the Oder river. Until 2023, silver bullion was offered in Germany at a reduced Vat rate of 7%. From 2023, it is at 19%. The two-year window in the VAT difference between Poland and Germany has been the reason for increased rate of ‘silver tourism’.

In a similar way, until mid-2022, investors could take advantage of the VAT differences upon purchasing silver from Estonia. We wrote ‘VAT differences’, but we meant zero tax on silver bullion. To avoid VAT, transaction and the receipt of the goods had to be done in Estonia. And as in this situation it was up to the customer to arrange collection. This gave rise either to trips to beautiful Tallinn or the proliferation of local couriers. This solution, despite the additional logistical costs, worked well for Western European customers on larger volumes (i.e. on masterboxes). It was much less used in Poland, where the aforementioned VAT-magin was in place.

Currently, however, all EU member states have a VAT on silver bullion at approx. 20% - Germany 19%, Austria and Estonia 20%, Italy and the Netherlands% 21%, Slovenia 22%, Poland 23%, Finland 24%, Sweden 25%, etc. Switzerland has a lower VAT (8.1%). The United Kingdom is at 20%. In Norway, on the other hand, rate is zero - but here we show countries that are not members of the European Union. And let’s make it clear, that the above refers specifically to silver bullion - silver bars may be subject to other rates.

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What does all this mean? Using the example of Germany, a country whose citizens have a high esteem for precious metals - introduction of VAT on silver, together with an element of long-term price appreciation, resulted in a 73% drop in turnover. And, as a result, government budget revenues also fell, as the revenue from higher VAT failed to offset revenues from much higher volume, but counted at the old tax rate.

From the perspective of investors, however, this meant that they had to exercise virtue of patience, as any updates to silver holdings from 2023 onwards were done at a 19% loss on start. Admittedly, there was a correction in the following weeks that allowed to make purchases and to make up for these losses. And since beginning of 2023 silver appreciated by 35.5% in euro terms since 1 January 2023.

For investors in precious metals, however, there is always alternative. We offer legal and alternative solution, which is the purchase of partial (e.g. 57 ounces from a 100-ounce bar) or total silver bars stored in a duty-free warehouse in Zurich, protected by the renowned company Loomis international. Each bar is sourced from accredited mint producers: Valcambi Suisse, Metalor, PAMP, Royal Canadian Mint (RMC), Argor - Heraeus, Umicore, Asahi.

This offer could be found in the link below:

https://www.metalmarket.eu/en/products/100-oz-investment-silver-lbma-located-at-duty-free-magazine-in-zurich-loomis-4074

The phantom of tariff wars – is Europe next?

As a reminder - price of silver customarily follows the price of gold, albeit often with some lag. In addition, silver should be treated as ‘gold on steroids’. Which simply means that the white metal's movements can be much steeper (both up and down). Typically, historically x2, but in really heated moments we can even temporarily reach x4. And because of the correlation and the fact that both are largely used for investment purposes, what affects gold is also not unaffected by the white metal. ‘Price action’ is shaped primarily in the bullion markets. In our geographic peck of a woods, this would be the LBMA, or London market, and the New York, or Comex. And in addition to physical volume flows, investors need to keep an eye on the derivatives and futures that these two markets offer.

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One of the latest elements influencing metals valuations has become the fear of Donald Trump imposing import tariffs on Mexico, Canada, but also Denmark and the EU and China. Status as of the 3rd day of February 2025 is as follows - President Trump introduced additional tariffs under the International Emergency Economic Powers Act (IEEPA), then postponed the introduction of 25% tariffs on Canada and Mexico for a month following talks held. While the introduction of 10% tariffs on Chinese imports was maintained, Beijing did not remain indifferent and introduced its own retaliatory measures. Although not sizable as USA’s. It is worth mentioning here that China is, however, commercially oriented more towards ASEAN and the CEPA countries.

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Subject of tariffs on EU products, on the other hand, continues to exists but looming. The broad version of the 2.5% tariffs on everything is being speculated on, although it is possible that our supposed ally will grant EU with something more interesting. Trump himself, when questioned by a journalist, said:

Am I going to impose tariffs on the European Union? Do you want the truthful answer or should I give you a political answer? Absolutely, absolutely

Three countries mentioned earlier (Canada, Mexico, China) are destination for 41.1% of all US trade and are the import destination for goods weighing 41.7% of all US imports. Technically, European Union counted, as a whole, would be on one of the top spots, accounting for over 13% in both categories, but it remains hardly an uniformed entity.

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The implementation of 25% tariffs by the US on products imported from its continental neighbors, would affect the prices of numerous products (both directly and indirectly) and raw materials on both sides of the borders. Industry headlines have focused primarily on Canadian oil, often forgetting in the process that heavy-sour and light-sweet types are not the same thing. However, from our perspective - precious metals investors - issue also involves silver, among others. After all, the US is the largest globally importer of the white metal.

As silver crosses US border primarily in unprocessed (unwrought) form, let us focus on this category - according to World Integrated Trade Solution (WITS) dataset from the World Bank, we discuss value of 4.2 billion USD in 2023. Gross silver imports by the US come from Mexico (2.4 billion USD in 2023) and Canada (744 million USD). Trade ties along with geographical proximity are reason for popularity of Canadian bullion ‘leaves’ and Mexican Libertads, right next to local US ‘eagles’, bisons' etc.

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Both Canada and 41 of the 50 US states do not impose VAT on the purchase of silver bullion. In other words, price is a simple spot+margin equation and tax is only a concern when profits are realized (28% CGT). So the fear on the potential introduction of tariffs has shocked investors. At the same time, we would not underestimate the hype declarations of President Donald Trump himself and his administration. As the 45th US president, he has threatened to impose and imposed tariffs, leading to tariff wars of various sizes against China and the European Union. Hoping that by being elected as the 47th president he would change anything in his approach was and would be sheer naivety. Embargoes and tariffs have therefore entered the US diplomacy playbook for good. Or rather, playbook of pressure to pursue self-interest.

And the massive transfers of gold and silver from London to New York can attest to this. Institutional ‘smart money’ professionals, decided with their money. Though whether this is surely the result of the announced tariffs, or whether they have become a condenser of change.

London's bullion exodus - a performance repeated

Once upon a time, in the pandemic year one of 2020, investors rushed en masse to have metals delivered as soon as possible. No more rolling futures contracts into the future. In times of emergency, everyone wanted to have metal in hand. And since it is no secret that number of contracts concluded on the Comex exceeds the physical volume stored and registered as Comex by several times, well, the volume has to be imported from somewhere else. Obviously, some of the ‘longing’ opted to have their claims satisfied with dollar equivalents, but a large proportion categorically opted for physical delivery. So a short squeeze occured, interestss on metal lending rocketed upwards, and so did the spread between the closest-to-fulfil contracts and those further away in time. As a result, not only did Comex began to drain the LBMA's vaults (by mutual agreement), it also began to act as a black hole, absorbing all possible uncontracted volumes from both across the Atlantic and across the Pacific.

State of affairs at the end of January/early February 2025 reminds us of these distant events. Although, due to long-term changes in the perception of precious metals by the ‘smart money’, and price appreciation, fear of tariff wars should be seen as a catalyst for current movements, being one element of the overall landscape.

Since the swearing in of the new US president, US gold market has been trading with an additional premium over London’s price. The LBMA and CME Group are in talks on the subject, although at the end of January, spread was around 50 USD – at a level greater than the 2020 pandemic average - 42 USD. For silver, we are looking at a level of 1 USD, which is highest since the Hunt brothers is 80’s. This means by how much price of the nearest futures contracts has outperformed London spot price.

But as the LBMA reassuringly states:

The US gold market has been trading at a premium to the London market since the US presidential election result in late 2024. This happens from time to time in markets around the world.

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On Thursday 30 January 2025, Comex gold futures were at 2,853.20 USD against the London spot price of 2,798.24 USD. Since then, there has been further price appreciation in both gold and silver. The white metal is at levels under 32.5 USD while gold attacks 2880 USD.

The number of contracts Comex traders want to execute in February, declared on ‘first day notice’, reached records of 29,621 for gold and 1,306 for silver.

At the end of January, that is one week after the inauguration of new US president, 14 million ounces of gold (38 billion USD) and 45 million ounces of silver were transferred from London warehouses to New York. A few days later, it was a total of 82 billion USD in gold and further values/volumes of silver.

Eligible, or available gold volumes in Brinks' Comex warehouses, reached 4.92 million ounces. Previous record from the 2020 pandemic panic was 3.5 million ounces. It should be remembered that Brink's is only one of the nine official Comex depositories, but also one of these with largest storage.

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These figures are official because, in addition to Comex warehouses, some volumes were also transferred across the Atlantic to the private vaults held at HSBC and JP Morgan. And this is accompanied by a ‘the sooner the better’ attitude, as the waiting time for ‘withdrawals’ in London has increased from a few days to 1-2 months, as officially confirmed by the Bank of England. The liquidity of the London market has, therefore, been reduced. Official London stocks for gold and silver, for January, have of course fallen, although this does not yet look very dramatic, although rather worse for silver than gold. Fresh data from the LBMA published on 7 February is shown below. The extended lead time (1-2 months) is due to the fact that numerous volumes are unavailable for immediate sale because they are already subject to lending - collateral and swap transactions. Which, of course, gives room for speculation about the size of the actual bullion stocks vs. the LBMA.

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And these are not the only volumes headed to the US, as already since November, bullion exports from Switzerland had also increased.

We should also talk on silver. Its market is shallower than gold's, which also means it is more ‘tight’, which means it is more susceptible to large movements. The difference is that with the movements we are experiencing, gold can be delivered to the LBMA by central banks, in the form of further volumes. In this way, liquidity will return. In contrast, in case of silver, there is no ‘lender of last resort’ institution. This means that drain on London warehouses and volumes of silver-backed ETFs (SLV, for example) may be more irreversible.

Speaking of SLV - since 22 January, shareholders have cashed out 36,750,000 shares, which means paid out around 33.5 million ounces of silver. Number of shares that could be lent has been reduced from 10 mln units, to 8,000! The percentage for lending silver from SLV is 12% (and rising) and from the gold ETF GLD is at 6.29%. Bullion banks, en masse, are lending/redeeming units, converting them instantly to physical metal and shipping them across the Atlantic.

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So it should come as no surprise that, given the situation, it pays to have silver (and gold) on the LBMA to lend to short sellers. The current cost of a month's rental, has behaved in a similar way to premium - it has moved up shy under 8%. And, of course, this is also the case for gold - at the end of the first week of February it is 5%. Both values refer to the monthly cost.

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On this occasion, it is near obligatory to observe export of silver from India towards the UK. If the ‘street’ finds the price of silver attractive, there could be a massive sale of silver jeweler and tableware. On the one hand, this will help replenish London's over-stocked inventory, but on the other hand, not immediately, as logistics, combined with the need for LBMA-accredited precious metal refiners to process the white metal into LBMA-acceptable 1,000 ounce bars, will create a bottleneck in the flow. We recommend on this occasion our analysis ‘LBMA accreditation - facts, not myths’ explaining the subject.

Ergo, a short squeeze on silver, similar in its form to that from Berkshire Hathaway in 1998.

Conclusion

Duties on US neighbours have been postponed for at least a month, further proposals - including on the EU are on the table. What is uncertain is the status of the UK, (i.e. LBME and LME markets) in this matter, both in terms of tariffs, exemptions and possible rates. After all, special ties are special ties, but Trump and Starmer are politically separated by everything possible. However, blaming only the threat of customs duties, although a widely accepted narrative, does not seem to fully explain the whole picture experienced. Especially since we’re primarily dealing with the use of promises of tariffs as a negotiating bogeyman.

The whole situation is playing out in a macro environment in which the central banks of the global south and east are buying gold en masse, both officially and under the table. Poland, China, India, Turkey, the United Arab Emirates, Japan, Russia, Hungary, Singapore, Saudi Arabia, Qatar - these are just some of the jurisdictions that have bought or are buying gold for various reasons in recent years. We described this in more detail in our analysis ‘Has gold just overtaken the Euro as a central bank asset?’ Particularly notable here is the attitude of China, which directly as well as via Hong Kong has notoriously imported massive volumes into the country from Zurich and London, among others, while buying up most of the uncommitted volumes and trying to be as discreet as possible in the process.

Since the election of the 47th US president in November 2024, US bullion, investment banks, and smart money in general have also joined the ranks. And, already transferred to Comex warehouses, London gold and silver go into warehouses primarily in the ‘eligible’ category.

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‘Eligible’ is bullion held in an approved Comex vault that is acceptable for delivery under futures contracts. This bullion is simply gold and silver held in approved facilities that meet Comex eligibility requirements. This does not mean that bullion is in approved vaults for commercial purposes. Some of it may have been deposited in vaults by owners trading futures, but acceptable bullion may be deposited in approved vaults for many other reasons unrelated to futures trading.

‘Registered’, on the other hand, is acceptable gold for which a warrant has been issued by an approved warehouse. A warrant is a document of title issued by a warehouse to satisfy delivery of a gold futures contract. They confirm title to a specific quantity of gold. Specific serial numbers of bars on a specific shelf, in a specific warehouse. Let us therefore recap:

• January 2025 bullion deliveries on the Comex increased - volumes above the local average,

• Number of open contracts for gold deliveries increased significantly (but not yet breaking records). For silver, however, the indicator is closer to the historical average,

• Comex is happy to pay more per ounce than the London spot price, which is having a positive effect on metal prices, and which has resulted in an appreciation at this point that is greater than what might be expected from the 2.5% broad tariffs.

• Whoever in London has available stored bullion is now lending it out at a really good percentage. Or is selling it at a better than London price.

• Bullion goes primarily into the ‘Eligible’ category, i.e., I have, I own, I hold, I don't let go, MINE!

Hypothesis number one: Entities registered on the Comex are worried about Trump's customs policy and the associated repercussions. They decide, therefore, to hedge.

Hypothesis number two: entities registered on the Comex, seeing the increased role of bullion in the world and the general uncertainty in every aspect (including, and perhaps especially, in US bond rates), decide to increase their exposure to bullion, prompted by the confusion over import tariffs.

Hypothesis number three: new player(s) on the Comex have decided to make strong purchases. Of a size which corresponds to the usual historically good months. It's just that January on the Comex is usually not a ‘big’ month, and using the example of Berkshire Hathaway's actions from 1997-1998 such purchases should be spread out over time so as not to make price appreciation over time. And what exactly Berkshire did? Author of this analysis has already prepared a relevant text under the title ‘How Warren Buffet made money on silver’, which should appear, (if it has not already been published) soon.

Hypothesis number four: Trump talks a lot about crypto. However, gold also exists in his political outlook (and that of his advisors). It existed both in his 45th term and will exist during 47th term. However, this matter, along with the introduction of Judy Shelton, requires separate analysis.

It is therefore interesting to see what the second half of February will look like on the Comex, i.e. during the contracted deliveries deadlines and immediately after. We may have to deal with a continuation of the upward price trend. But we may also have to deal with a temporary weakening of it, in which case it will be essential to maintain the technical levels achieved.

How does this relate to the unfortunate VAT on silver? Bottoms are for buying. Silver, being more explosive can make up for taxes and premiums in a matter of days. Its appreciation is a palpable and well visible fact, and with current equity rotations and the macro environment, the path the metals are taking seems obvious.

Central banks remain bullish towards gold. Institutions too. Long-term investors too. Silver follows gold. So, so-called ‘street’ shouldn’t be afraid of a higher entry point, and carry on doing what ‘smart money’ do.