Because silver is such a hot commodity as a precious metal, it’s bitten it with a major shortfall for four years running. As global consumption has outstripped supply year after year, available silver reserves have dropped to around 150 million ounces. Recently, this has become more concerning, particularly in the case of India. Demand has boomed as the metal recently touched new all-time highs in rupee terms. Local producers have been overwhelmed with demand that has cleared their inventories. As such, premiums for the grey metal have soared.
Since mid-April, exchange-traded funds (ETFs) during that time globally have taken in over 100 million ounces of silver. Demand has risen through the roof. In 2022, this increase led to a structural market deficit of 148.9 million ounces. It gets even worse considering that most of the physical silver in London vaults are already committed to ETFs. That doesn’t leave much room for immediate supply.
Rising Demand and Local Market Pressures
The sudden increase in silver prices has had a huge effect on the Indian market. The start of 2023 saw silver demand start to ramp up severely, largely because silver started shooting up towards all-time highs in local currency. The sudden loss of supply from India’s largest precious metals refiner running out of silver has created a silver squeeze crisis for many local suppliers in India.
“Most people who are dealing silver and silver coins, they’re literally out of stock because silver is not there. This kind of crazy market — where people are buying at these levels — I have not seen in my 27-year career,” – Vipin Raina.
This causes an increase in premiums for silver to skyrocket. With analysts and bullion dealers catching wind of a hardcore bullish silver sentiment overtaking Indian media. This bright mood—the most positive in more than a decade—is felt across the nation. Our investor community is really on fire and inspired by the sense of urgency. This intensity is amped up even further by the FOMO effect — short for “fear of missing out.”
“The FOMO factor has worked,” – Bloomberg.
This intense demand has produced a vibrant seller’s market, with costs skyrocketing and available inventories plummeting. Since the summer of 2021, silver inventories in London have fallen by a third. This decrease only complicates matters further for Indian suppliers looking to restock their shelves.
The Strain on Global Supply Chains
The global nature of the silver market has been further impacted by individual logistical challenges and increased prices. The annualized overnight cost to borrow silver has skyrocketed over 100 percent per year as demand for it overwhelms supply. The London spot price recently spiked to a $3 premium over New York futures. This increase further reflects an emerging imbalance between supply and demand in markets nationwide.
The continuation of these supply constraints have contributed to frustrations among summer blending suppliers and refiners. Reports indicate that some banks could no longer offer prices for rolling forward clients’ loans due to the unavailability of physical silver.
“One senior banker described how tempers rose as clients who had borrowed silver — typically companies in the physical supply chain, like refiners and dealers — called repeatedly to ask for the latest cost of borrowing,” – Bloomberg.
Refiners are now left to deal with the agonising process of returning all that silver back to London. Worries about looming federal government shutdowns and customs impacts have only worsened the situation.
“The logistics are complicated, particularly amid fears the government shutdown may slow down customs processes,” – Bloomberg.
Despite these hurdles, representatives from across the industry are hopeful that there will be a return to supply chain norms in due time.
“There’ll be a natural momentum for material to move back into London and hopefully things will normalize,” – spokesperson for a precious metal refiner.
The Impact on Market Dynamics
The free float silver supply has fallen precipitously from 850 million ounces to just 200 million ounces. This shocking 75 percent reduction has unnerved markets. With London vaults reportedly tapped out, cracks have started to show in the London market, with shortages being reported worldwide.
Market analysts are cautioning that if these trends continue we should expect increased volatility in silver prices in the future. The combination of supply constraints and booming demand means we’re entering an era with the ingredients in place for high prices to persist.
“Analysts, bullion dealers were all giving bullish calls on silver in Indian media in a way that has not happened in the last 14 years,” – Bloomberg.
Perhaps the most mystifying of all are the global economies trying to figure out what the silver squeeze means. Stakeholders all along the supply chain are waiting with bated breath to see how these dynamics will shift.