The silver market is in the initial stages of a remarkable transformation. That change is resulting from a combination of federal policy and market forces. Further heightening the focus on this precious metal, the United States, just last month, added silver to its critical mineral list. In turn, as the market continues to react, the price of silver has skyrocketed and multiple indicators suggest a rapidly tightening supply landscape.
This week, a major new breakthrough has landed. The premium between the London physical price and the New York futures price has nearly reverted to $1. Traders are apparently willing to pay premiums many multiples higher for the privilege of instant access to physical silver. Recent data shows a record negative implied “financing rate” on a one-year silver swap. This translates into an effective premium of nearly 7 percent for traders to obtain physical silver at market rates today rather than for delivery one year from now.
The London market’s liquidity has almost disappeared thanks to a short squeeze, amplifying the general supply crunch. Meanwhile in India and Shanghai prices have skyrocketed far beyond that in London. This difference has led to an arbitrage opportunity, leading to a massive net flow of silver from Western markets. This atmosphere has fuelled fears over the long-term supply of silver. Most industry experts agree there is insufficient silver to satisfy the increasing demand.
Supply Constraints and Market Deficits
The numbers behind the structural silver market deficit are shocking. For four consecutive years this trend has continued, with last year’s deficit totaling 148.9 million ounces. For context, the free float of silver in London has faced a dramatic drawdown. It has dropped from a high of 850 million ounces down to just 200 million ounces — a devastating decline of 75 percent. This precipitous decline in silver available for delivery poses severe, and perhaps deadly, ramifications for the health of the silver market.
The most recent of these reports reveals that the collective shortfall over the last four years has totaled 678 million ounces. That figure is about the same as ten months’ total mining supply anticipated in 2024. The cost of borrowing silver overnight has jumped 600%. It has now risen above 100 percent on an annualized basis, an indication of the rising pressure on the market.
“There is no quick or scalable solution to silver’s structural deficit.” – Faysal Amin
The current paper-to-physical ratio stands at an impressive 356:1. This effectively means that for every one ounce of physical silver existing in the world, there are 356 paper ounces extant in the market. This lack of uniformity exposes a huge gap. The hunt for physical silver is far exceeding its supply, but reckless speculation comes first.
Global Dynamics and Market Behavior
Photo by Ispro for Shutterstock China’s role in the global supply chain goes beyond just production. China is estimated to dominate the world’s refined silver supply by 60 to 70 percent. Recent data reveals that Shanghai inventories have fallen to their lowest levels in a decade, further straining global supply chains. The situation has led industry observers to draw parallels between current trends in silver and China’s earlier strategies regarding rare earth metals.
“This move mirrors China’s earlier strategy with rare earth metals, where export controls were used to secure domestic industrial advantage and global pricing power.” – Faysal Amin
In light of all these dynamics, the behavioral aspects of the market are changing rapidly. Short squeezers pressing investors holding paper certificates to deliver physical at any cost. This huge increase in demand has initiated what some market analysts are referring to as a “run” on London’s spot silver market. This fundamental change in behavior will continue to drive investors and users to offload paper contracts. Consequently, they will more and more need to force the issue of physical metal being extracted.
“Only a short squeeze can plausibly explain the violent price action in silver today.” – Chris Powell
Implications for Investors and Future Prospects
The ramifications of these changes are profound for investors and stakeholders in the industry. With prices changing by the minute, and worries about the future supply of silver reaching a boiling point, investors are cashing out on their silver investments. Individuals can become nervous about forgoing the opportunity to cash in on large price increases. That anxiety might push them to spend even more in the weeks ahead.
Industry experts caution that the latest turn of events is more than just a demand cycle. Yet they illustrate a deeper issue that lies within the market structure itself.
“Silver prices are not just reacting to demand — they are reacting to the realization that the market’s underlying structure is no longer credible.” – Faysal Amin
The real-world landscape on the global stage is always evolving. Investors should always be diligent and attuned to changes in supply, pricing trends, and geopolitical events that may impact the silver market.