The silver market is exhibiting signs that suggest a potential physical squeeze, driven by a combination of surging demand, tightening supply, and unique market dynamics.
1. Explosive Price Performance and Market Warnings
Silver has experienced an unprecedented rally, surging 152% year-to-date, making it its strongest annual performance since 1978. This has led to spot prices exceeding $110 per ounce. UBS has warned that recent moves in precious and industrial metals appear "out of control".
2. Structural Supply Deficit
The global silver market is facing its seventh consecutive year of deficit in 2025, with a cumulative shortfall of nearly 800 million ounces since 2021. This is largely due to mine output continuing to decline while demand surges. Approximately 70% to 80% of global silver production is a byproduct of mining other metals, making it difficult for silver output to scale independently.
3. Surging Industrial and Investment Demand
Industrial demand for silver is experiencing strong tailwinds from sectors such as solar panels, electric vehicles (EVs), and advanced electronics. Additionally, there has been a significant increase in investment demand, partly due to capital flight from China's banking sector, driving savers toward hard assets. Retail investors have shown substantial interest, with significant inflows into silver-backed exchange-traded funds (ETFs) like the iShares Silver Trust (SLV).
4. COMEX Inventory and Delivery Concerns
COMEX has seen a significant increase in delivery demand, with 40 million ounces standing for delivery in January, far exceeding the typical 1-2 million ounces. With the March delivery month approaching, demand could reach 70-80 million ounces, potentially draining a substantial portion of COMEX's 110-120 million ounces of registered inventory. This situation has led to a "backwardation" phenomenon, where the spot price of silver is higher than its futures price, indicating acute physical shortages.
5. Geopolitical and Market Disconnect
China's decision to reclassify silver as a strategic commodity and tighten export controls through 44 licensed companies has turned a large share of tradable silver into a tool of policy, impacting global supply chains. This has contributed to an escalating disconnect between paper and physical prices, with physical coin dealers charging significant premiums over CME futures prices.
Conclusion
The combination of persistent supply deficits, surging industrial and investment demand, increasing delivery requests on COMEX, and geopolitical influences points towards conditions ripe for a physical silver squeeze. While the market has experienced significant volatility, the underlying dynamics suggest that the squeeze shows few signs of abating.
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