Understanding the Current Silver Squeeze

For now, the squeeze is primarily centered in the wholesale London bullion market, where the dominant form of silver traded is the Good Delivery silver bar, weighing 31.1 kilograms or 1,000 troy ounces, as shown in the picture below. These bars must be at least 99.9% pure and produced by refineries approved by the London Bullion Market Association (LBMA). Approved refiners include Argor-Heraeus, Asahi Refining, Heraeus, Metalor, MKS PAMP, the Royal Canadian Mint, and Valcambi, among others.

Further evidence of stress in London's physical silver market can be seen in the widening bid-ask spreads for spot silver. These spreads, which typically hovered around 3 cents per ounce, have now spiked to well over 20 cents.

Even more evidence of stress can be seen in the recent spike in the spread between the London spot price of silver and the New York price, as represented by COMEX silver futures. This spread, which normally sits around minus $0.30 per ounce with futures trading slightly higher, jumped to an extraordinary $3 per ounce, with the London spot price actually exceeding the futures price.

The intraday chart from the past week highlights the sharp surge that developed in the spread between the London spot price of silver and the New York futures price:

One of the key factors contributing to the current physical silver shortage in London is the significant drawdown in silver inventories over the past few years. London holdings have fallen from a peak of 1.18 billion troy ounces in 2021 to just 790 million ounces today, a 33% decline as shown by the black line in the chart below.

The drop is even more pronounced when accounting for "free float" silver, which excludes the holdings of the nine largest ETFs. This trend is illustrated by the yellow line in the chart. The smaller the available inventory of physical silver, the more vulnerable the market becomes to shortages like the one we are now witnessing.

One of the main factors behind the sharp decline in above-ground silver stock in recent years, and a key setup for the current physical silver squeeze, is the structural silver deficit that has persisted over the past half decade. This deficit has been driven by demand consistently outpacing supply, with an annual shortfall of around 150 million troy ounces, a figure that is expected again this year.

As long as this imbalance continues, above-ground silver inventories will continue to shrink, making shortage conditions more severe and more frequent. This is especially true now that investor demand is surging with silver finally breaking above $50. I believe this milestone will trigger a sea change in investor sentiment toward silver, a metal that was seen as a laggard for much of the past fourteen years.

The persistent silver deficit is driven by a combination of shrinking supply and rising demand. On the supply side, global silver mine production has already peaked and has been declining over the past decade as economically viable deposits are gradually exhausted. And as time goes on, this supply crunch is only likely to worsen.

At the same time, demand for physical silver has skyrocketed across multiple sectors, with the biggest driver being the surge in solar panel manufacturing. As the world shifts away from fossil fuels toward renewable energy, this trend is only in its early stages. Silver demand for photovoltaic (solar panel) applications alone has nearly tripled over the past four years, increasing by an astonishing 143.1 million ounces. With global efforts to expand clean energy accelerating, this demand is set to grow even further.

Although investment demand for silver has been relatively subdued for much of the past decade, I expect it to rise significantly as silver's bull market continues to strengthen. This is particularly likely now that the spot price has surpassed the key psychological level of $50, which marked the peak of the last two major silver bull markets in 1980 and 2011. The current breakout is still in its early stages, but it signals that history is being made in the silver market.

I believe significantly stronger investment demand for physical silver is on the way, particularly from American ETFs, which have only recently begun accumulating silver at a gradual pace. For example, the iShares Silver Trust (SLV), the largest U.S. silver ETF, increased its physical holdings from 417.5 million ounces to 496.53 million ounces over the past two years. That is a modest 19% rise, which falls far short of the 160% surge in silver's price over the same period. I expect that gap to close soon, and as it does, it should intensify the existing physical silver shortages not only in London but also in the New York futures market.

Another important factor to consider in the current physical silver shortage is the extreme imbalance between "paper" silver and actual physical supply. At present, there are an estimated 360 ounces of paper silver, including ETFs, futures, and other derivatives, for every single ounce of physical silver. This massive disparity significantly increases the risk of a sharp short squeeze, which I believe is going to eventually occur during the course of this powerful silver bull market.

In such a scenario, holders of paper silver will be forced to scramble for the extremely limited supply of physical metal in order to meet contractual obligations. This would cause the price of paper silver products to collapse, while physical silver prices will skyrocket to extraordinary levels, reaching at least several hundred dollars per ounce.

What I believe will greatly contribute to the upcoming silver price surge, the scramble for physical silver, and the collapse of paper silver products is the eventual unwinding of the large net short positions in COMEX silver futures by swap dealers, primarily the trading desks of bullion banks such as JPMorgan and UBS.

What's even more astonishing is how much of this short position in silver futures is naked, meaning it isn't backed by physical silver. It's merely "paper" silver being dumped onto the market to suppress prices. However, as silver's bull market heats up, it's likely to trigger a wave of short covering, which occurs when traders who have bet against an asset through short selling are forced to buy it back as prices rise in order to limit their losses. As the price climbs, these traders become increasingly desperate to close their positions, further fueling the rally.

If the buying pressure is intense enough, it could even lead to a full-blown short squeeze, dramatically amplifying silver's upward momentum. Given the size of their short position, bullion banks stand to lose approximately $272 million for every $1 increase in the price of silver, which is a setup for a major price surge. Now, just imagine what will happen as silver climbs another $10, $20, or more beyond the key $50 level it has just surpassed.

All of the factors I discussed, including the physical silver shortage in London, the dwindling above-ground silver inventories over the past four years, the structural silver deficit, strong demand but dwindling supply, and now a surge of investor interest and demand, have finally pushed silver above the critical $50 level in the past couple of days. Many of these new investors are part of a younger generation that is not battle-scarred like the older generations who experienced silver's past disappointments in 1980 and 2011.

I believe that outcome is likely for several reasons, including the fact that silver remains quite undervalued and because of the upcoming failure of the paper silver market. That failure will result in a scramble for extremely scarce physical silver, making the current shortage in London seem like a walk in the park comparison. In my view, what we are witnessing now is a precursor to that much larger event.

To summarize, the physical silver shortage in London, also known as the silver squeeze, is part of a broader process in which silver is finally coming into its own and gaining the recognition it has long deserved. For years, it was overlooked and undervalued as investors chased flashier assets such as cryptocurrencies and tech stocks.

I believe that many investors who previously ignored silver are now beginning to take notice and will increasingly flood into it. In a world glutted with overpriced and overhyped investments, silver remains one of the few assets that is still genuinely undervalued. This shift in perception and demand will send its price soaring, rewarding those of us who had the conviction to get in early.

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