Silver: Above-ground stocks are emptying at a dramatic pace

Above-ground silver warehouses are currently emptying at an unprecedented rate. Until recently, the major metal exchanges in London and New York had gotten used to the fact that only a very small amount of the silver traded on the markets had to be physically delivered to the buyer at the end of the contract term. It was therefore sufficient to hold only a small amount of silver physically to cover this demand.

However, we could be experiencing a paradigm shift at this point. The level of physical silver deliveries on the London Metal Exchange was already exceptionally high in October. But this high level will be surpassed by another 73% in November.

The increase in physical deliveries is not insignificant, as silver contracts with a silver content equivalent to a full year’s production are traded on the major metal exchanges every day. So far, the large amount of paper silver has not been too much of a problem either for the exchanges or for the sellers of the silver contracts, because physical delivery was only requested for a fraction of the traded contracts.

Aggressive silver buying could put the metal markets under pressure

Now, however, more and more silver buyers seem to be switching to covering their needs via the metal exchanges and then having the purchased silver physically delivered from the exchange warehouses. Considering that the market is already in deficit for the fourth year in a row due to rising industrial demand for silver in 2024, it could be that a perfect storm is brewing here.

Silver is needed in many green technologies. It is contained in solar modules as well as in electric vehicles. Silver is also an important and indispensable raw material for aerospace technology, the military and electronics.

Although existing deficits can be bridged for a certain period of time by reducing stocks, a strong impact on the price is to be expected at the latest when stocks start to run out. In the past, the silver price was determined in particular by trading in paper silver. Now, however, there is a possibility that real industrial demand will become a more significant factor in the silver price.

Will demand really determine the price of silver in the future?

Until now, the silver market was like the tail wagging the dog, because it was the derivatives, i.e. derived financial products, that determined the price of physical silver. This was often so low that it did not even cover the mines’ production costs.

India has already used the price slump in the first half of November to buy silver aggressively. As this silver is not needed as an object of speculation but as a basis for its own industrial production, it has also been registered for physical delivery.

This increases the pressure on five major U.S. banks. In the past, they built up large short positions, i.e. sold silver on the market that they do not physically own. They cannot physically dispose of this silver either, as the total contracts on fire as short positions correspond to around five years of global production.

However, if more and more silver buyers in London, New York and Shanghai now demand physical delivery of the silver they have bought, the bankers may soon have to realize that they have been sitting on a very, very hot stove.