The London silver market is in turmoil: A massive short squeeze has temporarily driven the silver price above the mark of 50 US dollars per ounce – only for the second time in history. In the British capital, spot silver is currently trading significantly above prices in New York, liquidity is considered thin, and market participants are reporting sharply increased borrowing and financing costs for physical metal. The dynamics evoke memories of the legendary price jump of 1980, when the Hunt brothers tried to dominate the market – even if there is no single player today who would “control” the market.
What is Driving the Short Squeeze in Silver?
According to traders and analysts, an unusual combination of factors is coming together in silver. On the one hand, there has been a broad flight into precious metals – i.e. into gold and silver. The triggers are primarily concerns about growing government debt in industrialized countries and the devaluation of currencies. This trend has been further reinforced by the budget dispute and the recently escalated budget blockade in the USA. Silver benefits in such phases both from its status as a monetary metal and from its industrial use.
On the other hand, specific factors of the silver market are at play. Traders point to a sharp increase in demand from India in recent weeks. At the same time, the supply of freely available bars that support daily trading in London is shrinking. Although the traditionally central storage location has hundreds of millions of ounces in vaults, a large part of these holdings is tied up – for example in ETFs or long-term custody – and is not available for short-term liquidity. In addition, supply deficits in recent years have shrunk the buffer: Mine production has not kept pace with demand from investment and industry, including applications in the solar industry, electronics and medical technology.
In addition, there is an increased outflow of metal to the USA this year – triggered by the fear of possible trade barriers. According to market calculations, the “free” inventories available in London have fallen from over 850 million to around 200 million ounces since mid-2019; since mid-2021, this corresponds to a decrease of about one third. This shortage makes the market susceptible to bottlenecks – and thus to price jumps like the current one.
London Premiums, Tight Logistics: Silver Flies across the Atlantic in the Cargo Hold
A visible symptom of the short squeeze are the sharply increased London premiums compared to New York. Anyone who has shorted spot silver in London and cannot procure bars in time must “roll” positions – i.e. postpone them to later maturities – and pay sometimes considerable borrowing rates for this. Market participants speak of a situation in which the usual liquidity has practically dried up.
The price differences between the trading venues are so pronounced that some traders are using unusual logistics routes: In order to take advantage of the London premiums, cargo space on transatlantic flights is currently being booked for heavy silver bars – a transport that is normally reserved for gold, because the higher costs per unit of weight are more likely to pay off there. The fact that silver is now also taking the air bridge underscores the vehemence of the market distortions. The physical infrastructure – from vaults to secured trucks to freight capacities – is thus working at the capacity limit, which can further prolong the tensions.
Historical Context: Parallels to 1980, but Different Causes
The jump of the silver price above 50 US dollars per ounce is reminiscent of 1980, when a wave of speculation around the Hunt brothers brought the market to the brink of losing control. Today, however, traders and analysts do not point to a single market party, but to a cocktail of macroeconomic uncertainty, structurally scarce physical liquidity and short-term demand impulses – for example from India and the USA. In some respects, the situation even seems more acute: The free tradable goods in London are significantly smaller than a few years ago, which makes it easier for price premiums and borrowing rates to escalate.
For investors, processors and traders, the environment means increased uncertainty. Spreads between trading venues, availability of bars with London Good Delivery specification and the costs of metal lending (lease rates) are moving more into focus. At the same time, silver remains a hybrid: It reacts to macroeconomic drivers such as inflation expectations and exchange rates, but also to the industrial cycle – such as the demand for photovoltaics, where silver is needed as a conductive metal in solar cells.
How things proceed depends on several factors. It is crucial whether and how quickly the London inventories of “free” metal increase again – for example through inflows from ETFs or through the diversion of physical goods from other regions. Equally important is the development of demand in key markets such as India, as well as the trade policy situation between the USA and important exporting countries. Should the premiums between London and New York normalize and the borrowing rates come back, the situation could ease. However, if logistics and inventories remain tight, volatility in the silver price will also remain high.
