The London silver market is confronting an escalating physical squeeze, with a key interest rate indicator plunging into deeply negative territory, revealing extreme tightness in spot silver supply. The latest developments come from an analysis by Dutch trading expert Karel Mercx. He points out that a proxy indicator used to measure physical shortages in the London market—the spread between the 1-year silver swap rate and US interest rates—has now plummeted to -7.18%. This "distorted" data signifies that traders are willing to pay a premium of nearly 7% more for immediate physical silver delivery compared to silver for delivery one year later. Under normal circumstances, due to storage, insurance, and financing costs, forward prices should be higher than spot prices. Therefore, theoretically, this "one-year silver swap spread" should be a positive value to cover the costs associated with holding physical silver for a year. The current complete reversal of this situation indicates that investors holding paper certificates are seeking physical delivery regardless of cost. This behavioral pattern is described by market observers as a "run" on the London "spot" silver market. This will incentivize investors and users to continue selling paper contracts and instead demand the withdrawal of physical metal. Analysis suggests that as long as this shortage persists, the upward trend in silver prices is unlikely to end. Karel Mercx emphasizes: "This distortion explains why the silver rally is not over yet." A chart he published shows that this indicator is not only below the "red line" representing normalization but the gap is also continuously widening, indicating that the silver shortage in London is intensifying rather than stabilizing.
As long as this spread indicator remains below the "red line," upward pressure on silver prices will persist. Currently, the market is unclear at which price level supply and demand will find a new equilibrium. Recently, spot silver has broken through the $70 per ounce mark and continues to frequently set new record highs.
The paper silver system is under pressure. Silver swap rates are a crucial component of global precious metals trading. They exist to allow large participants like banks, producers, industrial users, and investors to conveniently exchange silver for US dollars without physically moving the metal out of vaults, thereby tightly linking London's physical market with New York's financial markets. However, this system designed to avoid physical transportation is now under significant strain. With spot prices substantially higher than forward prices, buyers are actively demanding physical delivery, causing silver to begin moving globally. Holding physical silver is no easy task; a position worth $1 million weighs hundreds of kilograms and requires professional vault space, insurance, and security measures. The fact that market participants are now willing to bear these additional costs and hassles highlights their shaken confidence in paper certificates and urgent demand for physical assets. This shift from holding unallocated silver ownership certificates to demanding the withdrawal of physical metal is a classic characteristic of a "run" on the London spot market.
Leverage risks and global arbitrage flows. The risk in the London market lies in its enormous leverage effect. According to analysis by industry expert David Jensen in his Substack article, the amount of paper silver (or "synthetic" silver) certificates circulating in the London market far exceeds the available physical silver inventory for delivery. This high leverage means that if physical withdrawal demand forms a trend, it could place immense pressure on the limited physical inventory, potentially rapidly triggering a market "squeeze" or unwinding of positions. Simultaneously, price disparities in global markets are further exacerbating London's predicament. Market observers note an "extreme" price difference between silver futures on the Shanghai Futures Exchange (SHFE) and those on the COMEX in New York. This arbitrage opportunity incentivizes traders to ship silver from London, where inventories are relatively (or perceived to be) more ample, to Shanghai where prices are higher, thereby further depleting London's already strained physical inventory.
Comments