London’s silver market is experiencing significant upheaval due to a massive short squeeze, pushing prices above $50 per ounce for only the second time ever. This situation has drawn parallels to the Hunt brothers’ infamous attempts to dominate the market back in 1980.
Prices in London have soared to levels rarely seen before, even surpassing those in New York. Traders are noting a severe lack of liquidity in the market; those holding short positions are finding it challenging to procure bullion and facing exorbitant borrowing costs to extend their positions.
The urgency has led some traders to book costly transatlantic flights to transport large amounts of silver, a practice usually seen with gold, eager to capitalize on the high premiums in London.
Market experts indicate there’s no modern counterpart to the Hunt brothers trying to control silver prices today. Instead, various factors have contributed to this recent price surge. However, the chaos of the last few days does resemble the financial crisis of 1980, and in some respects, it feels even more intense.
Anant Jatia, chief investment officer at Greenland Investment Management, expressed that such conditions in silver are unprecedented, emphasizing the severe lack of liquidity present.
For over a century, London has served as the epicenter of the precious metals market, where a limited number of banks establish global prices for gold and silver, basing their trades on metals stored in local vaults. Each day, secure trucks transport the bullion as trades conclude.
This recent price spike is largely attributed to increased investment in gold and silver spurred by rising debt levels in Western nations and worries about currency devaluation—a trend amplified by the ongoing fiscal standoff in the U.S.
Moreover, specific developments in the silver market have fueled the crisis, including a recent surge in demand from India, a shrinking supply of bullion available for trading, and apprehensions regarding potential U.S. tariffs on silver.
The silver market depends heavily on large stockpiles of silver stored in London to ensure liquidity. Unfortunately, these reserves have been steadily depleting. Mine production has struggled to keep pace with investor and industrial demand, particularly from sectors like solar energy, resulting in ongoing deficits. Additionally, fears of tariffs have prompted a rush to ship metals to the U.S.
As a result, London’s silver reserves have plummeted by a third since mid-2021. Most of these reserves are tied up in exchange-traded funds, with the metal available for market liquidity—primarily held by large banks—diminishing by 75% to about 200 million ounces, down from over 850 million ounces in mid-2019.
This month’s influx of investment coincided with heightened demand from India. Indian buyers previously sourced silver from Hong Kong but shifted their purchases during the Golden Week festivities, as noted by Daniel Ghali of TD Securities. One Indian ETF halted new investments due to a metal shortage.
The London Bullion Market Association, representing banks, refiners, and logistics entities within the market, acknowledged the tightness in the silver market and stated they are actively observing the situation.
Record-Breaking Prices
In the past couple of days, silver prices have shattered multiple records.
London’s daily silver auction, a tradition since 1897, exceeded $50 for the first time on Friday. Spot prices in London reached a premium of up to $3 compared to New York futures, a disparity last seen during the Hunt brothers’ market crisis. Additionally, the overnight borrowing costs in London have surged by over 100% annually, with some market veterans claiming they may have surpassed levels from the 1980 financial crisis.
Market stress indicators also show that the bid-to-bid spread for London silver jumped from its normal approximately 3 cents per ounce to well over 20 cents.
As Robert Gottlieb, a former precious metals trader, explained, the banks are hesitant to quote one another, leading to a significant lack of liquidity.
Market Fixes on the Horizon?
The 1980 market collapse was triggered by exchange interventions, with the Comex and Chicago Commodity Exchange Commission implementing rules that barred traders from taking new positions, allowing only liquidations.
Today’s silver market lacks a straightforward solution. The squeeze may ease as more silver becomes available in London, either through ETF investors and other holders selling, or traders shipping bars from elsewhere to alleviate the shortage.
Signs indicate this process may already be beginning. A logistics executive shared that he’s been receiving urgent requests to transport silver from New York vaults to London, estimating that traders are looking to move around 15 to 30 million ounces of silver. Friday marked the largest single-day silver withdrawal from the Comex in over four years.
Recently, silver prices have been trading at a discount compared to London, which could potentially encourage silver to flow out of China, although the amounts may be limited due to tight domestic circumstances.
Joseph Stephens, head of trading at MKS Pump SA, highlighted that there’s natural momentum for silver to return to London, but the real hurdle lies in coordinating the movement of stockpiles from around the world back to the city.
However, some traders remain cautious about exporting silver from New York due to the complex logistics involved. Even a minor delay could be costly amid London’s notorious traffic, particularly with worries about the government shutdown affecting customs clearance. There are still concerns that potential import duties on silver could be imposed due to ongoing Section 232 investigations into critical minerals.
Amy Gower, a strategist at Morgan Stanley, noted that if silver tariffs are avoided, it might relieve some pressure in the U.S market and lessen the tight conditions in London. Often, higher prices can be a short-term remedy for these situations.
