On January 29, silver futures surged past $117, witnessing an extraordinary rise of 275% over the past year. The driving force behind this spike appears to be a significant shortage of physical silver, as current warehouse stock covers just 14% of the outstanding futures positions.
This situation is exacerbated by low inventories, substantial commercial short positions, and an unusual backwardation in futures contracts, indicating a classic short squeeze is developing right now.
According to a recent report from CME warehouse inventory dated January 27, the total amount of silver in COMEX-approved vaults has dropped to 411.7 million ounces. More critically, the registered inventories available for immediate delivery against futures contracts have fallen to 107.7 million ounces.
In just one day, registered shares decreased by 4.7 million ounces. This reduction suggests that either silver has been withdrawn from storage or converted to eligible status, the latter of which is not available for futures delivery.
The total open interest stands at 152,020 contracts, which translates to about 760 million ounces, whereas registered inventories cover only 14.2% of these outstanding claims. If even a fraction of futures holders request physical delivery, exchanges could face significant operational challenges.
Data from the Commodity Futures Trading Commission’s Trader Commitment Report, published on January 20, highlights the level of pressure on the short side. Commercial traders, mostly banks and dealers, are currently holding 90,112 short contracts, compared to 43,723 long contracts. Their net short position amounts to 46,389 contracts, roughly equating to 231 million ounces.
This net short position is more than double the available registered silver meant for delivery. If those in long positions start opting for physical settlements, short sellers may need to source the metal in an already constrained market, potentially driving prices up even more.
Since early October, the silver market has experienced backwardation, with spot prices surpassing futures prices. This price structure indicates a strong immediate demand for physical silver that outstrips supply—something that’s typically not sustainable in regular market conditions.
Analysts have noted that futures contracts are rolling back from March and February into January, which is a bit unusual. It seems that long-term holders prefer not to wait for a later delivery date.
In just January, there were 9,608 contracts issued for actual delivery, representing nearly 45% of the current registered inventories. This supply squeeze is further intensified by rising industrial demand, especially in solar panel production, where silver now constitutes a hefty 29% of total production costs, up from 14% last year.
This makes silver the largest cost component in solar energy production, outpacing aluminum, glass, and silicon. Major Chinese manufacturers are cautioning investors about potential net losses in the coming years, specifically in 2025 and 2026.
In response, Longi Green Energy has announced plans for mass production of copper-based solar cells starting in the second quarter of 2026. However, industry experts suggest that transitioning to alternatives takes years, and short-term trends still heavily favor physical silver.
In contrast, the gold market doesn’t show the same level of stress. COMEX gold inventories total 35.9 million ounces, with 18.8 million ounces classified as registered. The open interest of 528,004 contracts represents 52.8 million ounces, reflecting a much healthier coverage ratio compared to silver.
Gold futures are currently in contango, a normal market setup where futures prices are higher than spot prices, and inventory movements remain minimal.
The Silver Association reports that the silver market is now in its fifth year of structural deficit, with above-ground stockpiles continuing to shrink. Given the rising lease rates and expanding in-kind insurance premiums globally, the conditions seem favorable for further price increases.
However, it’s worth noting that this expanded market may be vulnerable to significant corrections if traders start taking profits or if exchanges implement position limits or increase margins.
