Silver futures continued their impressive ascent, surpassing $117 on January 29, marking a staggering 275% increase over the past year. This remarkable rally is fueled by an acute physical supply shortage, with warehouse inventories now covering merely 14% of outstanding futures positions.
The sharp rise in silver prices is attributed to a combination of dwindling inventories, extensive commercial short positions, and a notable shift in contract rolls, indicating a classic short squeeze currently taking place.
Recent data from the CME’s warehouse stock report, issued on January 27, shows that total silver holdings in COMEX-approved depositories have plummeted to 411.7 million ounces. More crucially, registered inventory—the only silver available for immediate delivery against futures contracts—declined to 107.7 million ounces, a drop of 4.7 million ounces in one day. This decrease could be due to withdrawals or conversions to eligible status, with eligible silver not being available for futures delivery.
With total open interest at 152,020 contracts, an equivalent of 760 million ounces, the registered inventory covers just 14.2% of these paper claims. Such a disparity raises concerns that if even a small fraction of futures holders opts for physical delivery, the exchange may encounter significant operational challenges.
Further complicating matters, data from the Commodity Futures Trading Commission (CFTC) indicates that commercial traders, including banks and dealers, have amassed short positions amounting to 90,112 contracts against only 43,723 long contracts, resulting in a net short position of 46,389 contracts—around 231 million ounces. This figure far exceeds the 108 million ounces of registered silver available for delivery. If long positions demand physical settlement aggressively, short sellers may face immense pressure to secure silver in a tightening market, potentially driving prices even higher.
The phenomenon of backwardation, where the price of spot silver exceeds that of future contracts, has persisted since early October. This condition reflects an immediate demand for physical silver that surpasses supply, a scenario that is uncommon in typical market conditions.
Moreover, January has seen the issuance of 9,608 contracts for physical delivery, representing approximately 48 million ounces—nearly 45% of the current registered inventory. Analysts have noted an unusual pattern of futures contracts rolling back from March to January and from February to January, suggesting that long holders are hesitant to wait for later delivery dates.
The implications of this supply crisis extend beyond the futures market, as the solar industry also grapples with rising costs. Silver now accounts for a historic 29% of total solar panel production costs, a significant increase from 14% last year and only 3.4% in 2023. This burgeoning demand highlights the critical role silver plays in renewable energy technologies as the market responds to tight supply conditions.