(Mike Maharrey, Money Metals News Service) For the first time in history, India’s largest precious metals refiner ran out of silver.
A convergence of factors from market dynamics to logistical problems led to this unprecedented silver shortage. While the market dynamics that got us here might be difficult to untangle, the situation is about as basic as it gets.
There’s not enough silver.
October is typically a strong month for Indian silver demand with the approach of Diwali, a festival in honor of the Hindu goddess of wealth. Vipin Raina boosted his silver inventory, and he was ready for the rush.
Or at least he thought he was.
He told Bloomberg the demand blew him away.
“Most people who are dealing silver and silver coins, they’re literally out of stock because silver is not there. This kind of crazy market — where people are buying at these levels — I have not seen in my 27-year career.”
The pump was already primed before festival season, as demand for silver in India began to surge earlier this year after the grey metal zoomed to new all-time highs in rupee terms.
As gold continued to hit record high after record high, investors began to hop on the silver bandwagon. As Bloomberg put it, “India’s festival buyers were joined by international investors and hedge funds piling into precious metals as a bet on the fragility of the US dollar — or simply to follow the market’s irrepressible surge higher.”
The surge in demand quickly drove that price to a record over $50 an ounce. It wasn’t long before silver shortages were reported worldwide and cracks began showing up in the London market.
Underlying Market Rot in the London Silver Market
There was already underlying rot in the silver market due to a lack of metal.
The global silver market depends on hundreds of millions of ounces of silver stored in London vaults. Over the last several years, there has been a steady drain of silver.
The reason is simple. Silver demand has outstripped supply for four straight years. The structural market deficit came in at 148.9 million ounces last year. That drove the four-year market shortfall to 678 million ounces, the equivalent of 10 months of mining supply in 2024.
The Silver Institute projects a fifth straight supply deficit this year.
The shortage of silver in London was exacerbated when tariff worries led to a flow of metal from London to the U.S.
According to Bloomberg, silver inventories in London have dropped by one-third since mid-2021.
But the problem is even deeper than that.
Much of the silver in London vaults is already committed to ETFs. That leaves very little “free float” metal to provide liquidity to the London market.
According to Bloomberg, the amount of free float silver dropped from a high of 850 million ounces to just 200 million ounces, a 75 percent decline. Metals Focus estimates that the available metal is now closer to 150 million ounces.
This reveals a structural weakness in the paper silver market (and gold, too). It’s easy to sell an ETF share. All it takes is a few computer strokes. Moving metal that backs these funds is another story.
According to data compiled by Bloomberg, ETFs globally vacuumed up over 100 million ounces of silver in recent months, “amid concerns about the stability of the U.S. dollar, a wave of investment that’s become known as the ‘debasement trade.’”
The silver price rapidly surged to over $54, before dropping 6 percent and finally settling in the $52 range.
As prices rose, a significant short squeeze developed in the silver futures market.
In simplest terms, a short occurs when somebody sells a silver contract today, committing to deliver silver at a set price in the future with the expectation of a falling market price. If the price drops, the investor can sell the contract and pocket the gain. But if the price rises, the investor suffers a loss. If nobody will buy the contract, he is obligated to deliver the silver.
This short squeeze has caused liquidity in the London market to virtually dry up. This has driven London benchmark prices higher at a very rapid pace, and it has caused a price gap between New York and London. The London spot price recently shot to a $3 premium over New York futures. The last time we saw a premium like this was during the Hunt Brothers’ squeeze.
Meanwhile, the cost to borrow silver overnight rose to well over 100 percent on an annualized basis.
According to Bloomberg, things got ugly.
“One senior banker described how tempers rose as clients who had borrowed silver — typically companies in the physical supply chain, like refiners and dealers — called repeatedly to ask for the latest cost of borrowing. When his bank could no longer offer a price to roll forward its clients’ loans, some started screaming down the phone lines, he said.”
Things have gotten so dysfunctional, some traders were able to buy from one bank, quoting a lower premium and immediately sell to another bank for an instant profit.
India – The Straw That Broke the Silver Market’s Back
With the integrity of the silver market already undermined, the unprecedented silver demand in India pushed it over the edge.
Gold gets some of the blame.
With the price of gold so high, many Indian consumers turned to silver.
According to Bloomberg, a viral video last spring by investment banker and social media influencer Sarthak Ahuja primed the pump when he told his followers that the 100-1 gold-silver ratio made silver an obvious buy.
“Analysts, bullion dealers were all giving bullish calls on silver in Indian media in a way that has not happened in the last 14 years,” one analyst told Bloomberg. “The FOMO [fear of missing out] factor has worked.”
As Indian consumers began to pivot toward silver, the price premium began to rise. Typically, Indian prices run a few cents higher than global averages, but that spread began to grow. It was slow at first – from a few cents to 50 cents. And then to a dollar. And then above a dollar. Today, we’re seeing premiums as high as $5 an ounce.
“I have been here in this company for the last 28 years and I have never seen these kind of premiums,” a trader told Bloomberg.
Initially, Indian buyers were primarily sourcing silver from Hong Kong, but they reportedly shifted more toward London during the Chinese Golden Week Holiday in the first week of October.
But London vaults were already tapped out.
JPMorgan Chase ranks as the world’s largest precious metals trader, and the big bank is a key source of Indian silver. About two weeks ago, the JPMorgan representatives told at least one large Indian client that it didn’t have any silver to send in October.
Meanwhile, Indian suppliers were running out of silver, and local premiums skyrocketed. Several Indian ETFs stopped taking new orders because they couldn’t source the metal. However, other investment vehicles continued accepting new funds. This raised worries that they might be unable to obtain the needed metal.
Indian traders were forced to get their hands on metal wherever they could. Money Metals Exchange even arranged for a large shipment of 1,000-ounce silver bars to India.
Bullion banks engaged in similar operations, standing for delivery of silver on the COMEX and airlifting silver bars to Europe and beyond.
What’s Next?
There isn’t a quick, easy fix for the silver market.
This isn’t just a logistical problem. It is rooted in a fundamental lack of metal.
You can’t supply what doesn’t exist.
There is only one way to relieve the pressure – make more silver available in London. This can only happen if ETFs sell, freeing up metal for the free float stock, or by physically moving silver to London from overseas.
An executive at a logistics company said he has received calls from customers seeking to take silver out of New York Comex vaults and move it to London. He estimated traders want to shift between 15 and 30 million ounces of metal between the two hubs. That totals over 2 million pounds of silver.
A spokesperson for a precious metal refiner told Bloomberg, “There’ll be a natural momentum for material to move back into London and hopefully things will normalize.”
“It’s just a question of mobilizing those balances that are sitting elsewhere in the world and moving them back to London.”
That’s easier said than done.
In the first place, it’s going to require higher prices to clear the market.
Furthermore, according to Bloomberg, some traders are reluctant to move metal from New York to London.
“The logistics are complicated, particularly amid fears the government shutdown may slow down customs processes, and the London squeeze means that even one day’s delay could be punishingly expensive.”
Traders will undoubtedly be able to relieve some of the pressure by moving silver from New York to London. However, as long as demand remains elevated, there won’t be enough metal to go around. The higher price is attracting more investment interest and keeping demand elevated. Meanwhile, the dynamics driving precious metals prices generally higher, including de-dollarization, inflation worries, and global debt, aren’t going away any time soon.
And then there is the fundamental problem.
There isn’t enough metal.
And you can’t print silver.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
