Image Source: The Wall Street Journal
The silver price has erupted, surging past $117 on January 29, marking an astonishing 275% increase over the past year. This dramatic rise is attributed to a significant supply crisis in the market, revealing a precarious situation for investors and traders.
The Unfolding Short Squeeze
Emerging reports indicate that the warehouse inventory for silver has dwindled alarmingly, with only 14% of outstanding futures positions covered by available physical metal. As per the latest report from the CME dated January 27, total silver holdings in COMEX-approved depositories fell to approximately 411.7 million ounces, while the registered inventoryâthe type available for immediate deliveryâdropped to 107.7 million ounces.
This shortage is leading to a perfect storm for a short squeeze, as investors and traders seek to capitalize on the conditions. Notably, the registered stocks fell dramatically by 4.7 million ounces in just one day, forcing metal either out of vaults or into eligible status, which is not deliverable against futures contracts.
Pressure on Commercial Short Positions
The surge in silver prices is compounded by an alarming discrepancy between commercial short positions and the supply available for delivery. Data from the Commodity Futures Trading Commission (CFTC) revealed that commercial traders hold 90,112 contracts short against only 43,723 long. This net short position translates to approximately 231 million ounces, which is more than double the registered silver available.
If holders of long positions demand physical delivery, short sellers may struggle to obtain the metal in such a tightening market, causing prices to potentially spike even further.
Backwardation Signals Stress in the Market
The silver market remains in a state of backwardation, wherein spot prices exceed those of futures prices. This situation indicates immediate physical demand is exceeding supply, a rare occurrence in stable market conditions. Analysts have also noticed an unusual pattern where futures contracts are rolling back to earlier delivery dates, suggesting long holders are hesitant to wait.
In January alone, nearly 48% of the current registered inventory has been scheduled for physical delivery, a concerning figure that highlights the increasing pressure on the market.
Solar Industryâs Demand For Silver
The situation is exacerbated by soaring demand from the solar industry, where silver is becoming the most significant cost component of photovoltaic production. This year, silver costs accounted for 29% of total solar panel production, skyrocketing from just 3.4% in 2023. Major manufacturers, including Trina Solar and Jinko Solar, have started warning against potential net losses due to these climbing prices, amplifying the urgency in supply concerns.
Longi Green Energy has announced plans to mass-produce copper-based solar cells, but industry analysts note that transitioning to these alternatives could take several years, emphasizing that short-term demand drivers will continue to favor physical silver.
Whatâs Next for Silver Prices?
While the gold market remains stableâwith COMEX gold stocks standing at 35.9 million ounces and a greater coverage ratio at 35.7%âthe outlook for silver continues to lean toward further increases. The structural deficit in the silver market, which has persisted for five consecutive years, is drawing down existing stockpiles and creating conditions ripe for continued price appreciation.
As more investors look closely at the silver price, one thing remains clear: while the potential for sharp corrections exists, especially with interventions from exchanges, the ongoing supply demand imbalance could keep driving prices upward in the near term.
Frequently Asked Questions
What factors are driving the recent rise in silver prices?
The recent rise in silver prices is primarily due to a supply crunch in the market, declining warehouse inventories, and increased demand from the solar industry.
Why is there such a disparity between registered silver and short positions?
Commercial traders are holding significant short positionsâover 231 million ouncesâwhile registered silver available for delivery is only around 108 million ounces.
How does backwardation affect the silver market?
Backwardation indicates that buyers are willing to pay more for immediate delivery than future contracts, signaling a high demand for physical silver compared to what is being supplied.
What could be the impact of the solar industry on silver prices?
With silver becoming a critical component in solar panel production, increased demand from this sector could exacerbate supply issues, further driving up silver prices.
Should investors be concerned about a price correction?
Yes, traders should remain cautious, as significant price corrections can occur if profit-taking accelerates or if exchanges implement limits or margin hikes due to the current market pressure.
