Silver keeps rising

It's hard to see how this train stops.

Good Evening Team.

While I am sort of on holiday, it’s a bit hard to ignore what’s going on in the metals markets. The kind of moves being made are those I’ve been calling for, for years now.

Remember when I took you down the rabbit hole on gold back in February? When COMEX vaults were being stuffed with tons from London, and I speculated — wildly, perhaps — that someone was preparing to bring back the gold standard?

Gold is now above $4,500.

But today, we’re not talking about gold. We’re talking about silver.

The textbook explanation for silver’s >170% move this year goes something like this: solar panels need silver, China’s restricting exports, supply is tight, therefore price goes up.

Clean.

Simple.

Boring.

Except the actual mechanics of what’s happening are far more interesting — and far more alarming — than supply and demand.

What we’re witnessing is a full-scale fracture between paper silver and physical silver. The same dynamic I outlined with gold in February, except silver has a ticking time bomb attached: industrial users who need the metal and can’t wait.

You see, in a functioning market, arbitrage opportunities disappear within seconds. If gold trades at different prices in London and New York, traders immediately buy cheap, sell expensive, pocket the difference, and prices converge.

This is Market Making 101.

Here’s what’s happening in silver over the past few weeks: Shanghai is trading at $77-91 per ounce, COMEX in New York sits at $71-80 and Dubai is at $91. That’s a $6-20 spread on a commodity with known shipping costs of maybe $1-2 per ounce.

This spread is just sitting there.

The arbitrage should be simple: buy silver on COMEX, ship it to Shanghai, sell at $85, collect your profit minus $2 shipping. Rinse and repeat until the spread closes.

But it’s not closing.

Why? Because when you try to pull physical metal out of COMEX to ship East, you’re discovering something uncomfortable.

There isn’t enough metal to move.

This is the same playbook as gold. Except worse.

COMEX operates on a fractional reserve system. This is not a conspiracy theory — it’s how futures markets work by design.

The number of paper silver contracts outstanding, what’s known as open interest, represents roughly 300 times more silver than physically exists in COMEX vaults.

Normally this doesn’t matter. Most traders close positions before expiration with maybe 1-2% demanding physical delivery.

But what happens when that percentage ticks up?

In December alone, 60% of registered silver was claimed for delivery in the first four days. Four days.

Let me put that in context: COMEX registered silver inventories have been drawn down to multi-year lows. Meanwhile, open interest — the number of outstanding contracts — keeps climbing.

More people are betting on silver.

Fewer ounces are available to deliver.

This is a classic bank run. Except instead of depositors lining up outside Northern Rock, it’s Samsung and solar manufacturers lining up at COMEX saying ‘we need physical metal, and we need it now.’

Gold’s value is primarily monetary. If you can’t get physical gold today, you can probably wait a few weeks.

Central banks can be patient.

Silver is different.

Roughly 75% of silver production comes as a byproduct of copper and zinc mining. You can’t just mine more silver if prices go up. You to justify more copper mining, which might produce more silver as a side effect.

This means silver supply is structurally inelastic in the short term.

Meanwhile, demand is exploding. Solar panels consumed 290 million ounces in 2024, with projections of 450 million ounces by 2030. Samsung is signing multi-year deals directly with miners to secure supply for EVs.

Silver is the best conductor of electricity on the periodic table, and there is no substitute for many electronics applications.

And then there’s the AI factor. Altman is calling random companies begging for electricity. Data centres are installing aircraft engines to avoid grid connection delays because they can’t wait for traditional hookups. Every AI query needs electrons.

The marginal electron increasingly comes from solar.

And solar needs silver.

The AI electricity demand chain is only just beginning, and it leads directly to silver.

For the past five years, industrial demand has exceeded newly mined supply. Industry has been consuming above-ground inventories (the silver sitting in vaults and warehouses). Those inventories are now critically low.

And on 1 January China is implementing export licensing requirements on silver.

Remember what happened to antimony and tungsten? Called those too.

China is the world’s second-largest silver producer. They also refine much of the world’s silver ore — meaning raw material from other countries gets shipped to China for processing.

Early estimates suggest approximately 25% of China’s 140 million ounces of annual exports, roughly 35 million ounces, will be restricted.

In isolation, 35 million ounces doesn’t sound catastrophic. Global silver demand is over 1 billion ounces annually.

But markets don’t work in isolation. When inventories are already tight and everyone knows a major supplier is restricting exports, behaviour changes.

Industrial users start hoarding. Just-in-time inventory management goes out the window. Samsung isn’t waiting to see if they can buy silver next quarter at a reasonable price — they’re locking in multi-year supply agreements today.

This is the same psychology that caused toilet paper shortages during the pandemic. Except this time it’s a critical industrial metal with no easy substitute.

While COMEX plays games with paper contracts, the London OTC market— where actual physical silver changes hands between bullion banks, refiners and industrial users — is screaming.

The London forward curve is in deep backwardation.

What’s backwardation? It means the market is paying you more for silver today than for a promise of silver in the future. Spot price is higher than forward prices.

This is not normal. Commodities typically trade in contango — future prices higher than spot, because there’s a cost to store and finance inventory.

When a market inverts into backwardation, it’s signalling stress. It means people need metal now and are willing to pay a premium for immediate delivery.

A year ago, the London curve showed $29 spot rising to $42 in forward months. Normal contango. Today it shows $80 spot falling to $73 forward. Inverted.

Meanwhile, COMEX paper sits in lazy contango, pretending everything is fine.

The 1-year silver swap remains deeply negative. Everyone wants physical silver. Nobody wants paper. This is the clearest tell that something fundamental has broken.

Three markets are telling three different stories. COMEX paper says everything’s fine, just normal commodity trading. London physical says we need metal NOW and will pay up for it. Shanghai physical says we’ll pay $10-15 premiums over COMEX because paper prices are fiction.

When physical markets diverge from paper markets like this, history is clear: paper eventually reprices to physical reality, not the other way around.

Worse yet, consider the commodity-monetary angle. Normally, commodities exhibit downward-sloping demand curves. Price goes up, demand goes down.

Silver is doing the opposite.

SLV, the largest silver ETF, is seeing increasing inflows as the silver price rises. Investment demand is going up alongside price. After years of outflows, suddenly everyone wants exposure.

The higher the price, the more people want it. This isn’t industrial demand — industrial users don’t want higher prices. This is monetary demand.

Typically, gold exhibits this characteristic. Bitcoin exhibits this characteristic. Currencies exhibit this characteristic.

But copper doesn’t. Oil doesn’t. And corn doesn’t.

When a commodity starts behaving like money, the normal rules stop applying.

The ETF flows confirm it: Western investors are finally waking up to what Eastern physical buyers never stopped knowing.

According to the latest CFTC data, commercial traders — the big institutions, the bullion banks, hedge funds and market makers — are net short approximately 275 million ounces of silver.

The ‘smart money’ that’s supposed to provide liquidity to futures markets is collectively short almost 10% of global annual silver production.

In a normal market, this is fine. Commercials hedge and prices mean-revert.

But what happens when physical supply is tight, delivery demands are spiking, and Shanghai is paying $15 per ounce premiums over your short position?

You get squeezed.

The Hunt Brothers in 1980. The 2011 spike. Every silver squeeze in history has ended the same way: commercials get caught short, scramble to cover, and prices spike until someone changes the rules.

And here’s the kicker: speculative positioning isn’t even crowded yet.

Silver specs are net long just 19% of open interest. Gold specs? 31%. Despite silver’s massive outperformance, there’s still room to run from a positioning perspective.

The fuel hasn’t been exhausted. Most of the demand is physical, not speculative leverage.

Which brings us to the playbook COMEX always reaches for when things get uncomfortable.

Margin hikes.

Here’s how it works in layman’s terms(though if you don’t know the basics, this Substack may be too high risk for you):

COMEX increases the capital required to hold a futures position.

If you’re trading on leverage, which most futures traders are, you suddenly need more cash in your account. If you don’t have it, you’re forced to liquidate.

In 2011, COMEX raised silver margins five times in nine days. Margins went from 4% of notional, which allowed 25x leverage, to 10%, which allowed 10x leverage. The leverage collapse triggered forced liquidation, and silver crashed from $49 to $26 in weeks.

Should you be scared?

Well, we’re already at 17% of notional. That’s six times leverage. We’re already tighter than the worst point of 2011.

The margin kill switch has already been pulled.

In 2011, margins started at 4% and went to 10% — a 2.5x increase that flushed out degenerate leverage. Today, we’re starting at 17%. Another hike to 20% isn’t going to trigger a 2011-style liquidation cascade.

What it does is hit the hedgers. The producers trying to lock in prices and the refiners managing inventory risk.

Push margins too high, and you don’t get forced liquidation. You get reduced liquidity, wider spreads and commercials migrating to OTC markets.

The playbook that worked in 2011 doesn’t work the same way today. The market structure has changed.

This is the other bear case I keep seeing:

‘They’ll just switch to copper.’

Let’s price it properly.

Solar panel manufacturers can substitute copper for silver in their production process. The economics are compelling: at current prices, conversion payback is about 1.5 years.

CFOs should be tripping over themselves to sign off on this.

And yet: conversion takes 4 years minimum to reach 50% copper adoption.

Why? Because money doesn’t change physics. There are 300 factories globally making solar cells. Converting each factory to copper plating will take around 18 months. Engineers need training, paste formulations need qualification and supply chains need rebuilding.

Solar manufacturers have already absorbed a 3x move in silver prices and kept buying. At $28 per ounce, the 2024 average, the industry made $31 billion in profit. At $79 per ounce today, profits are down to $16 billion.

The breakeven — where solar manufacturing becomes unprofitable — is somewhere between $100 and $150 an ounce.

Meanwhile, the industry is actually shifting toward panel technologies, specifically TOPCon and HJT, that use more silver per watt, not less. The weighted average intensity is projected to increase from roughly 13.5 milligrams per watt in 2025 to 15.2 milligrams per watt by 2030.

The bears are talking about copper substitution. The industry is adopting technology that increases silver intensity.

Users seeing the supply crisis are securing multi-year agreements now, not waiting to see how things develop. And investors who missed the 170% move are piling in, exhibiting the same behaviour we typically see in monetary assets.

Commercial shorts sitting on 275 million ounces underwater need to be covered. That’s not a slow process when physical is tight.

And even if solar manufacturing profits drop to zero - and we see demand destruction - that doesn’t mean the silver rally ends there.

Solar panel prices rise. Higher prices slow adoption. Solar becomes less competitive versus fossil fuels.

And in fossil fuels, years of underinvestment will be exposed.

Oil and gas prices recover - but we could also see a short-term energy crisis. Which drives oil higher. Which drives natural gas higher. Which drives coal higher.

And then the industrial metals complex reprices because you need copper for everything, aluminum for everything and steel for everything.

And silver simply keeps rising with everything else.

But what about recycling? Surely at $80, recycling will flood the market with supply?

Will it?

Let’s think about where recycled silver comes from. Electronics contain silver, but the amounts are tiny and expensive to extract. Not economical at $80, not economical at $150. Medical devices are single-use and too small to recycle. Solar panels have a 20-year lifecycle.

The panels installed in 2024 won’t be recycled until 2044. Automotive applications might yield some silver, but we’re talking small amounts per vehicle.

That leaves silverware and coins.

Except much of that was already turned in during the 1980 spike when silver hit $50 and the 2011 spike when it hit $49.

What’s left is sitting in a refinery backlog. There aren’t enough silver refiners to process the material that’s already in the queue. Refineries are operating at capacity with multi-month backlogs. It will take years for recycled supply to meaningfully contribute.

New mines? Silver is 75% byproduct. You want more silver, you need more copper mining. Even then, it takes years to bring new mines from exploration to full production.

And here’s a fun detail: Citadel and other large funds have fucked themselves, having made a habit of shorting silver juniors, making funding extremely difficult.

Even if miners want to expand, accessing capital has been deliberately constrained.

Meanwhile, manufacturers are signing multi-year supply agreements directly with miners, locking up future production before it even comes out of the ground.

The supply response everyone is counting on? It’s not coming. Not fast enough, anyway.

Let me briefly sum up:

• We have a physical shortage. Five straight years of deficit, with industrial users consuming above-ground inventories and vaults at multi-year lows.

• We have a paper disconnect. Shanghai trading $10-20 premiums over COMEX, with arbitrage not closing because there isn’t enough metal to move.

• We have China export restrictions. Roughly 35 million ounces potentially offline starting 1 January, causing psychology to shift from just-in-time inventory management to hoarding.

• We have commercial shorts underwater. 275 million ounces net short while physical supply tightens is a classic squeeze setup.

• We have speculative positioning that’s still light. Only 19% of open interest net long despite the massive move, compared to 31% for gold.

• We have price up, demand up movements. Monetary characteristics appearing in silver ETFs as Western investors finally wake up.

• We have London backwardation. The physical market begging for immediate delivery at premium prices, with the 1-year swap deeply negative.

• We have margin hikes that hit hedgers more than speculators because the leverage has already been flushed from the system.

• We have a substitution timeline that takes 4 years minimum for copper conversion, meaning silver can move faster than factories can adapt.

• We have >$100 accelerating toward us faster than expected as industrial hoarding combines with investment FOMO.

This is a genuine supply crisis meeting a fractional reserve paper market.

And it’s starting to break.

The Gold-Silver Question

Which brings me to the uncomfortable part.

Gold is above $4,500. In February, I speculated that the US might be preparing to return to some form of gold standard. That the massive flows of gold into COMEX vaults were deliberate.

If that thesis had any validity, then what’s happening in silver becomes very interesting through a different lens.

Is the silver rally organic, or is it a distraction?

Think about it: gold has moved 70%+ this year. But silver has moved 170%+.

If you’re a central bank or government trying to accumulate gold quietly, what’s the best way to do it?

Create a more exciting story somewhere else.

Let retail pile into silver. Let the financial media write breathless articles about solar panels and Chinese export restrictions and commercial short squeezes. Let everyone focus on the industrial demand narrative.

Meanwhile, gold continues its quiet march higher. Central banks continue buying at record pace. COMEX vaults continue filling with physical metal.

I’m not saying this is happening.

I’m saying it’s worth considering.

The other scenario: silver’s rally is entirely legitimate — a genuine supply crisis meeting inelastic demand. And gold is simply moving in sympathy, as it tends to do.

But what if the silver rally is designed to get people to sell gold for silver?

Gold is monetary metal. It’s the asset central banks hold. It’s the asset that matters if we’re moving toward a new monetary system.

Silver is industrial metal. It’s critical, yes. It’s scarce. But it’s not the foundation of the monetary system.

If you’re accumulating gold for strategic reasons, getting retail and even institutional players to rotate from gold into silver would be convenient.

Both markets are exhibiting the same physical-paper disconnect. Both markets have the same fractional reserve dynamics. Both markets are under stress.

But only one of them has governments and central banks as the primary buyers.

Think about that.

But let’s stick to silver for now.

Let’s game this out.

You’re running COMEX.

Silver is squeezing.

Physical demand is overwhelming paper supply.

What are your options?

The first is to increase margins further. This is the 2011 playbook— raise margin requirements until the leverage collapses and forced liquidation kills the rally.

The problem is we’re already at post-2011 margin levels. Further hikes hit commercials and hedgers more than speculators. You risk breaking the market’s functionality entirely. Limited effectiveness.

Can slow the rally but won’t stop a genuine physical shortage.

The second option is to impose position limits. COMEX can cap how many contracts any single entity can hold. This prevents whales from cornering the market or demanding massive physical delivery. They’ve already done this, see Rule 112, Notice MSN12-11-25. The problem is this works against coordinated manipulation, Hunt Brothers style. It doesn’t work against distributed demand from hundreds of industrial users all needing physical metal.

Addresses the wrong problem. Can’t stop genuine industrial demand.

The third option is cash settlement requirements. COMEX could simply change the rules: no more physical delivery, all contracts must settle in cash at expiration. This is the nuclear option. It would effectively admit that COMEX is a paper market disconnected from physical reality.

The problem is this would instantly destroy COMEX’s credibility as the global benchmark for silver pricing. If you can’t get physical metal, why trade the contract at all? Industrial users would migrate entirely to OTC physical markets or direct miner agreements.

The Shanghai price becomes the global benchmark. COMEX becomes irrelevant. Stops the squeeze but kills the market.

Pyrrhic victory.

The fourth option is emergency imports and vault stuffing. COMEX could coordinate with bullion banks and refiners to massively increase registered inventory. Fly in metal from London, Switzerland, wherever it can be sourced. This is what they did with gold in February when the tonnage came in from London.

The problem is where’s the metal coming from?

If vaults globally are tight, you’re just moving deck chairs. And with China restricting exports, there’s less available metal to move. Also, if you’re stuffing vaults specifically to prevent delivery defaults, you’re admitting there’s a problem — which creates more demand for physical delivery.

Buys time but doesn’t solve the structural shortage.

The fifth option is to coordinate with industrial users. COMEX could work with major industrial buyers like Samsung and solar manufacturers to stagger delivery demands and avoid concentrated squeezes.

The problem is why would industrial users trust this? If you need metal for production in Q1, you can’t wait until Q3 because COMEX asks nicely. Also, if manufacturers believe there’s a shortage, they’ll demand delivery immediately rather than risk waiting.

Requires trust that doesn’t exist when markets are stressed.

The sixth option is trading halts and circuit breakers. COMEX could implement aggressive circuit breakers — halt trading when prices move too fast in either direction. The problem is this just delays the inevitable.

When trading resumes, the physical shortage hasn’t gone away. If anything, halts increase panic because they signal the exchange can’t handle normal price discovery. Remember 27 November when CME halted commodity futures trading for ‘technical issues’ right as silver was breaking out?

The market saw through it immediately.

Optics disaster. Doesn’t solve anything, increases distrust.

The seventh option is the miner pump. Instead of defending the spot price directly, the powers that be could pump silver mining stocks.

If you can create a massive rally in silver miners, you achieve several things simultaneously.

You redirect capital flows.

Retail and institutional money piles into miners instead of physical metal or futures.

You relieve delivery pressure.

Less demand for physical means less strain on COMEX vaults. You create hedging opportunities. Miners hedge production forward, creating short positions that offset commercial shorts.

You buy time. Commercials underwater on shorts get breathing room to unwind positions.

Consider this the pressure release valve strategy.

The big banks could co-ordinate through their equity desks. Pump the mining sector, create headlines about ‘the real way to play the silver bull market,’ or get Cramer on CNBC saying ‘don’t buy silver, buy the miners for leverage!’

It’s worked before in other commodity cycles.

Pump the equities, take pressure off the underlying.

The problem is this only works temporarily. Mining stocks are ultimately leveraged bets on the metal price. If physical shortage persists, miners run out of metal to sell forward. The hedging breaks down. And when the equity bubble pops, all that capital flows back to physical.

But temporarily? It could give commercials a window to cover shorts and reduce exposure before the system breaks.

But bottom line, COMEX’s options are all bad.

What Happens Next?

Short term, expect volatility.

The bears will point to RSI indicators and say silver is ‘overbought’ and due for a crash below $50.

But that’s chart astrology. The fundamental story is changing.

If you believe the supply story, the drawdowns are buying opportunities.

If you think this is all speculation and the market will normalise, then you’re betting COMEX can somehow conjure 275 million ounces to cover commercial shorts while industrial users are hoarding and China has restricted exports.

Good luck with that.

If silver does push above $100 and solar manufacturing starts to become unprofitable, we’re not looking at an isolated commodity spike.

We’re looking at a repricing of the entire energy transition.

The kind we haven’t seen since the 2000s China infrastructure build. Except this time, there’s less spare capacity, less investment and more debt constraining the supply response.

Of course, I’m not your financial advisor. This is speculation, not advice.

But if you believe the physical shortage story, then drawdowns are buying opportunities. Focus on the curve, specifically backwardation, not the price. Watch Shanghai premiums as leading indicators. Expect extreme volatility in both directions.

If you think this is overblown, then you’re betting COMEX can solve a physical shortage with financial engineering.

If you think silver is a distraction from gold, then allocate accordingly. Watch central bank buying patterns more than price. Consider that the real story might be in what’s NOT being talked about. Remember that governments play long games.

If you think both markets are breaking, then diversify across physical, miners, and other real assets. Prepare for broader commodity repricing. Understand this could be the start of a multi-year supercycle.

Manage your risk because volatility will be extreme. COMEX could go nuclear at any time.

The only thing I’m confident about is this:

When paper markets diverge from physical reality at this magnitude, something has to give.

Either supply appears, which takes years, or paper reprices to physical, which can happen overnight, or the market structure changes through cash settlement or migration to OTC.

COMEX can change the rules. It can raise margins, impose limits, halt trading, pump miners or force cash settlement.

But it can’t create silver that doesn’t exist.

And that’s the whole game.