Has the silver market squeeze officially begun?

In today’s issue:

• Silver shifting to New York due to price gaps and tariff uncertainty
• Lease rates surging, signalling tightening supply and strong demand
• London’s silver stocks strained, risking defaults on paper silver contracts

Last week, I reported on the alarming rate at which silver is moving from London’s bullion vaults to New York warehouses.

This trend hasn’t slowed down – by all accounts, it’s intensifying. But now, there are even more signals flashing red. This suggests that the physical silver market is experiencing significant strain.

One of the clearest indicators of mounting pressure is the sudden spike in silver lease rates. On Tuesday, the one-month lease rate for borrowing silver in London nearly doubled overnight to a staggering 6.5% per annum, according to BullionVault.

If you’re unfamiliar with lease rates, think of them as the interest rates charged to borrow physical silver. When these rates climb sharply, it’s a telltale sign that physical metal is becoming increasingly scarce.

According to Bruce Ikemizu, formerly of Chinese bank ICBC Standard’s Tokyo branch and now head of the Japanese Bullion Market Association, “6.5% for silver is almost at a level that could be called a squeeze. I think there is a good possibility that the price of silver will jump in the future.”

Spot prices and arbitrage opportunities

Silver’s price action seems to support his prediction.

On Wednesday, spot silver prices surged to $32.54 per ounce, briefly surpassing the mid-December high of $32.33, before pulling back. However, there remains a stark price discrepancy between London and New York.

London silver bullion is trading around $1 per ounce lower than New York’s most active silver futures contract. This price gap, known as an arbitrage opportunity or “arb,” is encouraging banks, dealers and brokers to continue shifting silver from London to New York, where they can fetch a higher price.

Of course, price differences alone don’t explain the entirety of this shift. There’s another significant factor at play: uncertainty surrounding potential US tariffs on silver imports.

The impact of US tariff uncertainty

The US silver market is currently clouded by the prospect of new tariffs. President Donald Trump recently sparked fears of a trade war by proposing 25% tariffs on Canadian and Mexican imports – only to later put those plans on pause. But even this uncertainty has been enough to send ripples through the silver market.

Traders, wary of potential trade restrictions, have been rushing to close out short positions on the CME (Chicago Mercantile Exchange). This has amplified demand for physical silver, pushing premiums higher and causing spot silver to enter a rare state of backwardation.

In a normal market, futures prices tend to be higher than spot prices to account for storage and carrying costs. But when backwardation occurs, the opposite happens: spot prices outpace futures prices, signalling strong immediate demand for physical metal.

Jonathan Butler, head of business development and strategy at Mitsubishi’s precious metals division, explained the situation succinctly: “Metal for immediate delivery has been so in demand that short-dated forward rates have moved into a rare backwardation, pushing lease rates higher.”

The problem of supply constraints

In 2024, the US imported 4,200 tonnes (135 million ounces) of silver, according to the US Geological Survey. Historically, about 44% of US silver imports have come from Mexico and 17% from Canada. That means nearly 82 million ounces of annual silver imports could be affected if tariffs were imposed.

Here’s where things get tricky. Unlike gold, silver mining is primarily a byproduct of other metal production – mainly copper, lead and zinc. This means that global silver supply cannot respond rapidly to price spikes or shifts in demand. Even if silver prices surge, mining companies can’t just ramp up production overnight to meet new demand.

If US tariffs make Canadian and Mexican silver more expensive, buyers will have to look elsewhere. But because new supply cannot be generated instantly, the most likely outcome is an even more aggressive drawdown of London’s already stretched silver vaults.

London’s silver stocks are running on fumes

London’s silver vaults are already under pressure, and the current squeeze is only making things worse. Even before this latest surge in demand, available stockpiles were critically low. Most of the silver in London vaults isn’t freely available for delivery – it’s tied up in investment holdings, exchange-traded funds (ETFs) or backing large-scale industrial contracts.

To make matters worse, the London silver market operates on a fractional-reserve basis. This means that there are significantly more paper silver contracts circulating than there is actual physical silver available.

Estimates suggest that between 4 and 6 billion ounces of fractionally backed silver promissory notes have been issued in the London cash/spot market.

This creates a precarious situation: if more market participants start demanding physical delivery instead of settling in cash, we could see defaults. Some traders are already scrambling to lease silver to meet obligations, and the surging lease rates suggest they’re struggling to find the necessary metal. Simply put, there isn’t enough available silver to go around.

Are we on the brink of a silver price explosion?

With demand soaring, supplies tightening and lease rates spiking, all the ingredients for a silver price explosion are in place. If this squeeze continues, silver could be primed for a significant breakout in the near future.

Historically, when lease rates spike to these levels, it signals that a major move is coming. In past instances of extreme physical tightness, silver prices have reacted violently, with rapid gains in short periods. The fact that London’s vaults are already stretched thin only adds fuel to the fire.

As silver continues to flow out of London and into New York, the question isn’t so much whether a squeeze is happening – it’s whether it’s about to reach a breaking point. If traders continue demanding delivery at these unprecedented rates, we could soon see a scramble for physical silver unlike anything in recent memory.

The silver market squeeze appears to be unfolding, potentially on the verge of gaining momentum. The only question left is: how high will prices go before the pressure eases?

Buckle up – the silver rush is on.

Until next time,

James Allen
Contributing Editor, Fortune & Freedom