Silver futures broke through $117 on January 29, continuing a historic bull run with a 275% increase over the past year. Severe physical supply constraints are supporting this rapid surge. Exchange warehouse stocks cover only 14% of open futures contracts.
Inventory reduction, excessive commercial short positions, and abnormal backwardation rolling. These complex factors are triggering a typical short squeeze in real-time.
Warehouse inventory is under pressure
According to the latest CME warehouse inventory report dated January 27, the total silver holdings in COMEX-certified warehouses have decreased to 411.7 million ounces. Particularly important is the fact that the 'registered' inventory available for immediate delivery of futures contracts has decreased to 107.7 million ounces.
Registered inventory decreased by 4.7 million ounces in one day. The inventory has either been withdrawn from warehouses or moved to the 'eligible' category. Eligible inventory cannot be used for futures delivery.
The total open interest stands at 152,020 contracts (760 million ounces). The registered inventory only covers 14.2% of this entire open position. This means that even if some futures holders demand physical delivery, the exchange may face significant operational stress.
Commercial selling has led to an excess of physical supply
According to the CFTC's positions report from January 20, the strength of the short side pressure was revealed.
Commercial players, mainly consisting of banks and dealers, hold a short position of 90,112 contracts and a long position of 43,723 contracts. The net short position stands at 46,389 contracts, amounting to approximately 231 million ounces.
This net short position exceeds twice the deliverable registered inventory of 108 million ounces. If bullish buyers strongly assert their demand for physical delivery, the short side may be forced to procure physical supply in a tight market, leading to further price increases.
Backwardation and roll reversal indicate market tension
The silver market has continued in backwardation (where spot prices exceed futures prices) since early October. This market structure indicates that physical demand significantly outstrips supply, which is rarely seen in normal markets.
Analysts point out that there have been consecutive rollovers from the March and February contracts to the January contract. This unusual movement indicates that long holders do not wish to defer delivery and are seeking early delivery.
In January alone, 9,608 tons (48 million ounces) have been specified for physical delivery. This corresponds to nearly 45% of the currently registered inventory.
Headwinds in the solar power generation industry
The tight supply is also fueled by robust industrial demand. Silver currently accounts for 29% of solar panel manufacturing costs, a significant increase from 14% last year and 3.4% in 2023.
This surge has made silver the largest material in the manufacturing cost of solar power generation equipment, surpassing aluminum, glass, and silicon. Major Chinese manufacturers, such as Trina Solar and Jinko Solar, have warned investors of expectations for losses in 2025 and 2026.
In contrast, Longi Green Energy announced that it will start mass production of copper-based solar cells from the second quarter of 2026. However, industry analysts say that the transition to alternative materials will take years, so demand for physical silver is expected to remain extremely strong for the time being.
Gold remains relatively stable
On the other hand, there are no similar concerns in the gold market. The total COMEX gold warehouse inventory is 35.9 million ounces, of which the registered inventory is 18.8 million ounces. The open interest is 520,804 contracts (52.8 million ounces), and the coverage ratio is 35.7%, more than double that of silver.
Gold futures are trading in contango (where futures prices exceed spot prices) as usual. Inventory changes are also very slight.
Outlook
The structural supply shortage in the silver market has continued for five consecutive years, according to a report by the Silver Institute. The decrease in above-ground inventory shows no sign of stopping, lease rates have skyrocketed, and physical premiums have expanded worldwide. The groundwork for further price increases is in place.
However, it is necessary to note that such an overheated market carries a high risk of sharp adjustments if there are phases of profit-taking, or interventions such as position limits and margin hikes by exchanges.
