Silver’s Last Bailout

The silver market has long operated under a structure that allowed paper promises to substitute for physical metal. For decades, Western futures exchanges maintained a system in which the vast majority of contracts settled in cash, limiting the need for actual metal to change hands. That framework helped provide liquidity and flexibility, but it also created a mechanism through which supply pressures could be deferred rather than resolved.

 

The question now is whether that mechanism is approaching its limits.

A useful starting point is the September 2020 settlement involving JP Morgan, which agreed to pay $920 million to resolve allegations related to precious metals market spoofing. More recently, the bank closed out a reported 3.17 million-ounce silver short position shortly before silver prices accelerated from roughly $73 to more than $120 per ounce. This part was simultaneous with the removal from registered silver earmarked for delivery to China.

While the timing has attracted attention, the broader issue extends beyond any single institution. The focus today is increasingly on the changing relationship between paper silver markets and the physical market itself.

For much of the modern era, the COMEX and London Bullion Market Association (LBMA) operated within a framework where most futures contracts settled financially rather than through delivery of metal. Estimates commonly place cash settlement rates near 90% of outstanding contracts.

The Shanghai Futures Exchange (SFE), by contrast, developed around a different model. Physical metal must be available to satisfy delivery obligations, creating a tighter connection between futures activity and underlying inventory.

This distinction has become increasingly important as physical demand has accelerated.

Delivery Demands Reshape the Market

The defining development in silver over the past year has been the rapid growth in physical delivery requests.

COMEX deliveries totaled approximately 203 million ounces during 2024. By 2025, that figure had risen to roughly 474 million ounces. The trend continued into 2026, with approximately 165 million ounces delivered during the first quarter alone.

At the same time, inventories have been drawn down significantly. According to the figures cited in the source material, COMEX silver inventories have fallen by roughly half since October 2025.

The result has been persistent tightness throughout the physical market and recurring episodes of backwardation, a condition where near-term metal commands a premium over future delivery.

Historically, backwardation in precious metals has tended to be episodic. The current environment has proven more durable.

The Growing COMEX-Shanghai Gap

One of the most notable features of today’s silver market is the widening price gap between Western exchanges and Shanghai.

An arbitrage spread of roughly 11% has emerged between COMEX and the Shanghai Futures Exchange. Under normal market conditions, such discrepancies tend to attract traders who quickly close the gap through cross-market transactions.

The persistence of the spread suggests that underlying market conditions may be preventing the normal balancing process from functioning efficiently.

The existence of a sustained premium in Shanghai reflects stronger demand for immediately available metal and raises questions about the availability of deliverable supply within Western markets.