Historic short squeeze in London silver, market liquidity has nearly completely dried up!

The London silver market is experiencing rare turmoil not seen in decades. An unprecedented "short squeeze" is sweeping through this century-old precious metals trading hub, driving silver prices to soar above $50 per ounce—reaching this level for the second time in history, and reminding the market of the 1980 incident when the "Hunt brothers" attempted to manipulate the silver market.

Latest data shows that the London spot silver price has reached unprecedented premium levels relative to New York futures, with market liquidity nearly dried up. Traders holding short positions are struggling to find deliverable metal and are forced to pay high costs to delay settlement. Some institutions have even chartered cargo space on transatlantic flights to airlift heavy silver bars—this expensive operation is typically only used for transporting gold bars—to profit from the premiums in the London market. Anant Jatia, Chief Investment Officer of Greenland Investment Management, exclaimed:

"I have never seen anything like this before. What we are seeing in the silver market is completely unprecedented, and there is almost no liquidity in the market right now."

London has been the global pricing center for precious metals for a century, with its market operations relying on a few banks and a limited number of vaults within the city. At the end of each trading day, armored vehicles shuttle back and forth to transport metals for delivery. However, this mechanism has now been completely disrupted.

From Safe-Haven Funds to Indian Demand, Multiple Factors Intensify London Market Liquidity Crisis

Analysts point out that this squeeze is not a "modern-day Hunt brothers conspiracy," but rather the result of multiple forces converging.

First, global investors have been pouring into gold and silver recently, hedging against the rapid rise in U.S. debt, fiscal deadlock, and currency devaluation risks. Meanwhile, the unique supply-demand tension in silver has exacerbated market volatility.

Second, the surge in investor buying coincided with a sudden increase in demand from India this month. According to Daniel Ghali of TD Securities, Indian buyers had previously sourced silver from Hong Kong but shifted their purchasing channels during the "Golden Week" holiday. An Indian ETF even suspended new investments on Thursday, citing domestic shortages.

Additionally, traders are concerned that the U.S. may impose import tariffs on silver, triggering a trend of metals being shipped out of the U.S. market ahead of time, further driving up the spot premium in London.

The London Bullion Market Association stated in its latest announcement that it is "aware of the tight conditions in the silver market and is actively monitoring the situation." The association represents banks, refiners, and logistics companies, whose activities constitute the London market.

Inventory Plummets: London Silver "Free Float" Shrinks by 70%

The liquidity of the London silver market relies on hundreds of millions of ounces of metal stored in local vaults. However, these inventories have been continuously drawn down in recent years:

• Insufficient mineral supply cannot meet investment and industrial demand (especially in the solar industry),
• ETF holdings continue to rise, locking in physical silver in the market,
• Increased exports to the U.S. have intensified the tightness of available inventory in London.

London's silver inventory has decreased by one-third since mid-2021, a significant portion of which is held by exchange-traded funds. Meanwhile, according to Bloomberg data, since mid-2019, the freely available silver inventory in the London market has plummeted from 850 million ounces to only about 200 million ounces, a decline of up to 75%.

Short squeeze escalates: borrowing costs soar, premiums hit record highs

As the short squeeze escalates, silver prices have broken multiple records in the past two days.

The London silver price auction—daily pricing activity held since 1897—broke through $50 for the first time on Friday. The premium of London spot prices relative to New York futures reached as high as $3, a level previously seen only during the Hunt brothers' squeeze.

The overnight borrowing cost for silver in London has annualized over 100%, with at least one market veteran believing this is higher than any level during the 1980 squeeze.

Former precious metals trader and JP Morgan Managing Director Robert Gottlieb stated:

"Banks are unwilling to quote each other, leading to extremely wide bid-ask spreads. This has created a significant liquidity shortage."

Airlifting silver bars, transoceanic arbitrage

During the 1980 "Hunt brothers incident," exchanges ultimately ended market manipulation by restricting new positions and forcing liquidations. Today, however, there is no "one-click reset" mechanism.

The current relief path is to bring more physical silver back to London: including ETF investors or holders selling, or shipping physical silver from overseas.

An executive from a logistics company stated that he has received increasingly urgent calls from clients over the past week seeking to withdraw silver from New York Comex-related vaults and airlift it to London. He estimates that traders are currently seeking to transport about 15 million to 30 million ounces of silver from New York to London. On Friday, Comex saw the largest single-day silver withdrawal in over four years.

Joseph Stefans, trading director at one of the world's largest precious metals refiners MKS Pamp SA, stated:

"Silver will naturally flow back to London, hoping for normalization. The question is how to mobilize stock from other parts of the world and transport it back to London."

Morgan Stanley strategist Amy Gower pointed out:

"If silver were tariff-free, it might alleviate U.S. metal demand and ease some of the tightness in London. High prices often resolve these issues in the short term."

Risk warning and disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk