Silver futures soared above $117 on January 29, marking a historic rally of 275% over the past year. A severe shortage of physical supplies is causing the surge. Currently, warehouse inventory covers only 14% of the outstanding futures position.
The confluence of depleted inventories, large commercial short positions, and an unusual backward contract roll shows that a classic short squeeze is currently unfolding in real time.
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Warehouse inventory is tight
According to the latest CME warehouse inventory report dated January 27, total silver holdings in COMEX-approved vaults decreased to 411.7 million ounces. More importantly, registered inventories (the only metal available for immediate delivery against futures contracts) fell to 107.7 million ounces.
Registered shares lost 4.7 million ounces in one day. Metal has been withdrawn from storage or converted to eligible status. Eligible silver is not available for futures delivery.
Total open interest is 152,020 contracts (equivalent to 760 million ounces), with registered inventories covering only 14.2% of the outstanding paper claims. This means that exchanges could face severe operational stress if even some futures holders demand physical delivery.
Commercial short position exceeds deliverable supply
Data from the Commodity Futures Trading Commission’s (CFTC) Trader Commitment Report, surveyed on January 20, reveals the extent of short-side pressure.
Commercial traders (mainly banks and dealers) hold 90,112 short contracts against 43,723 long contracts. Their net short position totals 46,389 contracts, or approximately 231 million ounces.
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This net short position is more than double the 108 million ounces of registered silver available for delivery. If longs actively support physical settlements, short sellers will be forced to source the metal in an increasingly tight market, potentially accelerating price increases.
Backwardation and backward roll signal stress
The silver market has been in backwardation since early October, with spot prices exceeding futures prices. This price structure indicates that immediate physical demand exceeds supply, a condition that is rarely sustained in normal markets.
Analysts have observed futures contracts rolling back from March to January and from February to January. This unusual pattern suggests that long-term holders do not want to wait for a later delivery date.
In January alone, 9,608 contracts worth 48 million ounces were issued for actual delivery, representing almost 45% of current registered inventories.
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The solar power industry is feeling the pinch
The supply squeeze is further exacerbated by unrelenting industrial demand. Silver now accounts for a record 29% of the total production cost of solar panels, up from 14% last year, and will only account for 3.4% in 2023.
This surge has made silver the single largest cost component in solar power production, surpassing aluminum, glass, and silicon. Major Chinese manufacturers such as Trina Solar and Jinko Solar are warning investors about expected net losses in 2025 and 2026.
In response, Longi Green Energy announced that it would begin mass production of copper-based solar cells in the second quarter of 2026. However, industry analysts note that such alternative efforts typically take years to scale, and short-term demand trends are firmly tilted toward physical silver.
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Gold remains stable in comparison.
Gold, by contrast, shows no similar signs of stress. COMEX gold warehouse inventories total 35.9 million ounces, of which 18.8 million ounces are registered. With an open interest of 528,004 contracts (52.8 million ounces), the coverage ratio is 35.7%, which is more than double that of silver.
Gold futures remain in contango, a normal market structure where futures trade above the spot price. Daily inventory movements are minimal.
outlook
According to the Silver Association, the silver market is now in its fifth consecutive year of structural deficit, and above-ground stockpiles continue to dwindle. Conditions remain ripe for further price increases, with rising lease rates and widening in-kind insurance premiums across global markets.
However, traders should also be aware that such an expanded market is susceptible to sharp corrections if profit-taking accelerates or if exchanges intervene with position limits or margin increases.
