Is the silver squeeze about to get worse?

[SINGAPORE] Silver is flashing red hot signs of a supply squeeze with prices climbing back towards multi-year highs as surging borrowing costs, narrowing future spreads and entrenched structural deficits add fuel to the rally – a trend The Silver Institute expects to extend into a fifth straight year in 2025.

On top of tight supply, silver is getting a lift from steady demand in green industries such as solar and electric vehicles (EVs), while talk of Fed rate cuts, gold’s shine and the de-dollarisation buzz are all adding to the metal’s price momentum.

Silver hit a 13-year high of almost US$40 an ounce on Jul 23, before easing to about US$36 by the end of the month. It has since recovered to around US$38 an ounce, “partly piggybacking on gold’s strength and the relative resilience seen in base metals”, said Edward Meir, senior metals analyst at Marex.

“The silver market is experiencing notable signs of tightness,” said Christopher Wong, foreign exchange and rates strategist at OCBC. “On the physical side, supply remains tight while demand is broad-based – spanning industrial users, retail and institutional investors.”

Wong noted that the spread between August and December 2025 silver futures has narrowed, underscoring near-term scarcity relative to forward delivery.

Meanwhile, silver lease rates – essentially the cost of borrowing physical silver – have surged to over 6 per cent, a level that signals “severe tightness” in the market.

“On net, this combination of structural deficits, surging borrowing costs and narrowing futures spreads highlights genuine stress in the physical silver market,” he said.

Fragmented inventories also play a part in squeezing the physical market of silver.

“Silver is affected by a different kind of trade fragmentation – one driven more by logistical and financial constraints than by geopolitics,” said Patricio Faundez, practice leader of economics at Gem Mining Consulting.

“A large portion of US silver is held by exchange-traded funds and other financial instruments, effectively ‘trapping’ physical inventories within the country and disrupting the natural arbitrage between markets.”

This has caused divergent trends at key hubs. “Inventories at the London Bullion Market Association have fallen to their lowest levels this year, while the Commodity Exchange inventories in the US have reached record highs,” he added.

OCBC forecasts silver prices to reach US$39.70 an ounce by end-2025 and US$42 an ounce by mid-2026, reinforcing a bullish outlook underpinned by “structural demand drivers and market tightness”, Wong said.

Strong demand

While gold often steals the limelight in times of market stress, silver prices are also lifted by solid industrial use, given its dual role as both a precious and industrial metal.

Besides market tightness, a strong industrial demand for silver – particularly in solar panels, EVs and green technology – is further supporting its prices, noted OCBC’s Wong.

Despite significantly higher prices, silver demand across the industrial spectrum “remains decent and has yet to show signs of retrenching”, noted Marex’s Meir.

OCBC’s Wong said other drivers of the silver rally include expectations of Fed rate cuts, spillover effect of the gold rush, and a de-dollarisation narrative, adding to the bullish sentiment surrounding silver.

Shortfall persists, but may recover

Meir noted that “this year’s shortfall may not be as high as previous years” due to mining expansions in the US, Peru and India.

Still, legacy producers such as Mexico are facing declines. “Mexican silver production will be down this year due to lower output from the San Julian mine as that facility approaches its end-of-life,” he added.

Chinese output is expected to rise 1.3 per cent to 119 million ounces in 2025, while Peru is forecast to grow 2.4 per cent on new projects at Toromocho and Reliquias.

Meanwhile, investment flows remain healthy. “The Silver Institute estimates that 95 million ounces of the metal changed hands in exchange-traded products investments during the first half of 2025, already surpassing the total for all of last year,” said Meir.

Retail demand is more uneven. “European retail demand is stronger than it was in 2024, but still lags the highs made in 2020 to 2022,” he said.

“Indian retail investment demand was impressive through the first half of 2025, posting a 7 per cent year-on-year gain,” but that could slow in the second half.

In contrast, US retail interest has dropped sharply. “Overall US retail demand was down by a whopping 30 per cent so far this year.”

Meir remains “somewhat constructive on silver going into August”, pointing to strength in gold and a weaker dollar as potential tailwinds. He expects prices to range between US$35 and US$36 an ounce in the near term.

In the long term, with physical silver harder to borrow and the forward curve tightening, OCBC’s forecast suggests further upside, especially if investor flows return in force.

“This is not just a price rally,” Wong said. “This is a reflection of genuine stress and imbalance in the physical silver market.”

Beyond the visible supply-demand gap, some analysts point to strains between the paper and physical markets as another source of stress, said Ned Naylor-Leyland, investment manager at Jupiter Gold and Silver Fund.

“The scale of the synthetic derivatives market in silver is disproportionately large, relative to mine supply and available physical markets.”

Futures and options have set silver prices since the 1980s, he added. But if a big industrial buyer was ever unable to get the metal it needs, he warned, it could spark a scramble in the physical market and send both silver and mining shares sharply higher.