Deconstructing silver’s spectacular move: Short squeeze, supply crunch, global price divergence

The breakout

Silver had already been firmly in the spotlight for weeks; Friday 26 December was when that focus culminated in a violent squeeze during a thin post-holiday session, carrying spot XAGUSD to intraday highs just under $80/oz.

On the day, spot silver opened near $72, traded through $79, and closed at $79.57, finishing up 9.6%. As of 26 December, silver was up roughly ~172% year-to-date, versus around ~71% for gold. The gold–silver ratio had compressed to below ~57:1, down from above 100:1 earlier in the year.

This was not marginal outperformance. 

It was a repricing.

Silver had momentum into year-end. Volatility was elevated. Positioning was already stretched. On Friday, liquidity thinned and price moved faster than available depth.

East vs west: Physical markets lead

The move on 26 December did not originate in Western markets. It was the paper market reacting to signals already visible in the physical market.

In the days before Christmas, physical silver in Shanghai traded near $79/oz, while COMEX futures were still trading around $71 — an $8 premium, or roughly 11%.

That divergence matters.

Shanghai is a delivery market. Contracts settle in metal. Positions cannot be rolled indefinitely. When buyers stand for delivery, they receive bars. Pricing reflects the immediate cost of securing physical silver under local demand and China’s import constraints.

COMEX, by contrast, is a derivatives market. Most contracts are cash-settled, rolled, or closed before expiry. Pricing reflects leverage, hedging flows, and speculative positioning far more than immediate physical availability.

Under normal conditions, arbitrage keeps these markets aligned. But arbitrage requires inventory, logistics, and confidence in delivery. The persistence of that premium signalled that physical metal was not readily available to close the gap quickly.

This did not mean Shanghai was “right” and COMEX was “wrong”. It meant price discovery was occurring in the physical market, and paper pricing had to adjust.

With China and India accounting for a dominant share of global silver consumption, sustained physical premiums in the region matter. Western benchmarks cannot ignore them indefinitely.

Short squeeze mechanics

Silver has long carried concentrated short exposure among commercial participants. That concentration does not imply conspiracy — it is a structural feature of a small market intermediated by a limited number of large players.

As prices rose, shorts came under pressure, with losses mounting and margin requirements tightening into the December delivery cycle. Delivery interest increased at the same time, reducing flexibility on the short side.

Once that process starts, the mechanics are straightforward. Shorts cut exposure or source metal, price lifts, liquidity thins, and adjustment becomes reflexive.

Industrial demand matters here, not as a trigger, but as a constraint. A significant share of global silver consumption is industrial, where demand is relatively inelastic. Silver is a small cost component in solar, electronics, EVs, and data infrastructure, but it is difficult to substitute in the short term.

That inelasticity does not cause squeezes. It limits how quickly demand falls when prices rise. In a market already under positioning stress, that limitation matters.

Stress signals were clear

Several indicators pointed to stress in the system:

• Registered inventories on COMEX fell to multi-year lows (registered metal is available for delivery; eligible is stored but not committed)
  
• Silver lease rates spiked, indicating demand for metal now
  
• London tightness re-emerged in 2025 as inventories were drawn down and metal was moved into vaults to meet demand
  
• Backwardation appeared, with spot trading above futures — abnormal for silver and a sign that immediate delivery was being prioritised
  

These are physical stress markers pointing to a squeeze driven by genuine supply scarcity.

The structural supply deficit

The backdrop to the squeeze is a multi-year supply imbalance.

2025 is projected to be the fifth consecutive year in which global silver demand exceeds supply.

• 2025 demand (est.): ~1.12 billion ounces
• 2025 supply (est.): ~1.03 billion ounces
• Annual deficit (est.): ~95 million ounces
• Cumulative deficit since 2021 (est.): ~800 million ounces
  

That cumulative deficit is close to a full year of global mine production and has been met by drawing down inventories across major hubs.

On the supply side, mine production in 2025 is estimated around ~813 million ounces, essentially flat. Roughly two-thirds of silver is produced as a by-product, limiting how quickly supply can respond to price.

Recycling is estimated up around ~1%, insufficient to offset deficits. Supply remains inelastic in the near term.

Demand remains sticky

Industrial demand dipped modestly in 2025 and jewellery and coin demand softened under higher prices. Even so, total consumption still exceeded 1 billion ounces.

More importantly, key demand categories remain price-insensitive. Solar installations reached new records despite thrifting efforts. Electrification, AI, and data infrastructure continue to embed silver into systems where substitution is difficult.

Investment demand also surged. Silver-backed ETFs added roughly ~187 million ounces in 2025 (based on latest estimates), a rise of around ~18%, the largest inflows since 2020. These flows have been heavily retail-driven.

What happens next

The obvious question is whether this move has overshot, or whether silver is transitioning to a higher equilibrium. After a vertical squeeze like this, consolidation or sharp retracements would not be unusual. Silver remains prone to violent corrections. This changes the level, not the volatility.

That said, the backdrop differs from prior failed rallies. Monetary conditions are likely to ease rather than tighten, reducing the opportunity cost of holding non-yielding assets. Fiscal and geopolitical risks remain elevated. More importantly, the supply side is not resolving quickly. New mines take years to develop, and industrial demand tied to electrification and energy infrastructure continues to grow.

If the pricing gap between Eastern physical markets and Western paper benchmarks persists, market structure may have to adjust. That means sustained physical premiums, pressure on Western benchmarks, or structural re-routing of flows. 

Friday 26 December was not the end of a move.‍

It was the point where long-standing imbalances became visible. Whether silver pauses here or pushes higher, it is no longer trading as it did before. The market has shifted from debating whether silver should reprice to managing exposure in a market where it already has.

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