The recent silver correction might have been the largest in history, yet it has not done much to reduce the interest in the metal. Instead of forcing traders out of their positions, demand for physical metal appears to remain intact.
However, the tension between the paper and physical market has to be resolved. Open interest declined from roughly 110,000 contracts in early December to about 76,000 in March. Still, that level is historically large enough to cause problems if too many holders demand physical delivery.
The price dynamics themselves have also created an unintended consequence. Lower prices, instead of easing stress on the system, tend to encourage buyers to accumulate more silver while it appears cheap.
As the Sirius report recently noted, when a commodity is already in shortage, pushing prices down simply prompts more participants to “pile in and buy as much as they can because it’s even cheaper.”
Furthermore, with assets like equities, commodities, and crypto moving down in lockstep recently, Sirius Report warns of a lack of options to reduce margin.
“In the past, if somebody needed a margin call in equities, they would just sell a bunch of contracts in silver. They would use that as a conduit to be able to get cheap money on the quick,” they pointed out, explaining how that is no longer possible owing to strong physical demand.
The 100 Pizza Problem
This behavior has contributed to a steady drain from exchange vaults. Recent depository data shows millions of ounces leaving COMEX storage in just a single session, with total inventories continuing to slide.
Former investment banker Felix Prehn argues the issue is becoming acute ahead of the next major delivery cycle.
Total silver inventory numbers often include both “registered” metal—available for delivery—and “eligible” metal, which belongs to private owners and cannot be used unless they choose to sell. Prehn warns that the difference between registered and eligible is enormous.
According to his calculations, the COMEX currently holds about 400 million ounces, but only 103 million ounces of registered silver are available for delivery. Furthermore, registered inventory is down 70% since 2020.
“It’s like having 100 pizzas and 400 very hungry people showing up for dinner,” he says, warning that the math doesn’t work if a significant share of contract holders request physical metal.
The critical date is February 27, the first notice day for March delivery. On that day, traders must declare whether they intend to take physical silver rather than cash settlement.
With vault inventories reportedly declining, even a modest demand could clear the remaining registered inventory. What happens then? That’s a question numerous market participants will try to answer over the next 3 weeks.
Price Watch: Sprott Physical Silver Trust (NYSE:PSLV) is up 5.37% year-to-date.
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