The silver market has recently experienced one of its most significant price corrections ever, yet unlike typical market reactions, this sharp downward movement has not dampened enthusiasm for the metal among investors and traders. On the contrary, demand for physical silver appears resilient and continues to hold steady, signaling a persistent confidence in the metal's intrinsic value despite the price retreat.
Underlying this dynamic is a notable divergence between the paper silver market — represented by futures contracts on exchanges — and the physical silver market where actual metal is bought and stored. Open interest, which measures the total number of outstanding silver futures contracts, has fallen from approximately 110,000 contracts in early December to around 76,000 contracts as of March. While this is a significant decline, it remains a substantial level historically capable of precipitating logistical issues if a large number of holders simultaneously seek physical delivery of silver rather than settling in cash.
Interestingly, the downward pressure on silver prices has had an unexpected effect. Rather than relieving pressure on physical inventories by discouraging buyers, lower prices have incentivized participants to accumulate additional physical silver. This behavior aligns with observations made in a recent Sirius report, which noted that when a commodity is in short supply, price reductions often prompt more buyers to enter the market and purchase as much as they can afford while the metal is perceived as more affordable.
The interconnectedness of various asset markets also plays a role. Recently, equities, commodities, and cryptocurrencies have moved downward in unison, reducing the typical avenues for traders to meet margin calls. Historically, silver contracts acted as a convenient instrument for quickly raising cash through sales to meet margin requirements in other markets. With physical demand for silver now strong, this mechanism is no longer as accessible, further complicating market liquidity.
This persistent accumulation of physical silver has manifested in pronounced withdrawals from exchange vaults. Depository data indicates that millions of ounces have left COMEX storage facilities within a single session recently, contributing to a continuous decline in total silver inventories held on the exchange.
Felix Prehn, a former investment banker with expertise in commodity markets, has highlighted the gravity of this issue as the forthcoming delivery cycle approaches. Silver inventories are often classified into two categories: "registered" silver, which is eligible and available for delivery against futures contracts, and "eligible" silver, which belongs to private owners and cannot be employed to fulfill delivery obligations unless those owners decide to sell.
Prehn estimates that while COMEX holds roughly 400 million ounces of silver overall, the amount of registered silver available for delivery is a fraction of that total — approximately 103 million ounces. More alarmingly, the registered inventory has plummeted by about 70% since 2020. To illustrate the disparity between supply and demand, Prehn uses an analogy: "It's like having 100 pizzas for 400 very hungry people. The math simply doesn't add up if a significant portion of contract holders demands physical silver."
The market is now closely focused on February 27, the first notice day for March silver deliveries, a date by which contract holders must indicate whether they intend to take physical delivery of silver or opt for cash settlement. Given the ongoing erosion of inventories held in exchange vaults, even a modest uptick in physical delivery requests could exhaust the available registered silver.
The outcomes of this situation remain uncertain and are the subject of intense analysis among market participants. Over the next three weeks, observers will be watching closely to see how inventory levels and delivery demands interact, potentially signaling a critical juncture for the silver market.
From a price perspective, the Sprott Physical Silver Trust (traded on NYSE under the ticker PSLV) has gained 5.37% year-to-date, reflecting underlying physical demand despite broader market volatility.