Silver Depletion Unstoppable: When Paper Systems Reach Their Functional Limits

By the end of 2024, dramatic changes occurred in the precious metals market. Silver repeatedly broke through historic price levels, recording nearly a 110% increase since the beginning of the year. On December 12, the spot price temporarily hit a record high of $64.28 per ounce. Silver showed a surge far exceeding the roughly 60% rise of gold. However, behind this rapid price increase were structural vulnerabilities in the silver market and warning signals of an impending crisis.

A Historic Turning Point in the Silver Market: Accelerating Supply Shortages

At first glance, the reasons for silver’s continued rise seem “completely rational.” Expectations of rate cuts by the Federal Reserve (Fed) are revitalizing the entire precious metals market, with traders increasingly betting on additional cuts in early 2026. As a volatile asset, silver tends to react more sharply than gold.

Meanwhile, industrial demand is also a major driver. Explosive growth in solar power, electric vehicles, data centers, and AI infrastructure demonstrates silver’s dual role as both a precious and industrial metal. Even more serious is the ongoing decline in global inventories. Production in key regions like Mexico and Peru in Q4 has fallen short of expectations, and silver bullion stocks on major exchanges are depleting year by year.

The Shanghai Gold Exchange’s silver stocks decreased by 58.83 tons in the week ending November 24, reaching 715.875 tons — the lowest since July 2016. CME’s COMEX silver inventories plummeted from 16,500 tons in early October to 14,100 tons, a 14% drop. This depletion of supply is a structural problem unlikely to improve anytime soon.

Anomaly in the Futures Market: The Limits of the Paper Silver System

The real issue in the silver market lies in the gap between “paper silver” and “physical silver.” Normally, spot prices are slightly higher than futures prices because holding physical silver incurs storage and insurance costs, while futures are just contracts, so they should theoretically be cheaper. But since Q3 2024, this logic has completely reversed.

Futures prices have systematically risen above spot prices, and the gap continues to widen. What does this mean? Someone is deliberately inflating futures prices. The fundamentals of silver are improving slowly, with no sudden surge in industrial demand or mine production. The reality is that funds are pushing up futures prices.

Even more alarming are signals from abnormal physical delivery markets. At the world’s largest precious metals trading venue, COMEX (New York Mercantile Exchange), over 98% of precious metal futures contracts were traditionally settled in USD or rolled over. But since mid-2024, physical silver delivery has surged, far exceeding historical averages. Increasing numbers of investors are losing faith in “paper silver” and demanding actual silver ingots.

The same phenomenon is happening with silver ETFs (notably the Silver Trust: SLV). Large capital inflows have led some investors to request physical silver instead of fund certificates, putting pressure on ETF silver holdings. In 2024, silver buyouts occurred in major markets in New York, London, and Shanghai. The cause is clear: in an environment of declining dollar interest rates, investors hesitate to settle in dollars and prefer tangible assets.

JP Morgan Chase’s Dominance: Past and Present Market Manipulation

When discussing short squeezes in silver, one name cannot be ignored: JP Morgan Chase.

The bank is known as an “internationally recognized silver speculator.” From 2008 to at least 2016, JP Morgan deliberately manipulated the prices of gold and silver through its traders. Their tactics were simple and crude: placing large buy or sell orders in futures to create false supply-demand impressions, then canceling orders at the last moment to profit from price swings. This practice, called spoofing, led to a $920 million fine in 2020 — a record penalty by the CFTC at the time.

But the reality of market manipulation went far beyond that. JP Morgan used large-scale short selling and deceptive trades to suppress silver prices intentionally, while accumulating large amounts of physical silver at artificially low prices. Starting around 2011, when silver approached $50, JP Morgan began stockpiling silver in COMEX warehouses. While other major banks reduced their silver purchases, JP Morgan increased holdings, eventually controlling about 50% of COMEX silver inventories.

After a settlement in 2020, JP Morgan appeared to have “reformed.” The bank announced systematic reforms, including hiring hundreds of compliance staff. Yet, as of CME’s latest data on December 11, 2024, JP Morgan still holds about 196 million ounces of silver in COMEX warehouses — roughly 43% of total inventories.

More critically, JP Morgan is the custodian of the Silver ETF (SLV), holding 517 million ounces (worth about $32.1 billion). It also dominates the “eligible silver” market — silver with delivery rights but not yet registered for delivery. In any round of silver short squeezes, the real game revolves around two key points: who can produce physical silver, and whether that silver can enter the delivery pool. JP Morgan has shifted from a major short seller to a “Silver Gate” — a gatekeeper controlling access to physical silver. Its influence over the entire market remains unchanged.

Limitations of the Paper System: Capital Shifts to Physical Assets

The current silver market can be summarized as: “The market is still moving, but the rules have changed.” The market has undergone an irreversible transformation, and trust in the “paper system” for silver is collapsing.

The highly financialized nature of the silver market is serious. Most silver is just a number on paper; actual silver bars are repeatedly used as collateral, leased, and involved in derivatives worldwide. One ounce of physical silver can correspond to more than a dozen warrants (financial instruments). For example, in London, LBMA’s liquidity is only 140 million ounces, but daily trading volume reaches 600 million ounces, with over 2 billion ounces of short positions.

While this “scoring system” functions under normal conditions, a mass demand for physical assets could trigger a liquidity crisis. In late November 2024, CME experienced an approximately 11-hour outage due to “data center cooling issues,” setting a new record for downtime. Notably, this outage occurred during a period when silver hit a record high, with spot prices surpassing $56. Some market insiders speculate that this system shutdown was to protect large product market makers from significant losses.

CyrusOne, the data center operator, later stated that the outage was caused by human error, but various interpretations circulated. The silver market’s reliance on paper-based systems is revealing its limits — they can no longer meet demand.

Gold to Silver, West to East: A Global Capital Shift

Silver is not an isolated case. Similar changes are happening in the gold market. Gold inventories at NYMEX continue to decline, with registered gold hitting new lows repeatedly.

Globally, capital is quietly moving eastward. Over the past decade, mainstream asset allocations have become highly financialized. ETFs, derivatives, structured products, leveraged instruments — all are “securitized.” But increasingly, funds are retreating from financial assets and turning toward tangible assets like gold and silver, which do not rely on financial intermediaries or credit guarantees.

Central banks are almost universally increasing their physical gold reserves significantly. Russia has banned gold exports, and even Western countries like Germany and the Netherlands are requesting the repatriation of gold stored abroad.

According to a Bloomberg report in October 2024, gold is quietly moving from west to east. Data from CME and LBMA shows that since April, over 527 tons of gold have been drained from vaults in New York and London. Meanwhile, major Asian gold-consuming countries like China have increased imports, with August’s imports reaching a four-year high. JP Morgan Chase has also responded to market shifts by relocating its precious metals trading team from the US to Singapore.

The intense rise in silver fundamentally reflects a quiet return to a “gold standard” mindset. While it may not be immediately practical, one thing is certain: those who control more physical assets will have greater pricing power. When the music stops, only investors holding real assets will be assured of a safe seat.