Vincent Le

Posted by Vincent Le on 10 Feb 2024

What Determines the Silver Price?

Introduction to Silver Price Action

Silver has faced a major disconnect in recent years—physical demand has strengthened considerably, yet prices have lagged behind. This has left many investors puzzled as to why robust retail and industrial buying haven't driven more significant gains.

In today's video, I closely examine this phenomenon and provide an in-depth breakdown of the divergent forces influencing physical and futures markets, including:

  • The opaque structure of the silver industry
  • How producer hedging and institutional investment decisions exert downside pressure on prices
  • How this counteracts the uptick that would be expected from widening supply deficits

For investors, the takeaway is clear—compelling fundamentals point to an eventual breakout. As demand persists while above-ground reserves decline, a price surge appears imminent.

Finally, I share my conviction that 2024 could see all the right conditions converge to propel silver markedly higher.

Silver Supply & Demand

According to the Silver Institute's annual report, in 2022 there was a significant deficit between silver supply and demand. Total silver demand reached 1.24 billion ounces, while supply was a bit over 1 billion ounces. This left a shortfall of around 237 million ounces.

To put the demand figures into perspective, 330 million ounces or 27% went towards retail investment bars and coins. This includes popular products like 100oz bars, Silver Maple Leafs, and American Silver Eagles.

The remaining 73% or nearly 900 million ounces supplied industrial applications, jewelry, silverware, and other diverse uses.

The substantial deficit reveals a disconnect that played out last year—robust demand across both retail and industrial segments was not matched by increasing supply. Above-ground reserves had to make up the sizable shortfall of 237 million ounces.

The strong demand dynamics persisted despite relatively flat pricing throughout 2022. As we'll explore next, these figures begin to reveal the disconnect between the physical fundamentals and the paper markets that set spot prices.

Retail Buying Doesn't Directly Affect Prices

When retail investors purchase physical silver products like coins and bars, it may seem logical that this extra demand would push prices higher. However, the market structure is more complex.

Prices set on futures exchanges like COMEX

Today, spot prices are predominantly determined on futures exchanges like COMEX, rather than directly by physical supply and demand dynamics. COMEX facilitates paper trading of silver futures contracts between commercial traders such as miners, refineries and factories which predominately hedge prices and rarely change their positions and non-commercial traders such as banks, hedge funds, and individuals which speculate on a leveraged basis and often move the silver price.

So, activity in the physical retail space does not automatically transmit to the futures market that is setting prevailing spot prices.

Dealers hedge with shorts if using leverage

Second, bullion dealers that utilize leverage and borrowing to fund operations may employ shorts on the futures exchanges to hedge their price exposure. For example, if a dealer carries large silver inventories financed with debt, falling silver prices could harm their financial position. Shorting futures contracts provides protection in case spot prices decline.

However, these shorts add downward price pressure that counters upward moves even when retail demand rises. The dealer hedging does not necessarily reflect conditions in the broader physical market.

Industrial Users & Offtake Agreements

A significant portion of industrial silver demand is met through direct supply contracts called offtake agreements. Their key characteristics:

1. Direct contracts between users and suppliers

These are negotiated deals between fabricators/manufacturers and mines or refineries to supply silver at agreed prices over specified periods of time. They allow industrial users to lock in reliable silver supply at predictable costs.

2. Don't go through futures exchanges

Unlike futures trading, offtake agreements are private bilateral contracts. They do not involve the futures exchanges where prices are set.

3. Important part of market

Industrial users aim to avoid price volatility interfering with their operations. Thus, offtake agreements are an important means for producers and users to transact outside the turbulence of exchange trading. For commodities heavily used in manufacturing like silver, these agreements likely represent a significant portion of the OTC physical market. However, their impact on prevailing spot prices is indirect at best.

LBMA Bars as Reserves

London Bullion Market Association (LBMA) accredited large wholesale bars function as an important silver reserve asset. Their stock levels generally reflect the current supply balance.

When supply—which includes recycling—exceeds demand in a given year, the excess supply is often fabricated into LBMA-approved bars for storage. These wholesale bars are the traditional form held in bullion bank vaults and exchanged daily between market participants.

Conversely, when total silver demand outstrips newly mined and recycled supply, causing a market deficit, LBMA bar reserves decline. This was evidently the case in 2022 based on the Silver Institute's estimated 237 million ounce shortfall.

Available data reveals that LBMA bar stockpiles held in major vaults and exchanges have fallen markedly over the past two years. This implies substantial draws on reserves to meet the strong industrial and retail demand exceeding supply.

Declining LBMA bar inventory levels indicate a protracted supply/demand imbalance. Yet silver prices have remained rangebound, pointing to the disjointed link between physical and futures markets.

How This Affects Prices

As covered, there is a disconnect between physical supply/demand fundamentals and the actual spot prices, which are predominantly set on futures exchanges.

Prices Set on Futures Exchanges

Silver futures trade on exchanges (collectively) nearly around the clock, except on weekends. This facilitates price discovery based on constantly changing sentiments and news.

Traders take positions betting on whether they expect silver prices to rise (long contracts) or fall (short contracts). Their collective actions determine market prices. This futures trading environment, while liquid and efficient, is also susceptible to overshoot the realities of physical supply/demand flows, as we've discussed.

Main Players

Next, we'll examine the major players. There are two primary categories of participants in the silver futures markets:

1. Commercial users

About 60% of open interest comes from commercial businesses like miners and refiners hedging future production. These are categorized as "commercial users.”. These commercial hedgers have a large net short position which rarely change quickly, maintaining downward price pressure.

2. "Non-commercial" users

The remaining open interest comes from banks, hedge funds, and other speculators categorized as "non-commercial" traders. These large non-commercial entities tend to react to news events like interest rates. Their substantial highly-leveraged trading volumes significantly sway silver prices.

Mismatch Between Physical and Prices

1. Producers hedge downwards

Miners and refiners represent the largest trading volume. Their hedging activity exerts persistent downward pressure as they seek to lock in prices and reduce risk.

2. Investors sell based on other factors

Meanwhile, large investment funds and banks have an outsized impact on prices as they react to interest rates and macro news rather than physical tightness.

In summary, the dominant futures participants act counter to physical fundamentals. Producers hedge down while institutions sell based on external factors. This explains why increased physical demand does not always driven price gains in the short term.

Expectations for 2024

In light of the intricate interplay between market mechanics and anticipated developments, I have an optimistic outlook on silver's future and have positioned myself by storing LBMA 1000 oz silver bars, which have some of the lowest premiums in the industry at just USD 0.60/oz over spot.

Our 14 years of dedication to Systemic Wealth Protection has allowed us to cultivate relationships and infrastructure that open doors globally. As the first-ever London Bullion Market Association (LBMA) affiliate member in Southeast Asia, Silver Bullion has carved out a unique position to provide our clients access to LBMA bars at low premiums.

I extend this strategy to anyone who also aims to take advantage of the convergence of deepening physical deficits and robust industrial demand.


Gregor J. Gregersen 
Founder, Silver Bullion Pte Ltd


Gregor Gregersen, founder & CEO of Silver Bullion, Singapore.