The crisis behind the rise of silver: when the paper system begins to fail

The article: Xiao Bing｜Deep Tide TechFlow

In December, the precious metals market’s main character isn’t gold; it’s silver that shines the brightest.

Rising from $40 to $50, $55, $60, it has rapidly crossed multiple historical price levels with an almost out-of-control speed, leaving little room for market respite.

On December 12, spot silver briefly hit a historical high of $64.28 per ounce, then sharply plunged. Since the beginning of the year, silver has risen nearly 110%, far surpassing gold’s 60% increase.

This appears to be an “extremely reasonable” rally, but it also makes it particularly dangerous.

The Crisis Behind the Rise

Why is silver rising?

Because it looks worth it.

According to mainstream institutional explanations, all this makes sense.

The Fed’s easing expectations reignite the precious metals rally, recent soft employment and inflation data, and market bets on further rate cuts by early 2026. As a highly elastic asset, silver reacts more intensely than gold.

Industrial demand is also fueling the rise. Explosive growth in solar energy, electric vehicles, data centers, and AI infrastructure fully reflects silver’s dual nature (precious metal + industrial metal).

Global stockpiles continue to decline, exacerbating the situation. Mexican and Peruvian mines underperformed in Q4, and the silver ingots in major exchanges’ warehouses are decreasing year by year.

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If these reasons are all you consider, the rise in silver prices is a “consensus”—even a belated valuation of its intrinsic worth.

But the danger lies in the story:

Silver’s rise looks rational but is unstable.

The reason is simple: silver is not gold. It lacks the consensus that gold has and doesn’t have a “national team” backing it.

Gold remains resilient because central banks worldwide are buying. Over the past three years, global central banks have purchased over 2,300 tons of gold, which is reflected on national balance sheets as a sovereign credit extension.

Silver is different. The world’s gold reserves exceed 36,000 tons, but official silver reserves are almost zero. Without central bank backing, when extreme market volatility occurs, silver lacks any systemic stabilizer and is a typical “island asset.”

The market depth disparity is even more pronounced. Gold’s daily trading volume is about $150 billion, while silver’s is only $5 billion. Comparing gold to the Pacific Ocean, silver is more like Poyang Lake.

It is small in size, with few market makers, insufficient liquidity, and limited physical reserves. Most importantly, silver’s primary trading mode isn’t physical but “paper silver”—dominated by futures, derivatives, and ETFs.

This is a dangerous structure.

Shallow waters capsize easily, and when large funds enter, they can quickly disturb the entire water surface.

And this year, exactly that scenario has occurred: a sudden influx of funds has rapidly pushed a market that wasn’t very deep away from the ground, lifting prices sharply.

Futures Short Squeeze

What has driven silver prices off track isn’t the seemingly rational fundamentals mentioned above; the real price war is in the futures market.

Normally, the spot price of silver should be slightly higher than the futures price, which is easy to understand: holding physical silver incurs storage and insurance costs, while futures are just contracts, naturally cheaper. This price difference is called “spot premium.”

But since the third quarter of this year, this logic has been turned upside down.

Futures prices have started to systematically stay above spot prices, with the gap widening. What does this mean?

Someone is aggressively pushing futures prices higher. This “futures premium” phenomenon usually appears in two situations: either the market is extremely bullish on the future, or someone is forcing a short squeeze.

Given that the fundamentals for silver are improving gradually—photo-voltaic and new energy demands won’t spike exponentially in a few months, and mine output won’t suddenly dry up—the aggressive behavior in the futures market looks more like the latter: funds are pushing up futures prices.

A more dangerous signal comes from anomalies in the physical delivery market.

Data from COMEX (the New York Mercantile Exchange), the world’s largest precious metals trading market, show that the physical delivery ratio in precious metals futures contracts is less than 2%, with the remaining 98% settled via USD cash or contract rollovers.

However, in recent months, COMEX’s silver physical delivery volume has surged far above historical averages. More and more investors are losing trust in “paper silver” and are demanding to take delivery of real silver ingots.

A similar phenomenon has occurred with silver ETFs. As large sums of capital flooded in, some investors began redeeming, seeking physical silver rather than fund shares. This “run” puts pressure on ETF silver reserves.

This year, the three major silver markets—New York COMEX, London LBMA, and Shanghai Gold Exchange—have all experienced run-offs.

Wind data shows that during the week of November 24, silver inventory at the Shanghai Gold Exchange fell by 58.83 tons, to 715.875 tons, reaching a low since July 3, 2016. COMEX silver inventories plummeted from 16,500 tons in early October to 14,100 tons, a 14% drop.

The reasons are straightforward: during a cycle of US dollar rate cuts, traders are reluctant to settle in dollars. An unseen concern is that exchanges may not have enough silver available for delivery.

Modern precious metals markets are highly financialized systems—most “silver” is just ledger numbers. Actual silver bars are repeatedly pledged, leased, and derived worldwide. One ounce of physical silver may correspond to a dozen different rights certificates.

Senior trader Andy Schectman takes London as an example: LBMA has only 140 million ounces of floating supply, but the daily trading volume reaches 600 million ounces. Meanwhile, over 2 billion ounces of paper claims exist on that 140 million ounces.

This “fractional reserve system” works well normally, but if everyone wants physical delivery at once, a liquidity crisis will arise.

When the shadow of crisis looms, a strange phenomenon in financial markets often appears—commonly called “cutting the network cable.”

On November 28, CME experienced an almost 11-hour outage due to “data center cooling issues,” the longest on record, preventing the proper updating of COMEX gold and silver futures.

Remarkably, this outage occurred at a critical moment when silver broke through its all-time high, with spot silver surpassing $56, and silver futures exceeding $57.

Market rumors suggest the outage was to protect market makers exposed to extreme risks and potential large losses.

Later, data center operator CyrusOne stated that the outage was caused by human error, fueling various conspiracy theories.

In summary, this futures-driven rally ensures high volatility in the silver market. Silver has essentially shifted from a traditional safe-haven asset to a high-risk instrument.

Who Is Manipulating?

In this short squeeze saga, one name cannot be ignored: JPMorgan Chase.

The reason is simple: it is widely recognized as the dominant silver market maker internationally.

From at least 2008 to 2016, JPMorgan manipulated gold and silver prices through trader activity.

Their approach was straightforward: placing large buy or sell orders in futures to create false supply-demand signals, enticing other traders to follow, then canceling orders at the last second to profit from price swings.

This spoofing technique led JPMorgan to pay a $920 million fine in 2020, setting a record for the largest penalty by CFTC at the time.

But this was not the full extent of market manipulation.

On one hand, JPMorgan used extensive short selling and spoofing in futures to suppress silver prices; on the other, it accumulated large physical silver holdings at artificially low prices.

Starting around 2011, when silver approached $50, JPMorgan began stockpiling silver in its COMEX warehouses. While other large institutions reduced their holdings, JPMorgan increased its position, eventually holding up to 50% of total COMEX silver inventory.

This strategy exploited structural weaknesses in the silver market: paper silver prices dominate physical silver prices, and JPMorgan influences both, being one of the largest physical silver holders.

So, what role does JPMorgan play in this current silver short squeeze?

On the surface, JPMorgan seems to have “reformed.” After the 2020 settlement, it underwent systematic compliance reforms, including hiring hundreds of new compliance officers.

Currently, there is no evidence that JPMorgan participated in the short squeeze, but the bank still wields significant influence over the silver market.

According to the latest CME data from December 11, JPMorgan holds about 196 million ounces of silver in the COMEX system (proprietary + brokered), accounting for nearly 43% of all exchange inventories.

Additionally, JPMorgan has a special role as custodian of the Silver ETF (SLV). As of November 2025, it manages 517 million ounces of silver, worth $32.1 billion.

More critically, in the category of “Eligible” silver (qualified for delivery but not yet registered as deliverable), JPMorgan controls over half of the holdings.

In any silver short squeeze, the core market battles are essentially twofold: first, who can deliver physical silver; second, whether and when these silver supplies are allowed into the delivery pool.

Unlike in the past, when JPMorgan was a major silver short, today it sits at the “gatekeeper” position of silver.

Currently, only about 30% of total silver inventory is “Registered” for delivery, while most of the “Eligible” inventory is concentrated in a few institutions. The stability of the silver futures market ultimately depends on the actions of these few nodes.

The Paper System Is Gradually Failing

If one were to describe the current silver market in one sentence:

The rally continues, but the rules have changed.

The market has undergone an irreversible transformation—trust in the “paper silver system” is collapsing.

This is not an isolated incident; similar changes are happening in the gold market too.

Gold inventories at the New York Mercantile Exchange (COMEX) have been declining steadily, with “Registered” gold repeatedly hitting lows, forcing the exchange to transfer gold from the “Eligible” category, which is not normally used for delivery, to fulfill transactions.

Globally, funds are quietly shifting.

Over the past decade, the mainstream asset allocation has been highly financialized—ETFs, derivatives, structured products, leverage tools—all can be “securitized.”

Now, more and more capital is withdrawing from financial assets and seeking physical assets that do not depend on financial intermediaries or credit backing, with gold and silver being prime examples.

Central banks continue to buy gold in large quantities, almost without exception choosing physical form. Russia has banned gold exports, and even Western countries like Germany and the Netherlands are demanding the repatriation of their overseas gold reserves.

Liquidity is giving way to certainty.

When gold supply cannot meet enormous physical demand, capital begins to seek alternatives, and silver naturally becomes the first choice.

The essence of this physical movement is a weakening US dollar and a reallocation of monetary pricing power amid de-globalization.

According to Bloomberg reports in October, gold is shifting from the West to the East.

Data from CME and LBMA show that since late April, over 527 tons of gold have flowed out of vaults in the US and UK—the largest western markets. Meanwhile, gold imports by Asian major gold-consuming countries, such as China, have increased, with August’s imports reaching a four-year high.

In response to these market changes, JPMorgan plans to relocate its precious metals trading team from the US to Singapore by the end of November 2025.

Behind the surge in gold and silver prices is a return to the “gold standard” concept. While this may not be feasible in the short term, one thing is certain: whoever holds more physical metal has greater pricing power.

When the music stops, only those holding real gold and silver can sit comfortably.