Physical Silver demand is challenging paper-driven futures market

Paper silver has driven the market for years, but with metal in short supply, physical demand is beginning to exert control.

After briefly skyrocketing to $120 an ounce, the silver price has corrected, retreating to the $75 range. However, one of the fundamentals driving silver to that record high remains in place.

There isn’t enough physical metal to meet demand.

Analyst David Morgan, publisher of the Morgan Report, told Kitco News that physical demand is beginning to exert dominance over paper-based pricing mechanisms. 

According to analyst Faysal Amin, published by FXStreet, the paper‑to‑physical ratio stands near 356:1. In other words, for every ounce of physical silver in the world, there are 356 paper ounces.

This is no different than fractional reserve banking. As long as everybody is content to keep their money in the bank, the system hums along quietly. But when people lose faith in the bank and demand their dollars, you end up with bank runs. Similarly, when people demand physical silver, the paper system collapses.

As Amin put it, “Silver prices are not just reacting to demand — they are reacting to the realization that the market’s underlying structure is no longer credible.”

Paper vs. metal

According to the official COMEX depository data on Feb. 11, total registered silver stocks have dropped below the 100 million ounce threshold to 98,138,005 ounces. 

Registered silver is officially available for delivery against a futures contract.

An additional 4.7 million ounces were withdrawn from the “eligible” category. This is silver owned by ETFs and other financial institutions and not available for delivery. 

Morgan told Kitco News that this indicates the global silver market is under stress.

“The physical market is taking control over whatever the paper price is."

Strong physical demand in Asia has exacerbated the displacement of metal. The Shanghai silver benchmark is currently running a premium of around $10 per ounce over the Western spot price. 

Silver supplies in London have been tight for months.

Problems started last spring when tariff worries incentivized the movement of silver out of London vaults to the U.S. An explosion in Indian silver demand this autumn was the straw that broke the camel’s back, leading to the first round of the silver squeeze. 

Initially, Indian buyers were primarily sourcing silver from Hong Kong, but they reportedly shifted more toward London during the Chinese Golden Week Holiday in the first week of October.

But London vaults were already tapped out.

As prices skyrocketed, silver moved from New York to London, easing some pressure, but the problem cannot be solved by shuffling metal from one place to another.

While the metal in the COMEX vaults primarily supplies the futures market. Shanghai does as well, however, Morgan said industrial users are increasingly turning to the Chinese exchange.

“It's certainly a futures market, but not to the extent London and New York are, which means a lot of that silver that's in inventory or on exchange is going to be taken by somebody for purposes of either investment or industry.”

This is creating very tight supplies in Shanghai. The price difference should incentivize a flow of silver East; however, Morgan said logistics and capital controls are creating friction.

"Obviously, if you're willing to pay more than the benchmark price in New York, it's going to be flown over to China. But the spread hasn't closed... Something's up."

Morgan said this big demand for physical metal in China is requiring 1,000-ounce bars, typically the domain of the COMEX. He likened retail demand to a flea on a dog compared to the tail of the dog.

“Once the industrial needs were not met, you saw that the physical market took over the silver price. That has happened very sporadically in the past. This time, it was the real deal. We saw something that we haven’t seen in a long time. We saw the silver price in 2025 go up 140 percent."

Then we saw a 70 percent price increase in a single month (January). Morgan emphasized that fundamentally, it is still a derivatives market, and it got significantly overextended. 

“The paper price, the paper paradigm took over. So, temporarily, even though the 1000-ounce bar market had basically taken control for weeks, perhaps months, and everybody was kind of cheering that understood what was really happening, it didn’t negate what was going on in the futures exchanges around the world. They go ahead of themselves.”

Morgan said that brought things back to reality, and that’s where we are today. 

“Now we are in a struggle between who’s going to win at this point, and it could go back and forth a couple of more times. Is it the paper pushers or the physical demand?”

Robust investment activity in India is adding to the demand pressure. Forty million ounces of silver reportedly flowed into Indian-based ETFs over a two-month period.

Policies at the COMEX are also altering the market. The CME group recently raised margin requirements, meaning traders must put up more up-front money when entering a futures contract. Morgan said, “The higher margin goes, the more we're forcing a cash-only market," adding that higher margin requirements create a natural break on speculative rallies by flushing out highly leveraged traders. 

All of this is playing out as physical silver demand outstrips mining and recycling supply year after year.

Based on preliminary data compiled by the Silver Institute, silver demand outstripped supply by about 95 million ounces last year, leading to the fifth straight market deficit. Including the projected 2025 shortfall, the 5-year market deficit will climb above 800 million ounces, an entire year of mining output.

The Silver Institute projects a market deficit of around 67 million ounces in 2026, even with higher prices creating headwind for industrial demand.

With the supply of metal limited, this battle between the paper and physical markets will likely continue, meaning more price volatility and big daily swings. However, it's important to keep in mind this crucial fact -- they can create paper to their heart's content. They can't create metal.