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.
Silver Supply & Demand
According to the Silver Institute's press release, in 2025, global silver demand is expected to remain broadly stable at 1.20 billion ounces.
Growth in industrial applications and retail investment will largely be offset by declining demand for jewelry and silverware. Industrial silver fabrication is forecast to rise by 3%, with volumes projected to exceed 700 million ounces for the first time. This growth is supported by structural gains in green economy sectors such as photovoltaics and electric vehicles, as well as continued development in consumer electronics driven by artificial intelligence. Modest gains are also anticipated in ethylene oxide-related applications and brazing alloys.
Physical investment in silver is also expected to increase by 3%, particularly in Europe and North America, as investors adjust to current price levels. However, the overall recovery in investment will be modest due to already elevated silver holdings accumulated between 2020 and 2023. A slight decline in Indian investment, prompted by high local prices and resulting liquidations, will partially offset global gains.
Jewelry demand is projected to decline by 6%, with India accounting for most of the drop due to elevated prices. Chinese demand will also weaken due to cautious consumer spending. In contrast, Western markets are expected to show resilience, with a shift from gold to silver jewelry and continued interest in branded pieces. Similarly, global silverware demand is forecast to fall by 16%, driven largely by price-related declines in Indian fabrication.
On the supply side, total global silver supply is anticipated to grow by 3% to reach an 11-year high of 1.05 billion ounces. Silver mine production will increase by 2% to a seven-year high of 844 million ounces, with new and expanded operations in China, Canada, Chile, and Morocco contributing to the rise. While output from gold mines will grow, production from base metal mines is expected to remain flat due to subdued metal prices.
Silver recycling is projected to increase by 5%, surpassing 200 million ounces for the first time since 2012. This growth will be led by industrial scrap, particularly from ethylene oxide catalyst replacements, along with price-driven recycling of jewelry and silverware in India.
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 the amount of silver reserves has hovered around the 800 million ounce mark but began declining at the beginning of 2025 where it now sits at 711 million ounces as of March this year.
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 2025
Despite the rise in supply, the silver market is forecast to remain in deficit for the fifth consecutive year. The 2025 deficit is expected to narrow by 19% to 149 million ounces, though it will still be large by historical standards.
I extend this strategy to anyone who also aims to take advantage of the convergence of deepening physical deficits and robust industrial demand.
Sincerely,
Gregor J. Gregersen
Founder, Silver Bullion Pte Ltd
Gregor Gregersen, founder & CEO of Silver Bullion, Singapore.