The London silver market is facing an escalating physical squeeze, with a key interest rate indicator revealing extreme tightness in the supply of silver in the spot market.
The latest developments come from the analysis of Dutch trading expert Karel Mercx. He pointed out that a proxy indicator used to measure the degree of physical shortage in the London market—the one-year silver swap rate minus the U.S. interest rate spread—has plummeted to -7.18%.
This &#34;distorted&#34; data means that traders are willing to pay a premium for immediate physical silver that is nearly 7% higher than silver delivered a year later. Normally, due to storage, insurance, and financing costs, forward prices should be higher than spot prices. Therefore, theoretically, the value of this &#34;one-year silver swap spread&#34; should be positive to cover the related costs of holding physical silver for a year.
Now, the situation has completely reversed, indicating that investors holding paper certificates are seeking physical delivery at any cost. This behavior has been described by market observers as a &#34;run&#34; on the London &#34;spot&#34; silver market. This will encourage investors and users to continue selling paper contracts in favor of demanding the withdrawal of physical metal.
Analysis indicates that as long as this shortage persists, the upward trend in silver prices is unlikely to end. Karel Mercx emphasized: &#34;This distortion explains why the rise in silver has not yet ended.&#34;
The chart he released shows that this indicator is not only below the &#34;red line&#34; representing normalization but that the gap is also widening, indicating that the silver shortage in London is intensifying rather than stabilizing.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d6598642-2ebc-407f-a2df-fc45c3fed3c7.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d6598642-2ebc-407f-a2df-fc45c3fed3c7.png"/>
As long as this spread indicator remains below the &#34;red line,&#34; upward pressure on silver prices will continue to exist. Currently, the market is unclear at which price level supply and demand will find a balance.
Recently, spot silver has surpassed the $70 mark and continues to reach new highs.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f4b41724-f7ae-466c-ba04-8ec4eda8ac05.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f4b41724-f7ae-466c-ba04-8ec4eda8ac05.png"/>
<h2>Paper Silver System Under Pressure</h2>
The silver swap rate is a key component of global precious metals trading. Its existence allows large participants such as banks, producers, industrial users, and investors to conveniently exchange silver for U.S. dollars without physically moving the metal out of the vault, thereby closely linking the London spot market with the New York financial market.
However, this system, designed to avoid physical transportation, is now under immense pressure. With spot prices far exceeding forward prices, buyers are actively demanding physical delivery, causing silver to begin flowing globally.
Holding physical silver is not easy; a position worth $1 million can weigh several hundred kilograms, requiring specialized vault space, insurance, and security measures. Market participants are now willing to bear these additional costs and inconveniences, highlighting their waning confidence in paper certificates and urgent demand for physical assets
This behavior of shifting from holding unallocated silver ownership certificates to demanding the extraction of physical metal is a typical characteristic of a &#34;run&#34; on the London spot market.
<h2>Leverage Risk and Global Arbitrage Flow</h2>
The risk in the London market lies in its enormous leverage effect. According to industry expert David Jensen's analysis in his Substack article, the number of paper silver (or &#34;virtual&#34; silver) certificates circulating in the London market far exceeds the physical silver inventory available for delivery.
This high leverage means that once a trend for physical extraction demand forms, it could place immense pressure on the limited physical inventory, potentially triggering a rapid &#34;liquidation&#34; wave in the market.
At the same time, price discrepancies in the global market further exacerbate London's predicament. Market participants have observed an &#34;extreme&#34; price difference between silver futures on the Shanghai Futures Exchange (SHFE) and the New York Mercantile Exchange (COMEX).
This arbitrage opportunity incentivizes traders to transport silver from the relatively abundant (or perceived as abundant) inventory in London to the higher-priced Shanghai, further depleting London's already tight physical inventory.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/58ab047c-d4d7-4dfb-a048-975153477c13.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/58ab047c-d4d7-4dfb-a048-975153477c13.png"/>

The London silver market is experiencing a severe physical squeeze, with investors aggressively selling paper silver contracts and rushing to buy spot silver, causing the key indicator "one-year silver swap spread" to drop to -7.18%, indicating extreme tightness in the spot market. Experts say this "distortion" is the core driving force behind the rise in silver prices, and under pressure from leverage and intensified arbitrage, the upward trend in silver prices may continue

- The London silver market is experiencing an intensifying physical squeeze, highlighted by a key interest rate indicator reflecting extreme tightness in spot silver supply.  
- An analysis by Karel Mercx reveals that the one-year silver swap rate minus U.S. interest rates has plummeted to -7.18%, indicating traders' urgency for immediate physical silver.  
- As this shortage persists, upward pressure on silver prices is expected to continue, with recent spot prices already surpassing $70, and significant risks of forced liquidations due to high leverage in the market.

The confidence behind silver's "continuous new highs": The run on London spot silver is intensifying