Silver's $40/oz Gap: COMEX vs. Shanghai Price Action

The gap between COMEX and Shanghai silver is now a critical market signal, not a minor arbitrage opportunity. The COMEX futures price sits around $78.53 per troy ounce, while the Shanghai Gold Exchange (SGE) benchmark trades near $111.50 per troy ounce. This creates a staggering ~40% spread that has been widening in recent days.

This divergence points directly to physical supply constraints. The Shanghai premium is not a simple currency or tax effect; it reflects a market where physical silver is in tighter supply relative to demand. Industrial demand from solar and EV sectors is driving a premium in Asia, the world's largest consumer, while COMEX's paper market struggles to keep pace with physical flows.

The widening spread indicates growing market stress. If this gap were purely an arbitrage play, traders would be moving silver from cheaper COMEX to higher-priced Shanghai. The fact that the gap persists and expands suggests significant friction-likely logistical, regulatory, or liquidity constraints-that is preventing this capital from flowing. This is a flow problem, not a pricing error.

The Physical Run and Supply Shock

The core driver of the COMEX-Shanghai gap is a physical run on the paper silver system. In just seven days last week, 33.45 million ounces of silver were physically withdrawn from COMEX, draining roughly 26% of its registered inventory. This is not a normal delivery pattern; it signals a systemic loss of confidence. Traders are pulling forward deliveries to secure metal, fearing the exchange may not have enough physical silver to meet obligations when the March contract arrives.

The inventory hemorrhage is mirrored in London, where the LBMA's eligible silver stocks are critically low. The resulting scarcity has crushed the silver lease market. One-month lease rates have surged to around 8%, an extreme premium that reflects a desperate scramble for metal. At these rates, the cost of borrowing silver to cover a short position is prohibitive, effectively killing cross-market arbitrage. This is the paper market's price for physical scarcity.

China's policy shift has fragmented the global supply chain. The country's reclassification of silver as a strategic material and imposition of export restrictions have tightened physical flows into Asia. This directly supports the Shanghai premium, as demand from solar and EV industries collides with constrained supply. The result is a bifurcated market where physical metal is being hoarded in Asia, while the COMEX paper system bleeds inventory.

Market Impact and Forward Scenarios

The $40/oz gap is a major market stress test. It creates a powerful but costly arbitrage signal. The total friction to move silver from COMEX to Shanghai is severe, with import costs of 13-24% including duties and VAT. This premium alone would erase most of the price difference, making physical arbitrage economically unviable for most traders. The gap persists because these high costs, combined with complex delivery logistics, act as a hard barrier.

Shanghai's price often leads the US market, suggesting this premium may not close but could widen. The SGE benchmark is the primary reference for Asia's massive industrial demand, and its price discovery sets the tone for global flows. When the Shanghai premium exceeds 15%, it signals a catch-up rally is likely, but the underlying supply-demand imbalance in Asia is structural, not temporary.

This bifurcation raises the risk of sharp, volatile price swings. As physical scarcity intensifies, exchanges may raise margin requirements to control risk, as seen with two margin hikes in 48 hours in early January. This could trigger forced selling in the paper market, causing a violent drop in COMEX prices. Conversely, if the premium continues to climb, it could force a broader market intervention to restore order, leading to extreme volatility in both markets.