Silver's Backwardation in Shanghai: A Supply-Centric Case for Strategic Entry

The Shanghai silver market is undergoing a profound structural shift, marked by acute backwardation, record-low inventories, and a surge in speculative demand. These dynamics present a compelling case for strategic entry, driven by a confluence of supply constraints and investor positioning.

Supply Constraints: A Perfect Storm of Scarcity

The Shanghai Futures Exchange (SHFE) silver market has entered a state of backwardation, where near-term futures contracts trade at a premium to longer-dated ones. As of December 2025, the spread between the Apr '26 and Feb '26 contracts widened to -¥49/kg, while the Jun '26 versus Feb '26 spread hit -¥77/kg according to market analysis. This inversion reflects a critical imbalance: physical silver is in such short supply that holders of deferred contracts are willing to pay a discount to acquire immediate delivery.

Underpinning this dislocation is a decade-low inventory level at SHFE warehouses, which fell to 531,211 kilograms in December 2025 according to market data. This depletion stems from two key factors: record exports of physical silver from China to London and surging industrial demand, particularly in the photovoltaic sector. According to a report, these exports have exacerbated global supply tightness, while domestic demand for silver in solar panel manufacturing has outpaced production. Compounding the issue, China's impending export restrictions, set to take effect in January 2026, will limit silver exports to only state-approved producers, further tightening the supply chain.

Backwardation and Price Dynamics: A Premium for Immediate Delivery

The premium for physical silver in Shanghai has reached extraordinary levels. By December 2025, the Shanghai spot price traded at a premium of over $8/oz against COMEX silver futures, a stark indicator of the market's preference. This premium has persisted despite global silver prices hovering near multi-year highs, underscoring the unique pressures in the Shanghai market.

The backwardation curve has also deepened as near-dated contracts become increasingly valuable. For instance, the TD-SHFE silver 2602 spread fluctuated between discounts of 20–30 yuan/kg and premiums of -5 to -10 yuan/kg within a single trading week, reflecting volatile supply expectations. These fluctuations highlight the fragility of the current market structure, where even minor shifts in inventory or demand could trigger sharp price swings.

Speculative Demand: ETFs and Open Interest Signal Bullish Sentiment

While supply constraints form the bedrock of the current dislocation, speculative demand has amplified the market's momentum. The Sprott Physical Silver Trust (PSLV) has expanded significantly, with investors seeking exposure. Meanwhile, open interest in SHFE silver futures surged to 789,444 contracts in one week, a testament to heightened participation.

In the Western market, the largest U.S. silver ETF, iShares Silver Trust (SLV), has seen a surge in call options near the $50 strike, signaling bullish expectations. This global investor appetite, combined with China's industrial demand, has created a self-reinforcing cycle: tighter supply fuels higher prices, which in turn attract more speculative capital.

Strategic Entry: Balancing Risk and Reward

The interplay of supply-driven backwardation and speculative demand creates a unique entry point for investors. Historically, backwardation in commodities often precedes price surges, as the cost of carrying physical inventory becomes prohibitive. In Shanghai's case, the depletion of exchange warehouses and impending export restrictions suggest that the current tightness is structural rather than cyclical.

However, risks remain. The January 2026 export curbs could initially reduce liquidity in the global silver market, potentially causing short-term volatility. Yet, for investors with a medium-term horizon, these risks are outweighed by the fundamentals. The photovoltaic industry's reliance on silver-accounting for over 10% of global demand-ensures sustained pressure on supply, while speculative positioning provides a tailwind for further price appreciation.

Conclusion

Silver's backwardation in Shanghai is not merely a market anomaly but a symptom of deeper structural forces. With inventories at multi-decade lows, industrial demand surging, and speculative capital flowing into the sector, the case for strategic entry is robust. Investors who act now may position themselves to capitalize on a market where supply constraints and speculative demand are locked in a powerful upward spiral.