Silver's Dual Crisis: Industrial Shortages and Expanding Short Squeeze Risks

The silver market in 2025 is teetering on the edge of a perfect storm, where structural supply constraints collide with speculative fragility. This dual crisis-driven by industrial demand outpacing mine production and a precarious short-covering dynamic-has created a volatile landscape for investors. As the year draws to a close, the interplay between physical scarcity and speculative positioning suggests that silver's trajectory in 2026 will be defined by both fundamental strength and systemic risk.

Structural Supply Constraints: A Deficit That Won't Go Away

The global silver market has been in a structural deficit for seven consecutive years, with industrial demand surging past mine production. In 2025, this gap widened to 95 million ounces, as declining ore grades, regulatory hurdles, and underinvestment in new projects stifled supply growth. Industrial consumption, now accounting for 58.5% of total silver usage, has been the primary driver of this imbalance. Solar photovoltaic (PV) installations alone consumed 25% of annual global silver supply in 2024, with demand projected to nearly double between 2020 and 2030. Electric vehicles (EVs) and AI-driven data centers further amplified this trend, with EV-related silver demand rising 20% in 2025 and AI infrastructure emerging as a new demand vector.

Geopolitical tensions have compounded these challenges. U.S.-China and U.S.-India tariff wars disrupted supply chains, while China's January 1, 2026, export ban on silver-controlling 70% of global refining capacity- threatens to tighten supply further. Inventories at key hubs like London and Shanghai have plummeted to their lowest levels since 2015, exacerbating physical shortages and pushing lease rates higher. This scarcity is not merely a temporary blip but a systemic breakdown rooted in the energy transition's voracious appetite for silver.

Speculative Fragility: Short Squeeze Dynamics Intensify

While industrial demand sets the stage for a bullish narrative, the speculative underpinnings of the silver market reveal a far more precarious picture. As of December 2, 2025, 22 banks collectively held net short positions of 212 million ounces on COMEX, according to CFTC data. These positions, often framed as hedging tools, have come under intense pressure as silver prices surged. Industrial users, facing acute physical shortages, are demanding immediate delivery, forcing short sellers into a costly scramble to source metal.

The divergence between paper and physical markets has widened dramatically. The EFP (Excess Forward Premium) spread, which measures the gap between COMEX futures and London spot prices, ballooned to $1.10 per ounce in 2025-far exceeding historical averages of $0.25. In Shanghai, physical silver traded at 12–13% premiums to Western benchmarks, reflecting localized scarcity and strategic hoarding. Meanwhile, speculative liquidations triggered by CME Group's December 2025 margin hikes have artificially depressed paper prices, creating a dislocation that cannot persist indefinitely.

This fragile equilibrium is further strained by the fragility of paper silver instruments. ETFs, reliant on complex custody and leasing arrangements, face heightened counterparty risks as physical silver becomes scarcer and lease rates rise. Authorized participants may struggle to source metal for redemptions, compounding systemic instability.

The Path to 2026: A Tipping Point

The convergence of these forces positions silver for a critical inflection point in 2026. On the supply side, China's export ban and depleted inventories will likely force prices higher, while industrial demand shows no signs of abating. On the speculative front, margin calls and liquidity pressures could trigger a cascading short squeeze, amplifying price volatility. The Federal Reserve's repo facility usage during Q4 2025 hints at systemic stress, though no official confirmation links these actions to silver-specific losses.

Investors must navigate this duality with caution. While the fundamentals argue for a long-term bull case-driven by the energy transition and dwindling above-ground inventories-the speculative overhang introduces near-term risks. A weakening U.S. dollar and rising investment demand could provide additional tailwinds, but the path will be anything but smooth.

Conclusion

Silver's dual crisis-structural supply constraints and speculative fragility-has created a market at a crossroads. Industrial demand, fueled by solar, EVs, and AI, is outpacing supply, while speculative short positions face mounting pressure from physical shortages. As 2026 approaches, the interplay of these forces will test the resilience of both the market and its participants. For investors, the key lies in balancing exposure to the inevitable shift in fundamentals while hedging against the volatility of a market teetering on the edge of a short squeeze.