Silver's Explosive Rally and the Case for Physical Ownership Over ETFs

The current surge in silver prices, now trading at record highs above $54 per ounce, reflects a confluence of structural supply constraints, industrial demand, and macroeconomic tailwinds. Yet, the growing dislocation between paper silver and physical silver markets-exacerbated by ETF structures and liquidity risks-suggests that investors may need to reconsider their exposure. For those seeking long-term value and resilience, physical silver increasingly appears to be the superior choice.

Structural Supply Constraints and Industrial Demand

Silver's price trajectory in 2025 has been driven by a multi-year supply deficit. Chronic underinvestment in exploration, declining ore grades, and rising production costs have left the market with insufficient capacity to meet demand. Industrial consumption, particularly in green technologies, has surged. Solar panels alone accounted for 243.7 million ounces of demand in 2024, with global solar capacity projected to grow sharply through 2030. This structural imbalance has led to a depletion of freely traded silver inventories, with London vaults experiencing persistent drawdowns and China's inventories reaching decade lows.

The U.S. dollar's decline, fueled by expectations of Federal Reserve rate cuts, has further amplified global demand for silver, making it more accessible to international buyers. Meanwhile, the gold-silver ratio-currently trading at 90-100:1, far above its historical average of 65:1-suggests silver is undervalued relative to gold, creating potential for further appreciation.

ETF Dislocation and Structural Risks

While silver ETFs like iShares Silver Trust (SLV) and abrdn Physical Silver Shares (SIVR) offer convenient exposure, their structural vulnerabilities are becoming increasingly apparent. The silver futures market, where paper trading volumes far exceed physical delivery capacity, has created a system prone to price distortions during supply crunches. ETFs, which rely on physical silver to back their shares, face liquidity risks when physical availability tightens. For instance, SLV holds 501.9 million ounces of silver in allocated vaults-roughly 60% of annual global mine production-but this concentration raises concerns about systemic fragility.

Recent events underscore these risks. A cooling system failure at the CME disrupted Comex silver futures trading, forcing physical markets in London and Shanghai to step in and reveal the true scarcity of deliverable silver. During such crises, ETFs may trade at significant premiums to spot prices or even suspend new investments to protect existing shareholders. For example, in March 2020, physical silver premiums reached 50-100% above spot prices, while ETFs faced operational challenges. Moreover, ETFs incur cumulative costs-management fees, tracking errors, and tax inefficiencies-that erode long-term returns. Physical silver, while requiring storage and insurance, becomes more cost-effective over 7-10 years compared to ETFs. Short-term volatility in ETFs is also amplified by high short interest, as seen in mid-2025 when managed money accounts trimmed net long positions, exacerbating price swings.

The Case for Physical Silver

Physical silver offers direct ownership and crisis protection, particularly during periods of market stress. When freely traded inventories collapse, as they have in 2025, physical silver can trade at substantial premiums, generating additional gains for holders. For instance, the U.S. designating silver as a critical mineral triggered precautionary buying, with 75 million ounces flowing into U.S. vaults since October 2025. This underscores the strategic value of physical ownership in a world where geopolitical tensions and supply chain disruptions are intensifying.

The structural tightness in the silver market also creates a "silver squeeze" risk. With industrial demand consuming over 60% of global supply and lease rates for physical silver spiking, securing ounces has become a priority over price. In such scenarios, ETFs-dependent on physical availability-are at a disadvantage. Physical silver, by contrast, provides a hedge against systemic risks in paper markets.

Conclusion

The current environment-marked by supply deficits, industrial demand, and ETF dislocation-presents a compelling case for physical silver. While ETFs offer liquidity and convenience, their structural vulnerabilities during periods of acute scarcity make them a less reliable vehicle for long-term value. For investors seeking resilience and direct exposure to a metal with both industrial and monetary attributes, physical silver increasingly appears to be the superior choice.