(Kitco News) – The silver market may be significantly overstretched as it continues to trade near all-time highs after surging above $53 an ounce. However, it doesn’t pay to go against the precious metal when momentum is not on your side.
That is a lesson commodity analysts at TD Securities were reminded of this week as they exited a tactical short position in silver, taking a nearly $2.4 million hit.
The Canadian bank recently shorted silver when prices were at $48.37 an ounce, expecting that its rally toward $50 an ounce would unleash a wave of supply into the marketplace. The tactical short position emerged even as TDS has remained extremely bullish on silver, anticipating renewed investment demand that will drain already beleaguered stockpiles in vaults associated with the London Bullion Market Association.
“Price action in lease rates reveals that London silver markets have undeniably been squeezed as we expected, resulting in extreme dislocations with silver lease rates exploding higher, reflecting critically scarce metal availability in the London ecosystem,” said Daniel Ghali, Senior Commodity Strategist, in the bank’s latest note. “That being said, we think the dislocations have now become sufficiently severe such that they are self-resolving.”
Although TDS now expects to see a flood of supply flow back into the market, the analysts said that their #silversqueeze has lasted longer than anticipated, as silver inventories in London have been slow to rebuild.
Analysts note that the market has been mired in complex supply chain issues that include the global trade war and robust industrial demand.
London vaults experienced tightening supply at the start of the year as massive amounts of silver flowed into New York. Bullion banks and other market players were moving tonnes of the precious metal to the U.S. as the threat of elevated tariffs loomed large over the marketplace.
Most of that metal has remained in New York, as growing industrial demand adds a new dynamic to the supply-and-demand picture. In August, the U.S. Geological Survey included silver on its 2025 draft list of critical minerals, citing its increasing importance in the electrification of the global economy. The list is expected to be finalized before the end of the year. Silver could also face new tariff threats if it is viewed more as a critical metal and not a monetary asset.
Despite this uncertainty, TDS expects that higher prices will bring the metal back to London.
“We estimate the pull on London remains roughly at the pace of Feb 2024 — large, but not atypical. This suggests the extreme pricing and associated dislocations are not a function of demand, but rather of liquidity,” said Ghali. “Logistical delays likely explain the continued tightness. That being said, with silver EFPs deeply negative and the Shanghai arb window likely open, silver is likely already making its way east from New York vaults and west from Shanghai vaults.”
While TDS has taken a hit with its tactical silver short trade, it remains net positive with its precious metals positions. In early September, the bank closed out its tactical long position in gold, booking more than $3 million in profits.
Neils Christensen has a diploma in journalism from Lethbridge College and has more than a decade of reporting experience working for news organizations throughout Canada. His experiences include covering territorial and federal politics in Nunavut, Canada. He has worked exclusively within the financial sector since 2007, when he started with the Canadian Economic Press.
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