Silver Flashes Rare Warning Signal as Physical Market Seizes Up - BofA Targets $65

Traders are chartering cargo planes to fly silver bars from New York to London, a desperate measure that reveals how severe the physical silver shortage has become.

Since October 9, spot silver at $52.51 has traded above December 2025 futures at $51.05, inverting the normal market structure where futures command premiums due to storage and financing costs. The persistent backwardation, combined with London lease rates that spiked as high as 39% and widespread physical shortages from India to Australia, has prompted Bank of America to raise its 2026 silver forecast to $65, the first major bank to make such a bullish call.

Spot silver (orange line) trades above Dec 2025 and Mar 2026 futures

London’s Liquidity Crisis Reaches Critical Mass

The epicenter of this dislocation is London, where silver lease rates exploded to 39% on October 9 before moderating to 11%. Even at current levels, borrowing costs remain extraordinarily elevated compared to typical rates below 1%. The numbers expose a fundamental problem: there isn’t enough physical silver available to meet demand in the world’s most important precious metals trading hub.

London silver prices are trading $1.55 above New York Comex prices, an arbitrage gap that normally would close within hours as metal flows to the higher-priced market. Instead, the spread persists because traders face a critical bottleneck: uncertainty around Section 232 tariff investigations. Silver was added to the U.S. critical minerals list in September 2025, making it potentially subject to import tariffs up to 50%. Shipping metal to London risks getting caught if tariff rules change mid-transit, destroying profits overnight.

Hence the extraordinary solution: air freight. Flying silver (typically reserved for gold due to its superior value-to-weight ratio) only makes economic sense when spreads are wide enough to cover expensive transport plus tariff risk. That this arbitrage exists at all demonstrates severe market dysfunction.

"There’s a genuine shortage of silver in London, but you’ve got 500 million ounces sitting in Comex doing nothing." Ryan Mangan, head of global metals trading at Macquarie, told Reuters. This paradox (massive inventories immobilized while London’s market seizes up) illustrates how fragmented the silver market has become.

Five Years of Deficits Drain Global Inventories

The current crisis didn’t emerge suddenly. It’s the culmination of five consecutive years of supply deficits totaling approximately 800 million ounces, nearly an entire year of global production.

According to the Silver Institute, the 2025 deficit is projected at 118-149 million ounces, continuing a structural imbalance where consumption consistently exceeds mine production. With output stagnating around 830 million ounces annually while demand surges past 1.24 billion ounces, the 400+ million ounce gap must be filled from existing inventories.

Those buffers are now critically depleted. COMEX registered stocks (available for immediate delivery) have collapsed over 70% from their 2020 peak, dropping from 346 million to just 82 million ounces by December 2023. Global ETF holdings decreased by 118 million ounces during 2023 alone. London vault holdings fell 40% between 2022-2023.

Industrial Demand’s Relentless Rise

What makes this deficit particularly intractable is that industrial demand (which cannot easily be deferred) is exploding due to the global clean energy transition.

Solar panels consumed approximately 232 million ounces in 2024, with projections reaching similar levels through 2028. Each panel contains 15-20 grams of silver, with advanced technologies like heterojunction cells requiring up to 150 milligrams per watt. Global solar capacity is forecast to reach 3,500 gigawatts by 2028, up from approximately 1,000 gigawatts in 2023, translating to sustained strong demand regardless of price.

Electric vehicles add another demand vector, with each EV containing more silver than combustion vehicles due to battery management systems (potentially up to 1 kg per pack), power electronics, and charging systems.

Unlike investment demand that fluctuates with sentiment, manufacturers generally cannot reduce silver usage without compromising product performance. They must procure metal regardless of price, creating an inelastic demand floor absent in previous silver cycles.

Investment Surge Compounds Physical Stress

While industrial demand provides the foundation, investment flows have accelerated in 2025. Global silver-backed ETF inflows reached 95 million ounces in just the first half of 2025, exceeding all of 2024’s inflows. Total global ETF holdings reached approximately 1.13 billion ounces by mid-2025.

In India, silver ETF inflows tripled gold ETF flows during 2025, with funds like HDFC Silver ETF delivering returns exceeding 100% year-to-date. However, several major Indian mutual funds (including Tata, Kotak, SBI, and UTI) temporarily suspended new lump-sum subscriptions in October due to high physical silver premiums and limited LBMA-certified bar availability.

Once metal enters ETF vaults, it becomes effectively unavailable for industrial use or futures delivery, further tightening available supply.

Bank of America Eyes $65 Silver

Bank of America became the first major financial institution to raise its 2026 silver forecast to $65 per ounce (with an average of $56.25), citing persistent supply deficits and irreversible industrial demand from the green energy transition.

BofA analysts noted that breaking $50 is "not merely a technical event but a necessary repricing mechanism to balance global demand with constrained supply." This distinguishes the current rally from previous speculative spikes, suggesting structural rather than cyclical forces.

Goldman Sachs, while also bullish on precious metals, warns of "greater volatility and downside price risk" for silver compared to gold, noting silver lacks the central bank buying support providing a floor under gold prices. They suggest the liquidity crunch may be temporary, with higher London prices eventually encouraging metal flows.

How 2025 Differs from 1980

The inevitable comparison to silver’s previous peak reveals critical differences. The January 1980 spike to $52.50 was driven by the Hunt Brothers’ attempted market manipulation through massive accumulation. When exchanges froze new speculative positions, prices collapsed as the scheme unraveled.

The 2025 environment is different. Current demand is driven by irreversible industrial trends. The green energy transition cannot be abandoned without reversing climate commitments that have achieved global policy consensus. Solar deployment will continue. EV adoption is mandated by regulation in major markets.

Silver is being repriced as both an essential industrial metal and a monetary asset, a dual dynamic absent in purely speculative episodes.

Key Levels and Catalysts Ahead

Several scenarios could drive silver’s next major move:

Squeeze intensifies: If physical delivery pressures increase and lease rates spike above 50%, silver could surge toward $60-65 as more shorts are forced to cover. This requires London supply remaining constrained despite arbitrage flows beginning.

Squeeze resolves: If metal flows from New York to London and lease rates normalize, backwardation could reverse, triggering a 15-30% correction as speculative excess unwinds. This would still leave silver well above 2025’s starting levels.

Tariff implementation: If Section 232 tariffs of 25-50% are imposed on silver imports, it would reshape global flows, potentially supporting prices by restricting U.S. market supply.

Critical levels to monitor: $50 as psychological support, December futures convergence with spot (currently $51.05), and lease rates returning below 5% as a signal that physical stress is easing.

The Takeaway

Silver’s sustained backwardation signals that decades of paper market dominance over physical fundamentals is breaking down. The convergence of five-year supply deficits, explosive industrial demand from irreversible green energy technologies, and record lease rates creates conditions unlike anything since 1980, but built on structural rather than speculative foundations.

Whether prices reach Bank of America’s $65 target or correct first depends on how quickly physical supply reaches London. But the broader secular story (silver’s transformation from investment metal to critical industrial commodity) suggests higher prices may be necessary to balance supply and demand over the coming years. The rare warning signal of sustained backwardation indicates the market is revaluing silver as a strategic resource, and that repricing appears to have just begun.