China’s big silver squeeze persists even as prices steady

SHANGHAI – International silver prices have steadied after an epic bout of turbulence, but supplies in China are still being pinched as investment and industrial demand drain stockpiles.

Domestic producers and traders are struggling to fill a backlog of orders, pushing up near-term prices and leaving the market heavily backwardated.

The front-month contract on the Shanghai Futures Exchange (SHFE) has surged to a record premium, indicating the market’s overwhelming preference for prompt deliveries of the metal. 

“Such a large backwardation is driven by an inventory crisis and the depletion of deliverable material,” said Sichuan Tianfu Bank senior analyst Zhang Ting. “Institutions still have incentives to continue squeezing the market for profit.”

Meanwhile, short-sellers on the Shanghai Gold Exchange (SGE), who bet that silver prices would fall, have been paying long holders deferral fees since late December to avoid having to make deliveries, highlighting a scarcity of metal to close positions.

The silver market’s historic sell-off since the end of January has erased most of the 61 per cent gain made in the first weeks of 2026. That rally was supercharged by a wave of speculative buying in China and elsewhere, as the white metal briefly overtook gold as a repository of fears over the dollar, the US Federal Reserve’s independence and spiralling geopolitical confrontations.

The relatively illiquid silver market is no stranger to extreme moves, including a worldwide squeeze on supplies in the autumn. That left Chinese inventories already depleted when investment demand spiked in December. Since then, stockpiles at warehouses linked to the SHFE and SGE have dropped to levels last seen more than a decade ago.

Demand for investment bars has stayed high. In Shuibei market in Shenzhen, China’s biggest bullion hub, merchants can easily find buyers for bars at premium prices. “Whenever there are stocks, they’re sold off quickly,” said Shenzhen Guoxing Precious Metals head of risk Liu Shunmin. 

Industrial needs are also contributing to the tightness. China’s solar manufacturers, which use silver in panels, are front-loading production to meet demand ahead of the loss of export tax rebates on April 1.

Many firms have taken advantage of the recent price collapse to buy the dip, said Shanghai Soochow Jiuying Investment Management head of trading Jia Zheng. 

The only way to ease the market’s immediate tightness in supply is if smelters can ramp up production during the week-long Lunar New Year break, said Jia, although that is a time of year when activity typically tails off.

There are signs, though, that the speculative fervour is cooling.

Aggregate open interest on SHFE has fallen to its lowest in more than four years as investors lighten their positions ahead of the holiday, which begins on Feb 16. BLOOMBERG