The silver market is facing increasing pressure as trade war fears escalate, with higher interest rates on borrowing the metal adding to signs of global dislocation.
A surge in rental rates for the precious metal has been the latest warning sign, with concerns growing over the impact of further tariffs from US President Donald Trump. That has prompted a rush to ship silver to the US in a bid to capture a premium in New York, which could put pressure on London.
The precious metals gold and silver have been in a bearish spiral this year, as Trump has challenged the global trade order. That has spurred demand for havens, and also opened up rare price dislocations between major markets. While spot silver has gained about 17% this year, making it one of the best performing commodities, futures prices in New York have outperformed.
On the physical level, tariff concerns, particularly levies on Canada and Mexico, and broader reciprocal restrictions that could come into effect next month, have drawn large amounts of gold and silver from London to US vaults. But given their relative density and value, gold tends to be transported by air, while silver often takes a much longer journey, usually by ship.
Rental rates for borrowing metals, generally for short periods, have surged. One-month rates for silver hit 6% this month after a bigger jump in February. That partly reflects concerns about rapidly depleting inventories in the British capital, with holdings hitting a record low last month. Moreover, not all that is left is tied to exchange-traded products. "I expect the rental rates in London will remain high for about two to three months," said Cao Shanshan, an analyst at COFCO Futures Co. With the U.K.-to-U.S. transfer underway, "silver is much larger than gold, so the silver transfer is likely to take longer," he said.
The totals reported by U.S. exchanges reflect the chaos. Comex-measured silver inventories have risen to their highest level in data going back to 1992 after surging 40% so far this quarter, a record-breaking gain. While New York is still attracting metals for now, there are also concerns that flows could be thrown into a protracted reversal if silver runs into a shortage in London vaults.
"If the long-touted ‘silver squeeze' materializes, these slower trade flows would be a major contributor to prolonging" any potential disruption, BMO Capital Markets analyst George Heppel said in a note. That's because it takes time for silver stocks to flow from the U.S. back to London, he said.
The U.S. imports about 70% of its silver from Canada and Mexico, which have borne the brunt of the Trump administration's trade moves so far. Ottawa then announced retaliatory tariffs of 25% on about C$30 billion ($20.8 billion) of U.S.-made goods, including silver. Trump has since reiterated his desire for April 2 to mark a new wave of levies.
"The market is likely underestimating the scale and impact of the U.S.'s April 2 reciprocal tariffs," Citigroup Inc. analysts including Max Layton said in a note, highlighting the price dislocation. There could be "substantial upside potential if reciprocal tariffs are implemented over the next six months," they said, adding that silver is unlikely to be exempt from the levies. Read More: Lutnick Praises UK, Mexico, Blasts Canada for Trade Retaliation
Spot silver was trading just above $34 an ounce on Tuesday, with Comex futures nearly 70 cents higher. TD Securities also signaled its concerns. "If the reciprocal tariffs were really the same, you would expect retaliatory tariffs on Canadian silver and that's about 20% of U.S. imports — so there's a higher risk associated with silver," said Daniel Ghali, senior commodity strategist at TD. "Even if the disruption is completely resolved overnight, we can't go back to the world before because you never know what's going to happen the next day."
Source: Bloomberg
