If you don't hold it, you don't own it

Rock, paper, scissors

Following the silver price crash in the first few days of February when the paper derivatives market drove the Comex silver strike price down by 26% in 24 hours, given the structural global shortage of silver, surely this presented an opportunity to buy physical silver at attractive levels? I therefore set out to add to my holdings of the metal.

My first port of call was the Royal Mint, but the site displays the message ‘Email me when in Stock’ for both silver bars and bullion coins. Perhaps I would have more success with other bullion dealers that provide access to product from smaller secondary mints. Finally, I found a small amount of Swiss 10 ounce bars and Britannia coins on offer from Atkinsons Bullion providing the buying opportunity I sought. However, nobody appeared to have explained to the metals dealers that silver on the Comex and the London Metal Exchanges was now quoted at a little over $70 an ounce. None seemed to have accepted that the price of an ounce of silver was now below $100. Of course, the answer was that the price of the rock bore little relation to the games being played and price manipulation in leveraged paper derivatives. I did buy the small amounts on offer but at prices near or above the highs seen quoted at the end of last year and nowhere near the current LME screen price. The physical rock was only available in tiny volumes at prices at least 25% above the quoted paper price. As of today, I can find none.

This will not end well. March is a major delivery month. Information on open interest in silver derivatives is publicly available and the arithmetic points to an approaching crisis. The data from Comex is extraordinary. In every month of 2025, the number of futures contracts called for delivery was over twice that of the previous year, and a total of 474 million ounces versus 202 million over the entire twelve month periods. So the trend was already highly visible and it has become obvious that the Comex is no longer used primarily as a hedging mechanism - it is increasingly used by industry and trade buyers as a mechanism to access wholesale deliveries of metal. Scroll forward to January 2026 and 49.4 million ounces were called for delivery, four times the 11.8 million January 2025 figure. January is not a major delivery month and these numbers show that market participants are not prepared to risk waiting for March, the next major delivery month.

Four days into February 2026, deliveries of 18.72 million ounces had already been made, a sum exceeding the whole of February 2025, with 98% of open interest being called for delivery, compared with the previously typical 5%-10%. Over the past three years, March open interest has risen from 24 million ounces in 2024, to 80 million in 2025, to 429 million at the time of writing. Some of this will roll forward to May, but we should expect a large proportion to be called. If March simply only matches 2025 with 25% called for delivery, the Comex must deliver 125 million ounces of silver. The more likely percentages of 50% or 70% would require deliveries of 214 million and 300 million ounces respectively.

I am sorry to bombard readers with numbers, but Comex registered silver inventories do tell a very worrying story. Last October, the freely deliverable silver at the exchange amounted to 167 million ounces, and by 22 January this year, this had fallen to 114 million and has since dropped further to 103 million. The pace is accelerating, and by March delivery (from 27 February), Comex inventories are likely to be under 100 million ounces. Using the most conservative estimates, this leaves a shortfall of 20 million ounces, but using less conservative assumptions it is quite possible that the shortfall could be as much as 200 million ounces of silver. The maths doesn’t work, and even on the slender chance that the Exchange survives the March delivery commitments without defaulting, May’s open interest is already above 132 million and July’s 88 million. 

Although these figures move daily, it is hard not to conclude that the writing is written indelibly on the wall - the highly leveraged silver derivatives market has been exposed by the Exchange’s lack of tangible metal to back contracts and is therefore insolvent. Similar dynamics are evident within the gold markets, but supply constraints are much less acute. The structural industrial silver deficit is growing, and above ground stockpiles are exhausted. Over 70% of silver is mined as a byproduct of copper, lead and zinc and it will take years if not decades before we can expect to see any meaningful increase in supply - and of course by then, more silver will be required just to keep pace with the growth in demand for what is now globally acknowledged to be a critical mineral. Truth will out in the end, but the successful short term manipulation of the paper price was intended to shake out nervous holders and allow traders to square their books. The most reliable exposure to silver remains the physical metal and ETFs with 100% designated metal backing each share, the Sprott Silver Trust (SPLV). Silver mining equities also offer leveraged exposure to the rise in the price of the metal. 

Readers might wonder why they should worry about what is happening within a relatively small, opaque and complex silver derivatives market, but the recent volatility provides a warning. What I describe above has a parallel with the 1980 Bunker Hunt bankruptcy, but never before against a background of an acute supply shortage of a critical metal upon which a frightening proportion of the modern world relies. What we have learned is that even derivatives offering traders, consumers and producers hedging facilities in a relatively small underlying market, comes fraught with danger. The silver experience calls into question the safety of other series within the $600 trillion derivatives markets. 

The silver price crash was precipitated by the market’s increased margin requirements that, in a reaction to rocketing prices, forced participants to put up more cash or sell down their positions. A move from a 15% to an 18% margin requirement doesn’t sound much - until you impute the enormous amounts of leverage employed by many market participants. The 2008 subprime mortgage crash was not caused just by poor lending criteria, but by massively leveraged structures that contained these assets. Today, as well as the example provided by the recent silver manipulation, which itself threatens to provide a systemic shock to the banking system, we have the private debt markets showing signs of stress, auto loan bankruptcies and worryingly leveraged AI data centre investments. So there were already enough ‘known unknowns’ to concern investors, quite apart from the relatively small silver derivatives markets that have exposed the financial system to systemic risk. By itself, the bullion banks with leveraged short positions and even an insolvent Comex can be bailed out either by higher prices (tempting eligible holders within the Comex vaults to trade), or by a central bank with an infinite capacity to print Dollars. But this episode does call into question the trust required to sustain larger and even more highly leveraged derivatives markets.

To dodge the bullets, precious metals stackers should stick to ownership of the rock and eschew the paper. If you do not hold it, you do not own it.

About the author 

Jo Welman had a career in the City spanning 45 years and worked in a wide variety of financial sectors. After graduating from Exeter University in 1979 with a degree in economics, Jo spent ten years at Baring Asset Management where he managed a range of UK and US pension funds and unit trusts, investing across multiple sectors including bonds, international equities, commercial and residential property and private equity.

In 1989 Jo became Managing Director of merchant bank Rea Brothers’ institutional and private wealth investment management division. Over the following decade Jo launched a series of specialist investment trusts and funds in a variety of industry and property sectors, before forming a joint venture with reinsurance broker Benfields (now Aon Benfield) and raising one of the first limited liability corporate capital vehicles for the Lloyds insurance market in 1993. As part of his long-standing involvement in the insurance industry, Jo co-founded the Benfield Re-Insurance Investment Trust plc (Brit) in 1995. Following the sale of Rea to Close Brothers in 1999 Jo became Chairman of Brit Insurance Holdings Plc and in 2001, in partnership with Brit and Benfields, he co- founded specialist asset management firm, EPIC Investment Partners (EPIC).

Jo continues to provide corporate finance and investment advice to entrepreneurs and private investors. He sits on the board as a non- executive director of ARK Syndicate Underwriting

“Feet up by the pool”

Jo does not receive any remuneration for his EPIC commentary. Instead, EPIC is pleased to promote the latest edition of his book “Feet up by the pool”.

Profits from sales of the book go to The Money Charity, a charity that shares Jo’s objective to help fill in some of the worrying gaps in the school curriculum. These omissions leave many young adults lacking in the financial awareness that they need to survive in a world where they will rely on their own savings if they are ever to stop working. Even if they earn the right to a full State Pension, today this amount hardly covers council tax and utility bills, and so they need to save and build up a sum of capital amounting to around twenty times their desired retirement income. A frightening number.

As Jo eloquently says, “If we can do our bit to raise awareness of the impending UK saving and pensions crisis, the exercise will have been worthwhile.”