Silver’s Two Markets: Paper Prices vs Physical Reality

The short answer is almost nothing in the real world.

The longer answer is where silver gets interesting.

The price most people follow is driven by paper silver, mainly contracts. These contracts are rarely settled with physical metal. They are opened, closed, or rolled. Because of that, prices can move very fast without a single ounce changing hands. 

Futures markets set prices, but they do not clear physical imbalances. When leverage dominates, prices can diverge from physical reality temporarily.

This chart illustrates how a build-up and subsequent unwind of leveraged futures positioning drove ETF flows and amplified silver’s price move.

Silver’s drop from the 120 area toward the 70s was too fast to reflect weakening demand. It was driven by paper selling, rising margin pressure, and forced liquidations as leverage exited the system. Ironically, the earlier rally had been fueled by the same paper positioning, even as physical supply was already tight. That combination made the market fragile. Once positioning shifted, the structure that pushed prices higher pulled them sharply lower. The month-end timing of the move further points to forced selling rather than a fundamental change in value.

The physical market tells a very different story

• Silver has been in a persistent supply deficit, with roughly 800 million ounces drawn from global inventories over the past five years, close to one full year of mine production.
• Mine supply is slow to respond, meaning higher prices do not quickly translate into more metal.
• Industrial buyers add structural pressure, securing supply to protect production rather than timing price moves.

Is Physical Silver Trading at a Premium, or Is Paper Trading at a Discount?

Stress in the physical silver market is not showing up as a single benchmark premium, but across different layers and price levels. These dislocations vary by product, tax regime, and delivery urgency, yet together they point to physical tightness not reflected in futures prices trading around the 70–80 range.

• China (Shanghai): Physical demand remains strong, with premiums often exceeding $8 to $10 per ounce above Western futures prices. This translates into roughly a 10 to 15 percent premium and highlights the divergence between regional physical markets and COMEX pricing.
• Japan has experienced some of the most extreme dislocations. Severe inventory shortages have at times pushed physical silver prices far above official spot levels, underscoring how supply constraints can overwhelm paper pricing.
• Dubai: Retail shortages have pushed small-denomination coins close to the 95–100 per ounce level when futures were trading near the low-70s.
• United States: While less extreme than in Asia, retail premiums remain elevated. One ounce bars and coins typically trade 9 to 13 percent above spot, with higher premiums depending on product type and availability.
• Europe: Physical silver continues to trade at elevated premiums, often around 20 to 25 percent above spot. These levels are partly influenced by VAT but also reflect tight supply and strong investor demand.

These levels are not directly comparable prices, but they show how physical silver is clearing at much higher effective levels than futures markets suggest. Rather than a single anomaly, this reflects paper and physical markets operating in parallel under very different constraints.

Historically, large gaps between paper and physical silver do not persist. Futures prices adjust faster and more violently than physical markets normalize.

Physical premiums usually compress after price adjusts, not before.