“Physical is King”: India Drains London's Silver Vaults & The 25-Year Supply Cliff | Phil Baker

Key Concepts

• Retail Investor Surge: Significant increase in micro silver futures volume driven by individual traders.
• CME GlobeEx Outage: A 10-hour disruption on the CME's trading platform due to cooling failure, occurring during a silver price breakout.
• Physical Demand Dominance: Physical market is increasingly driving financial markets, with "physical is king" being a key sentiment.
• Industrial Demand: Growing demand from sectors like solar, EVs, and electronics, leading to commercial users securing long-term inventory.
• India's Role: India has become a major driver of silver demand, with imports increasing significantly and driving up premiums.
• Gold-Silver Ratio: A key indicator suggesting silver is currently catching up to gold's performance.
• Supply Constraints: Mine output is not expected to increase significantly due to long lead times for new projects and regulatory hurdles.
• Inventory Depletion: Exchange inventories are being drained by both industrial users and ETFs, creating tightness.
• Geopolitical Factors: Russia's addition of silver to its state reserve fund and the US adding silver to its critical minerals list highlight its strategic importance.
• Skepticism and Revaluation: Historical skepticism towards silver due to past price bubbles is slowly giving way to recognition of its fundamental industrial demand.

Market Snapshot and Retail Surge

Silver is trading around $58 per ounce, having recently set a new record high. Gold remains steady above $4,200. The US dollar is weakening, and recent ADP jobs data showing 32,000 private sector job losses indicates a slowing economy. The CME is still addressing the aftermath of a 10-hour GlobeEx outage caused by a cooling failure at a data center, which occurred precisely as silver was experiencing a breakout.

Contrary to initial assumptions that central banks or sovereign wealth funds were the primary drivers of the silver market's recent surge, new CME data reviewed by Kiko News suggests that retail investors are the dominant force. Micro silver futures, designed for smaller traders, have seen a 238% increase in volume compared to the previous year. While institutional activity is present, this acceleration is attributed to individual traders acting in concert. The timing of the CME's GlobeEx platform outage, which lasted nearly 10 hours during a silver price spike to new record highs, and the subsequent jump in overseas premiums, highlights where real demand resides.

Fundamentals and the Gold-Silver Ratio

Phil Baker, former CEO of Hecla Mining and former chairman of the Silver Institute, argues that the current silver rally is not indicative of a market top, stating, "We have a long way to go before we're at the top." He emphasizes that the factors driving gold demand also apply to silver, particularly in the United States. However, Baker identifies India's market dynamics as a primary driver for silver.

The macro thesis for silver is supported by the same factors driving gold: market uncertainty, geopolitical chaos (Ukraine, China), and potential tariffs. Silver is seen as "catching up" to gold, and the gold-silver ratio is a crucial indicator. Baker anticipates this ratio will continue to narrow as silver outperforms gold.

Physical Market Dominance and Industrial Demand

The physical market is now influencing the financial market in an unprecedented way. A key quote from the LBMA annual meeting, "physical is king," reflects this shift. This sentiment is echoed by LBMA members, indicating a departure from the market dynamics of the past two decades.

Regarding physical demand, there are approximately 8800 December contracts (around 44 million ounces) standing for delivery on the CME. Notably, the buyers are not bullion banks but commercial users, including solar, EV, and electronics industries. Bloomberg reported that US industrial buyers are securing 6 to 9 months of inventory in anticipation of potential critical mineral tariffs. Baker confirms this trend, stating that industrial users are finally taking his 18-month advice to "don't be short silver."

Industrial demand for silver has more than doubled in 25 years, with approximately 55% of the 1 billion ounces of annual silver demand attributed to industrial uses. The shift from "just-in-time" supply to securing physical inventory suggests a potential breakdown in the traditional inventory model, forcing companies to hold silver on hand to avoid margin squeezes.

India's Pivotal Role in Silver Demand

India's role in the silver market has transformed dramatically. As the fifth-largest economy, growing at 8.2%, India's silver imports in October were four times higher than the previous year. Combined with US bar demand, India accounts for a significant portion of global physical offtake. Traders describe the situation as "musical chairs" with too many claims and not enough metal.

Baker asserts that India is the primary driver of current silver tightness. He notes that silver has moved from London to Mumbai due to this demand. Historically, the silver high in India was around 2200 rupees per ounce in 2011. At the start of 2024, silver was about 1500 rupees per ounce, and it has now surpassed 5000 rupees. Despite these all-time highs in rupee terms, demand remains "insatiable." Baker emphasizes that continued demand from India is the underlying driver of overall silver demand.

The significant increase in Indian imports, which quadrupled year-over-year in October (from 15 million ounces to 60 million ounces), is pulling metal directly from London vaults, the same inventories that COMEX relies on. This four-fold increase is a factor that Western traders may be underestimating. While silver can move globally, the fact that it was being transported by plane highlights the stress levels in the market. Baker tracks imports as the primary indicator of Indian demand, supplemented by direct observation and conversations.

Supply Chain Stress and Potential for Future Squeezes

ETFs also draw from the same LBMA pool as India. The convergence of these two major demand drivers (India and ETFs) pulling from the same supply pool is a key reason for the accelerating squeeze. While the immediate squeeze has been resolved, Baker warns that it can happen again, potentially in COMEX, Mumbai, Singapore, or elsewhere, necessitating the movement of metal between jurisdictions. Given the market stress experienced, he believes further such events are likely.

Geopolitical Significance and National Security

Russia's announcement to add silver to its state reserve fund, a move unprecedented for the country, has coincided with silver outperforming gold. Baker notes that at the LBMA meeting, there was no large appetite expressed by other BRICS nations to follow suit, though he acknowledges that their true interest levels may not be straightforward.

China's customs data shows increased silver and ore imports from Mexico, and the US recently added silver to its critical minerals list. Baker believes the US is "behind" in recognizing silver as a national security asset but commends the administration for its inclusion on the critical minerals list, acknowledging its essential nature for both investment and industrial uses.

Bottlenecks and Supply Chain Vulnerabilities

When considering what might "break first" in the market, Baker sees the pressure points as interconnected: COMEX delivery stress, LBMA inventories draining into India, tightening lease rates, and refiners dealing with shortages in Asia. He states, "they all play together frankly. There is you can't separate them." The high lease rates, for instance, were a direct result of the physical shortage.

The issue is fundamentally about the available silver in good delivery form globally. There is a shortage of the inventory levels required to assure demand.

Mine Output and Long-Term Supply Constraints

Misconceptions about silver supply persist. While the bearish argument has often centered on thrifting, particularly in solar, new data indicates that advanced solar cell technologies (like Topcon HTT) use more silver per watt, not less. Baker believes large-scale thrifting is not feasible in the short to medium term, as demand is growing faster than the ability to thrift.

The timeline from discovery to production for new mines is 10 to 20 years in the current regulatory environment, and even brownfield expansions can take 5 to 10 years. Peak silver mine output was approximately 900 million ounces in 2016, and Baker does not expect this level to be reached again this decade, realistically not until 2035. Last year, the top five global mines produced 41 to 17 million ounces, with the fifth largest mine representing only 2% of global supply.

With deficits running for five consecutive years, the market is being balanced by silver held by individuals and funds. Unlike gold, central banks do not have the same ability to reverse positions and sell silver. The deficits this year are projected to be between 100 to 200 million ounces, adding to previous years' deficits.

Recycling, which accounts for about 150 to 200 million ounces annually, cannot compensate for these deficits due to infrastructure limitations. Historically, recycling came from photography, but now it's primarily from electronics, jewelry, and coins, with limited capacity for growth. Therefore, the supply must come from existing silver held by individuals or from mines, which are not expected to increase production significantly for a long time.

Regulatory Hurdles and Permitting Bottlenecks

The lack of significant growth in mine supply is attributed to a long period of low silver prices, which discouraged exploration. Even with discoveries, regulatory delays are a major bottleneck. Permitting is identified as the primary obstacle, hindering geologists, developers, and operators. While infrastructure challenges can be overcome, regulatory stalls are insurmountable. Baker notes that the US regulatory environment is improving, recognizing the need for critical minerals.

Price Outlook and the Gold-Silver Ratio

The gold-silver ratio has tightened from 88 in July to approximately 74. Gabelli Fund projects silver at $65 as the ratio moves towards its long-term average. Baker believes silver is fundamentally supported by its catch-up to gold and that the ratio could fall below 50 or 60, leading to a dramatic impact on silver prices.

For investors, Baker reiterates that patience is key. He continues to monitor India's demand as the fundamental driver and the levels of inventory available to exchanges.

Strategic Capital Deployment for Miners

If Baker were CEO of a mining company at current prices, he would accelerate exploration activities to expand reserve bases and bring them into production, especially within a supportive regulatory environment like the US. Both near-mine drilling and greenfield exploration are crucial, with greenfield exploration offering the greatest potential for value creation. He believes there are still districts with genuine discovery potential, and rising prices will make older properties economically viable for re-examination.

The biggest mistake mid-tier producers could make is not aggressively advancing their projects. Baker advises against being bashful about exploration and project advancement, particularly in the US, where the regulatory environment is becoming more encouraging.

Byproduct Nature of Silver Supply

Silver is primarily a byproduct of copper, gold, lead, and zinc mining, with very few silver-only mines. This byproduct nature limits the potential for dramatic growth in mine production, as even large mines are unlikely to produce much more than 4 to 5 million ounces of silver. If copper projects slow down due to capex cuts, politics, or permitting, it will have a knock-on effect on silver supply, potentially leading to years of underproduction.

Equity Performance and Market Skepticism

Baker expresses surprise at how long it has taken for silver mining companies to be revalued, given the underlying fundamentals. He notes that silver stocks have performed slower relative to gold than expected. This skepticism is partly attributed to silver's historical reputation as "the devil's metal," with past price bubbles in 1979-80 and 2011 that lacked follow-through.

However, the landscape has changed with the doubling of industrial demand for silver since the mid-1980s, now accounting for 1.2 billion ounces annually, while photographic demand has fallen from a third to about 8%. The economic growth in countries like India, mirroring China's past trajectory, is also a significant beneficiary for silver.

2026 Outlook and Risk Factors

Looking ahead to 2026, Baker anticipates continued chronic tightness, higher premiums, and friction in metal movement. The key question is investor willingness to supply silver to the market and the price at which they will do so. He finds it difficult to envision sustained periods of lower silver prices, expecting volatility but an overall upward trend as long as gold's fundamentals persist and India's demand continues.

The primary risk case for 2026 would be a slowdown in India's economy, which would impact the marginal buyer. Other factors like fading tariffs or drying up financing could also play a role, but the underlying price support is seen as coming from India.

Conclusion

The silver market is experiencing a confluence of factors not seen in years: a surge in retail investor activity, a shift towards physical market dominance, robust industrial demand, and a pivotal role played by India. Supply constraints, driven by long lead times for new mine production and regulatory hurdles, are compounded by draining exchange inventories. While historical skepticism exists, the fundamental drivers, particularly industrial demand and India's insatiable appetite, suggest a strong outlook for silver, with the potential for continued price appreciation and a narrowing gold-silver ratio. The market is navigating a complex interplay of physical supply, industrial needs, retail sentiment, and geopolitical considerations, making it a dynamic and fascinating landscape for the foreseeable future.