Could India Be the Straw That Broke the Silver Camel's Back?

Could India be the straw that broke the silver camel’s back?

Most people associate India with gold, but the country also ranks as the world’s top silver consumer.

As we reported yesterday, one of the reasons for silver’s surge to record levels in recent days is a shortage of available silver in London. This is being partly driven by voracious demand in India.

India’s silver market reveals deep structural problems indicative of the broader global market.

Simply put, there isn’t enough silver. And risks of a major blowup are mounting.

Demand for silver in India began to surge earlier this year after the white metal zoomed to new all-time highs in rupee terms.

With growing investor interest in silver during an environment when gold seems pricey, a silver supply shortfall in India also sent the price to a significant premium locally.

Supply simply can’t keep up.

Indian silver imports exploded in January and February, but fell off as the year progressed. According to Reuters, through the first eight months of this year, demand was down about 42 percent from the same period in ’24. Rising demand in recent weeks soaked up the surplus imported last year that now needs to be met through additional imports today.

Initially, Indian buyers were primarily sourcing silver from Hong Kong, but they reportedly shifted more toward London during the Chinese Golden Week Holiday in the first week of October. This has exacerbated the silver shortage in London.

The free float of available silver in London was already down by over 75 percent, thanks to a recent explosion in silver ETF demand. Large silver shipments to the U.S. earlier this year, due to worries about tariffs, exacerbated the situation.

Indian traders are trying to get their hands on metal wherever they can. At least one major silver fund in India halted acceptance of new investors, citing a lack of metal. However, other investment vehicles are still accepting new funds. This raises worries that they might be unable to source the needed metal.

Meanwhile, Money Metals Exchange just arranged for a large shipment of 1,000-ounce silver bars from the U.S. destined for India via Dubai. Money Metals CEO Stefan Gleason said, “We might be doing this daily for a while.”

Bullion banks are engaged in similar operations, standing for delivery of silver on the COMEX and airlifting silver bars to Europe and beyond.

According to an article in BW Businessworld, an Indian financial publication, demand for silver is “frenetic.”

“Shelves are empty; mints are running overtime.”

However, there is an unusual anomaly in the Indian market. MCX futures are trading by as much as ₹20,000 per kg below the street price. Businessworld said this isn’t a "small kink."

“It’s a gaping hole in India’s precious metals market — and it’s getting wider.”

A commodity strategist who requested anonymity told Businessworld, “This isn’t a normal backwardation.”

“This is market stress. It’s a signal that someone, somewhere, can’t deliver metal.”

And therein lies the rub. There simply isn’t enough silver to meet the surging demand. And it's not just an India problem.

The global silver market is on track for its fifth straight structural market supply deficit.

Global demand outstripped the silver supply for the fourth consecutive year in '24. The structural market deficit came in at 148.9 million ounces. That drove the four-year market shortfall to 678 million ounces, the equivalent of 10 months of mining supply in 2024.

The Silver Institute projects a fifth straight supply deficit this year.

When miners can’t produce enough metal to meet demand, users must source silver from existing above-ground stocks. But to entice people to let their silver go, the price must rise.

Last year, there was record industrial demand for silver, but investment demand was tepid. But as the price neared record levels this year, investment demand has surged as well, stressing the market close to a breaking point.

As Businessworld put it, “Globally, silver inventories are collapsing.”

“Borrowing costs for the metal in London have spiked to multi-decade highs. ETFs and industrial consumers — from solar manufacturers to electronics firms — have swallowed available stock. Refiners in Canada, Australia, and even Vietnam are reporting backlogs.”

Businessworld reports that the silver shortage has turned the physical silver market in India into a “feeding frenzy.” 

“So acute is the shortage that India’s biggest fund houses — Kotak Mahindra, UTI, and SBI — have suspended fresh subscriptions to their silver ETFs, citing ‘market conditions’ and ‘supply constraints.’”

This chaos is bleeding over into the MCX (the Indian futures market, similar to the COMEX in the U.S.). Silver stocks in MCX vaults are getting thin.

“If even a fraction of contract holders demanded delivery, there isn’t enough metal,” a bullion trader told Businessworld.

Businessworld explained that trading physical silver for futures contracts looks like a no-brainer on paper. But it is an arbitrage few will touch. (Arbitrage is the practice of buying and selling an asset simultaneously in different markets to profit from a temporary price difference.)

Under current market conditions, a trader could sell silver at ₹1.70 lakh/kg, buy MCX futures at ₹1.46 lakh/kg, take delivery on Dec. 5, and pocket ₹24,000/kg in profit.

Who could resist?

Right now – almost everybody.

A trader quoted by Businessworld explained why.

“Who will trust delivery in this environment. Even if you have cash and contracts, you can’t be sure you’ll get the metal.”

This situation is most acute in India. However, it is indicative of the global market and explains why prices have risen so quickly.

We could see easing pressure in the upcoming weeks as metal moves to the areas of highest demand, but there is no easy fix for the underlying problem.

There is a lot of demand for silver. And there isn’t a lot of silver to meet that demand.

Again, this isn't just about India. Gleason summed it up.

"Maybe India is the straw that has finally broken the silver camel's back. Given India demand was heavily skewed to gold, just a small switch to silver can make a big difference in a small physical market dominated by leverage."

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