The Silver Short Squeeze – Risks and Precautions

As of October 31, 2025, the global silver market is grappling with unprecedented supply shortages, driven by surging industrial demand from sectors like solar energy, electronics, and AI manufacturing. Annual deficits have exceeded 200 million ounces, pushing prices toward multi-year highs and creating conditions ripe for a massive short squeeze. A short squeeze occurs when short sellers, those betting on price declines, are forced to buy back positions as prices rise sharply, often exacerbating volatility. While this can lead to explosive gains for long-position holders, it poses significant dangers, especially for those invested in “paper silver” vehicles like exchange-traded funds (ETFs) such as SLV. Based on my latest market assessment, I am issuing a cautionary alert to investors and traders about the risks associated with these “paper silver” ETFs in an effort to help mitigate potential pitfalls.

The Brewing Storm: Understanding the 2025 Silver Short Squeeze.

The Silver market has entered a critical phase, marked by extreme backwardation, where spot prices exceed futures prices by historic margins, such as the $2.88 spread observed recently. This signals acute physical shortages, with global hubs like the London Bullion Market Association (LBMA) and COMEX reporting critically low inventories. Commercial “float” is estimated at around 600 million ounces, while ETFs hold 600-700 million, tightening liquidity and heightening the risk of an institutional short squeeze. For investors, this environment amplifies vulnerabilities in paper-based holdings where the illusion of abundant supply can shatter amid real-world constraints.

Key Risks in Holding Silver ETFs During a Short Squeeze

Investing in silver ETFs like SLV (iShares Silver Trust) offers convenience but exposed holders to amplified dangers in a squeeze scenario. Unlike physical silver, these “paper” instruments rely on complex financial structures, custodians, and market mechanisms that can falter under pressure.

Counterparty and Custody Risks

SLV is backed by physical silver held by JPMorgan Chase, but in a squeeze, shortages could prevent redemptions, leading to cash settlements instead of metal delivery. This counterparty risk is heightened by high short interest, equivalent to about 10% of global annual production, potentially leaving investors without access to the underlying asset when it is most valuable. In my last weekly report (dated October 29^th) I explained to our members how I have been parlaying my SLV position over the years in an effort to grow the size of the position. I also talked about how I was now diversifying the position into the Sprott Physical Silver Trust (Ticker PSLV) and a handful of silver mining companies. Personally, I just do not trust JPMorgan as the custodian for BlackRock’s iShares Silver Trust, and I am not quite sure how they would handle a major short squeeze in the silver market. In 2020, JPMorgan was forced to pay a $920 million fine for manipulating silver prices, and in 2013, they paid another $920 million to regulators related to the “London Whale” scandal. So, my lack of trust is most certainly justified. Let’s face it: global ETF shortages have already disrupted trading, imposing restrictions and creating operational hurdles. My experience tells me that this bull market in silver is just the beginning of the “big squeeze” that’s yet to come.

Price Decoupling and Manipulation

Backwardation can cause ETF prices to decouple from the spot silver price, trading at premiums or discounts that erode returns. Heavy short selling in funds like SLV suppresses prices artificially, even as physical demand soars, but a squeeze could trigger rapid reversals, catching shorts off-guard and amplifying volatility. Investors may face “fails-to-deliver” (FTDs) and borrowing fee spikes, further distorting the market.

Liquidity and Volatility Challenges

In extreme conditions, liquidity can evaporate, leading to wide bid-ask spreads, trading halts, or forced liquidations, similar to what we saw during the GameStop (Ticker GME) short squeeze back in May 2024. The 2025 supply squeeze has already caused problems for short sellers in futures, and ETFs are not immune. Prices could surge unpredictably, but retail investors risk being whipsawed if premiums collapse post-squeeze.

Systematic and Regulatory Threats

Broader market interventions, such as force majeure clauses or regulatory suspensions, could exacerbate losses. With silver’s industrial ties, geopolitical factors or supply chain disruptions add layers of unpredictability, potentially turning a hedge into a liability. These risks are not hypothetical; veteran investors like Rick Rule have described potential squeezes as a “religious experience” for shorts, underscoring the pain for unprepared participants.

Precautions: Safeguarding Your Investments

While the allure of quick gains in a silver squeeze is tempting, prudence is essential. Here are actionable steps to avoid pitfalls:

1. Prioritize Physical Silver Over Paper ETFs: Opt for direct ownership of physical bullion to eliminate counterparty risks and ensure true asset control. This avoids issues like cash settlements and provides a tangible hedge against systematic failures.
2. Chose Safer ETF alternatives: If convenience is key, consider closed-end funds, like PSLV (Sprott Physical Silver Trust), which offers physical redemptions and government-backed custody by the Royal Canadian Mint, reducing manipulation vulnerabilities compared to SLV.
3. Monitor Market Indicators Closely: Watch for backwardation spreads, ETF premiums, and short interest levels. Avoid fresh allocations during inflated premiums, as history shows they signal caution. Use tools like COMEX and LMNA data to gauge physical tightness.
4. Diversify and Manage Position Sizes: Do not over-allocate to silver; spread risks across assets. Set stop-loss orders (using my 1% Rule for Managing Risk) and avoid leverage, which can magnify losses in volatile squeezes.

Proceed with Caution in the Silver Arena

The 2025 silver short squeeze presents both opportunity and peril, with paper ETFs like SLV amplifying risks through structural flaws and market dynamics. By understanding these threats and adopting precautions like favoring physical holdings or safer alternatives, investors and traders can better protect their portfolios. Remember, in volatile markets, the real value lies in preparation, not speculation. This is not financial advice. Always conduct thorough due diligence.

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