Goldman Sachs warns on silver outlook: Physical delivery difficulties are the driving force behind the recent surge, and a sharp correction may occur in the next 1-2 weeks.

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The London Bullion Market Association (LBMA) silver price broke through $50 per ounce yesterday, hitting a record high. However, Goldman Sachs commodity traders warned that the physical delivery difficulties behind this rally will be alleviated in the next 1-2 weeks, and the market may experience a sharp correction.

Behind this surge, the silver market is showing signs of extreme tension. The one-month lease rate soared to -21%, while the daily lease rate even reached an extreme level of -200%, reflecting a severe physical supply shortage in the London spot market.

This supply tightness has caused a dislocation in the normal relationship between LBMA and COMEX futures prices. The LBMA spot price has rarely traded at a $2.7 premium to COMEX futures. As a result, the Chicago Mercantile Exchange has raised margin requirements for silver and gold futures.

Goldman Sachs expects that a large inflow of physical silver from China and the US will ease the tightness in the LBMA market within 1-2 weeks, but the adjustment process will be extremely volatile.

Multiple Factors Overlap Behind Supply Tightness

According to Ole Hanson, Head of Commodity Strategy at Saxo Bank, the supply tightness in the silver market is mainly due to a decrease in LBMA free float. Strong ETF buying is a key driver, while retail demand in India has stayed high ahead of Diwali.

In addition, LBMA inventories were already tight in the first quarter due to a surge in imports related to US tariffs. Although net exports from China remain strong, up 241% year-on-year, out of 101 million ounces of exports, 99.9 million ounces went to Hong Kong, which is outside the LBMA system.

Goldman Sachs commodity trader Adam Gillard pointed out that derivatives positions further exacerbate the physical tightness. LBMA shorts mainly come from EFP long positions (as cheap options against potential 232 tariffs), producer hedging, as well as speculative lease rate shorts established too early by selling parties.

Delivery Challenges Restrict Arbitrage Mechanisms

In theory, traders could address the supply tightness by sourcing LBMA-standard silver bars, shipping them to London, and hedging the silver premium—but in practice, there are multiple obstacles.

Logistics companies need 2-3 weeks to gather metal from multiple US delivery warehouses and airlift it to London. Not all COMEX brands meet LBMA delivery standards, further extending logistics times.

December COMEX longs may have to wait until the end of the delivery window (end of December) to receive the physical metal, increasing financing costs and adding uncertainty to choices for LBMA shorts. LBMA forward liquidity has already dried up, meaning EFP-related silver shorts can only be established in the spot market, explaining why the overnight rollover rate reached 200%.

Adjustment Imminent but Volatile Process

Goldman Sachs expects a large inflow of physical silver from China and the US into the LBMA market in 1-2 weeks, with the curve eventually flattening.

However, this adjustment process is expected to be extremely volatile. Currently, demand far exceeds available supply, and supply-demand dynamics will ultimately dictate price movements. Market participants need to prepare for the impending sharp volatility.

Hedge funds find it hard to short silver for Shanghai Gold Exchange arbitrage, as capital controls prevent physical delivery. Meanwhile, bullion banks may not renew lending of domestic US metals in order to secure physical metal for export.

Risk Warning and DisclaimerThe market carries risks, and investment needs caution. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial situation, or needs. Users should consider whether any opinion, viewpoint, or conclusion in this article matches their particular circumstances. Investment is at your own risk. ```