Silver Leasing Rates Soar Amid Tariff Anxieties

The recent surge in silver leasing rates has once again disrupted the precious metals market. Traders are concerned that the US might impose additional tariffs on silver, further squeezing already tight physical supplies in London and exacerbating price discrepancies between major trading centers. Spot silver prices have already re-established themselves above $40 per ounce, a level not seen in 14 years. As of this writing, spot silver is trading at $41.25 per ounce, up nearly 43% year-to-date.

Impact of Silver's 'Critical Metal' Designation

In August, Washington designated silver as a “critical metal” for national security, sparking market fears that then-President Donald Trump might include it on a tariff list. Trump had already ordered an investigation into “critical minerals” in April of that year. As a result, New York futures prices for silver have traded higher than the international spot benchmark, with traders factoring in potential tariff risks and holders scrambling to ship silver to the US to earn a premium. Natixis analyst Bernard Dahdah noted, “The US market is worried that silver could be subject to tariffs, and this strong demand for physical metal is reducing the amount of silver available for leasing in the London market, thereby pushing up silver lease rates.”

Shrinking Inventories and Refineries' Shift to Gold

In reality, even without new policy disruptions, spot silver supplies were already tight. Recently, European refineries shifted their focus to re-melting gold bars due to the confusion caused by Trump's tariff policies. Simultaneously, London inventories continued to decline as investors flocked to gold- and silver-backed ETFs. These ETFs have seen gains of over 35% and 40% respectively, year-to-date.

Rising Cost of Borrowing Silver

The spike in silver leasing rates reflects an overall tightening in the market. Comex silver futures are trading about 70 cents above the London spot benchmark, and the cost of borrowing silver short-term in London has surged above 5% for the fifth time this year, far above the historical average of near zero.

Looking Ahead

One-year forward contracts are pricing below spot, a rare phenomenon reflecting stronger demand for immediately deliverable metal. This could be driven by traders eager to ship silver to the US before tariffs potentially take effect. Similar price swings earlier this year generated significant profits for traders at major banks like JPMorgan Chase and Morgan Stanley. At the time, Trump's comprehensive tariff agenda disrupted global financial and commodity markets. The unusually large spread between London and New York attracted a flood of precious metals into the US, as traders raced to capitalize on arbitrage opportunities. However, precious metals were exempted from tariffs in April, quickly ending that trading wave. According to data from the CME Group, delivery arrangements for Comex contracts expiring this month have been significantly higher than usual so far in September, primarily involving deliveries on behalf of gold bank clients. The data does not specify whether these deliveries are for arbitrage or simply to cover short positions. Silver inventories in Comex warehouses have also risen slightly in the past month, currently at their highest level since 1992. Despite this, the market remains fraught with uncertainty regarding Trump's tariff policies. BNP Paribas senior commodity strategist David Wilson stated, “It’s extremely difficult to trade in this uncertainty.” “If you look at the US ETF holdings, that’s been exploding,” he said. “So the market demand has been ongoing.” He added that traders shipping large quantities of precious metals to New York earlier this year to capture the premium wasn’t a one-off event. Now, more investors are beginning to believe that gold and silver prices still have room to rise, “which means that we may not see a sell-off.”

Conclusion

The surge in silver leasing rates reflects the uncertainty and anxiety in the precious metals market, primarily driven by concerns about new US tariffs. While the impact of these policies remains unclear, price volatility is likely to persist, creating both opportunities and challenges for traders and investors alike.

Analyzing the Price Volatility of Silver

Silver's price volatility is influenced by several factors beyond just tariffs and leasing rates. Its dual role as both a precious metal and an industrial metal contributes significantly to its price fluctuations. Industrial demand for silver, particularly in electronics, solar panels, and other applications, can impact its price independently of investment sentiment. Furthermore, the silver market is relatively small compared to the gold market, making it more susceptible to large price swings triggered by shifts in investor sentiment or speculative trading. The leveraged nature of futures trading can amplify these price movements, especially during periods of uncertainty or heightened volatility. Understanding these underlying factors can help investors better navigate the complexities of the silver market and make more informed decisions regarding their investments.