Will there be a silver exchange default? Expert on silver short squeeze in London and the crisis

Silver prices have exploded to a record high near $53 an ounce, igniting fears of a potential exchange delivery default — a rare but seismic event that could shake global commodity markets. The rally, triggered by a short squeeze in London, has pushed the metal’s price above the psychologically crucial $50 mark for only the second time in history, the last being in 1980 during the Hunt brothers’ infamous attempt to corner the market.

At the heart of this unprecedented rally is an acute shortage of physical silver and a massive mismatch between paper contracts and the actual metal available for delivery. According to Alok Jain of Weekend Investing, the situation has evolved into what he calls a “potential market disruption event.”

“Across the world, there is silver in abundance,” Jain explained in a recent video. “But what’s happening now is a confidence crisis. Sellers are holding back because prices are rising daily, and buyers are desperate to get immediate delivery. It’s like an auction where bids keep rising, but sellers keep stepping back. The market is locked.”

What a silver exchange default means

A silver exchange default occurs when futures exchanges such as LBMA (London), COMEX (U.S.), or MCX (India) are unable to fulfill physical delivery obligations on maturing contracts. Normally, less than 2% of silver contracts end in delivery; the rest are settled in cash. However, if even 5–10% of traders demand physical delivery while only a small portion of silver is available in vaults, the system can seize up.

“The problem,” Jain explained, “is that the paper market has grown far larger than the physical market. There might be 1,000 kg worth of silver contracts traded, but only 50 kg of actual silver available for delivery. If even a small number of buyers insist on taking delivery, the exchange could be forced into cash settlement or, in a worst-case scenario, default.”

A red flag for the market

One of the most alarming signs right now is backwardation — when futures prices trade below spot prices, indicating a scarcity of immediately available metal. “In normal times, futures trade slightly higher than spot due to storage and financing costs,” Jain noted. “But now, buyers are paying a premium for silver today rather than in two months. That’s a sign of panic.”

In India, the situation mirrors this global trend. Silver on the MCX is trading nearly Rs 20,000 below the street price, an inversion rarely seen in commodities. “When the spot price is ₹1.7 lakh and futures are ₹1.5 lakh, it tells you people don’t trust they’ll get delivery later,” Jain said.

What is the real issue?

Interestingly, Jain believes the crisis is not purely about the quantity of silver but about trust in the system. “Physical metal exists,” he said. “But people aren’t confident that if they buy at ₹1.46 lakh today, they’ll actually get delivery in two months. It’s a crisis of confidence more than a shortage of silver.”

If the number of buyers demanding delivery keeps rising while sellers remain reluctant, exchanges might have to auction for immediate supply at higher premiums, or even cash-settle contracts, refunding traders instead of delivering metal. Such a move would severely dent confidence in global silver markets.

Could exchanges actually default?

Jain doesn’t predict an immediate collapse, but he warns that the situation is fragile. “Markets don’t crash when prices rise — they crash when confidence breaks,” he said. “If delivery obligations can’t be met, even large exchanges like COMEX or LBMA could face temporary default risks.”

For now, the silver market remains in a state of high tension. With soaring industrial demand, investor panic, and a shrinking pool of available silver, the stage is set for one of the most closely watched stress tests in commodity market history.

“Silver is shining,” Jain concluded, “but trust is dimming. The question isn’t whether prices will fall — it’s whether the system can deliver.”