Market Analysis •
Coverage Ratio Demystified
A concise guide to understanding futures coverage ratio and its impact on silver prices.
TL;DR – Coverage Ratio in a Nutshell
| Concept | What it measures | Typical market implication |
|---|---|---|
| Open Interest (OI) | Total number of outstanding futures contracts (each = 5 000 oz for COMEX silver). | The potential amount of metal that could have to be delivered when the contracts expire. |
| Physical coverage | How many ounces of that OI are already “assigned” to real silver sitting in CME‑approved warehouses. | Those contracts can’t be rolled without moving the actual metal. |
| Coverage ratio = Physical coverage ÷ OI (expressed as %). | The percentage of contracts that are already backed by physical metal. | A high number means a lot of the market is “locked‑in” to real silver; a low number means most contracts are purely speculative. |
Why a low coverage ratio does not automatically mean “price will go up because there isn’t enough silver”
- Low coverage = plenty of “paper” that can be closed/rolled without moving metal, so delivery pressure is low.
- Price moves are driven primarily by actual inventories, demand outlook, cost‑of‑carry and net positioning. A tight inventory can push spot up, but the premium (futures‑physical divergence) stays modest when most contracts are uncovered because traders can unwind them easily.
Why a high coverage ratio matters
- When > 60 % of OI is already tied to real silver, any short side that wants to stay in the market must either obtain physical metal, borrow it, or close before expiry. This creates a delivery bottleneck.
- The bottleneck adds an extra premium on futures (often 15‑25 % above spot) on top of normal cost‑of‑carry, because participants are willing to pay for the right to receive scarce metal at expiry.
Quick sanity‑check checklist
| Question | What to look for |
|---|---|
| Is inventory falling? | Yes → spot pressure upward. |
| Is coverage ratio high? | Yes → delivery pressure adds a premium on top of any spot move. |
| Is coverage ratio low? | No delivery bottleneck; premium component likely small, even if spot rises. |
| What’s the net OI bias (long vs short)? | Predominantly uncovered shorts often signal bearish sentiment despite low inventories. |
Bottom line
- Coverage ratio ≠ scarcity. It tells you how many contracts already have real silver attached.
- Only when low inventory and high coverage coincide do we see the classic “futures‑physical divergence” with a strong premium.
- To gauge price direction, consider both inventory levels and coverage ratio, plus demand outlook and cost‑of‑carry.
This post is for educational purposes only. It does not constitute investment advice.