Understanding the concept of Futures‑physical divergence
A clear explanation of futures‑physical divergence, COMEX inventories, open interest and what these metrics mean for the physical silver market.
Introduction
In recent SilverBug posts we highlighted a striking data point:
Futures‑physical divergence: COMEX inventories fell to ~113 M oz with > 60 % of open interest covered by physical delivery commitments, creating a premium of 15‑25 % over paper contracts.
If you are new to precious‑metal markets, that sentence can feel like jargon. This post breaks down each term – futures, physical inventory, open interest and the resulting premium – and explains why they matter for anyone watching the silver market.
1. What is a Futures Contract?
A futures contract is an agreement to buy or sell a specific amount of a commodity (in our case, one troy ounce of silver) at a predetermined price on a set future date. The key features are:
- Standardised size: On the COMEX exchange a standard silver futures contract represents 5 000 ounces.
- Margin‑based trading: Traders only post a fraction of the contract’s value (the margin) and settle daily gains or losses.
- Physical delivery option: Most contracts are physically settled – at expiry the seller must deliver actual silver to a COMEX‑approved warehouse, unless they close out the position beforehand.
Avoiding Physical Delivery
Most market participants who do not want to take or make physical delivery simply close out their position before the contract’s last trading day. This can be done by:
- Selling a long position (or buying back a short) in the same month‑ahead contract, which offsets the open interest.
- Rolling the exposure into a later‑month contract – close the expiring contract and simultaneously open a new one further out.
- Using a cash‑settled silver futures product or an ETF/forward that has no delivery mechanics.
If you fail to offset the position, the clearinghouse will automatically assign physical delivery based on the remaining open interest. Therefore, closing or rolling is the only reliable way to avoid receiving (or having to deliver) actual silver.
Because futures trade 24/7 on electronic platforms, their price reflects market expectations of where spot (cash) silver will be in the future. This price is often called the “paper” price because most participants never intend to take delivery.
2. Physical Silver Inventories – The Real‑World Stockpile
Inventories refer to the amount of physical silver stored in COMEX‑approved depositories (e.g., the New York and London warehouses). These numbers are published daily by the CME Group.
- Why inventories matter: They represent the metal that can actually be delivered against expiring contracts. A shrinking inventory signals tighter supply for those who need to take delivery, while a growing inventory indicates ample physical metal.
- Current level (as of Dec 2025): Approximately 113 million ounces – down from roughly 130 M oz a year earlier.
When inventories fall, the market perceives a scarcity risk. Traders who must obtain physical silver for delivery will be willing to pay more than the paper price, creating a premium.
3. Open Interest – How Much Metal Is “On The Table”?
Open interest (OI) is the total number of outstanding futures contracts that have not been settled or closed. It is different from daily volume, which measures how many contracts changed hands in a single day.
- Interpretation: High OI means a large amount of metal is “locked‑in” to be delivered at some point in the future.
- Physical coverage ratio: When we say > 60 % of open interest is covered by physical delivery commitments, we mean that more than 60 % of those contracts are held by participants who have already earmarked or own the actual silver needed for delivery. The remaining OI is speculative – traders betting on price moves without intending to take delivery.
A high coverage ratio amplifies the link between inventory levels and futures prices, because many market participants depend on the real‑world metal supply.
4. Futures‑Physical Divergence Explained
Futures‑physical divergence occurs when the price of a paper (futures) contract deviates significantly from the spot price implied by physical inventories and delivery costs. The divergence is expressed as a premium (or discount) on the futures price.
How the premium forms:
- Inventory decline: COMEX inventory drops → fewer ounces available for delivery.
- High coverage ratio: Most open interest is backed by actual metal, so traders cannot simply “roll” their positions into new contracts without obtaining physical silver.
- Delivery constraints: Storage space, insurance and transportation costs rise as inventories tighten.
- Result: Buyers willing to pay extra for the right to receive physical silver at contract expiry → futures price sits 15‑25 % above the cash spot price.
The premium is a market signal that physical scarcity is influencing paper pricing. When inventories rebound, the premium usually narrows as delivery risk eases.
5. Why Should You Care?
For Investors:
- Pricing indicator: A widening premium suggests physical supply stress – potentially bullish for spot silver prices and for physical bullion holdings.
- Arbitrage opportunities: Sophisticated traders may buy physical silver, store it, and sell futures contracts to lock in the premium (known as “cash‑and‑carry”). The profitability of such strategies depends on storage costs versus the observed premium.
For Industrial Users:
- Cost forecasting: Companies that need silver for solar panels or EVs watch the premium because a persistent gap can raise their input costs even if paper futures look cheap.
For Market Analysts:
- Macro‑signal: Persistent divergence often precedes broader market moves. It tells you whether the market is pricing in real physical constraints or merely speculative sentiment.
6. Putting It All Together – A Quick Checklist
| Metric | What to Look For | Implication |
|---|---|---|
| COMEX Inventories | Falling below ~120 M oz (historical median) | Tighter physical supply → potential premium ↑ |
| Open Interest Coverage Ratio | > 60 % backed by physical delivery | Strong link between inventory and futures price; higher sensitivity to inventory changes. |
| Futures‑Physical Premium | 15‑25 % above spot (as of Dec 2025) | Indicates scarcity risk; bullish for spot silver, may attract cash‑and‑carry arbitrage. |
7. Conclusion
Futures‑physical divergence is more than a headline figure – it encapsulates the relationship between real silver sitting in warehouses and the paper contracts traded by investors worldwide. When inventories shrink and a large share of open interest must be settled with actual metal, the market rewards those willing to hold the physical asset with a noticeable premium.
For anyone tracking the silver market – whether you are an investor, industrial consumer or analyst – monitoring inventory levels, open‑interest coverage, and the resulting premium provides a clear window into supply‑demand dynamics that drive price movements beyond pure speculation.
This post is for educational purposes only. It does not constitute investment advice.