Silver’s Contradiction: Shanghai Inventories Drain, Chinese Premiums Stay Elevated, and Options Traders Turn Bullish Again
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Silver spent the week caught between two very different narratives. On the surface, prices appeared directionless. Despite sharp swings driven by geopolitical headlines, inflation concerns, and shifting expectations around U.S. monetary policy, silver finished the week almost unchanged, declining just 0.29% overall. Yet beneath that relatively calm headline performance, the physical and derivatives markets were sending much stronger signals.
China continues to pay a substantial premium for physical silver, with Shanghai prices trading approximately 10.35% above LBMA benchmarks even after the announcement of a U.S.-Iran peace agreement. At the same time, Shanghai inventories have suddenly shifted from months of aggressive accumulation into meaningful depletion, with SHFE vaults recording their largest weekly withdrawal since February. Meanwhile, options traders appear to be quietly repositioning for higher prices, as call demand begins overtaking put demand ahead of the June Federal Reserve meeting.
The result is a silver market that looks considerably healthier beneath the surface than recent price action would suggest. While macroeconomic uncertainty continues weighing on sentiment, physical demand remains resilient, leverage remains exceptionally low, and signs of renewed speculative interest are beginning to emerge.
One of the most striking developments following the geopolitical de-escalation between the United States and Iran was the resilience of Chinese silver premiums.
Recent Shanghai Gold Exchange pricing showed Ag(T+D) trading at approximately ¥16,895 per kilogram, equivalent to roughly $77.75 per ounce. This compared with an LBMA reference price of approximately $70.46 per ounce, leaving a premium of 10.35%.
Normally, easing geopolitical tensions and improving risk sentiment would be expected to reduce urgency in precious metals markets. Instead, silver continues commanding a double-digit premium in China. This suggests that local demand remains robust even as global investors rotate toward risk assets.
The persistence of these premiums matters because physical premiums are often among the most reliable indicators of real-world demand. Futures markets can be influenced by leverage and short-term positioning, but a buyer willing to pay more than international benchmarks for physical metal is revealing genuine demand.
Even after the relief rally triggered by the reopening of the Strait of Hormuz and the easing of Middle East tensions, Chinese buyers continue demonstrating a willingness to pay substantially above global prices.
The geopolitical backdrop produced another notable shift: silver significantly outperformed gold.
The Gold-Silver Ratio fell sharply to approximately 61.30 as investors embraced a more risk-on environment. Silver traded near $70.41 per ounce while gold hovered around $4,316.80 per ounce, continuing a trend that has seen silver outperform whenever growth expectations improve.
Historically, silver tends to benefit more than gold during periods of improving economic confidence because it possesses both monetary and industrial demand characteristics. Gold often acts as a defensive asset, while silver participates in themes linked to manufacturing, electrification, solar energy, and broader economic activity.
The sharp move lower in the Gold-Silver Ratio therefore reflects more than relative price performance. It represents a shift in market psychology away from pure risk aversion and toward assets perceived as having greater economic sensitivity.
Perhaps the most important development of the week occurred inside Chinese vaults.
After months of aggressive restocking, SHFE inventories suddenly moved in the opposite direction. Exchange stocks recorded a net weekly withdrawal of 86.55 tons, equivalent to approximately 2.8 million ounces. This represents the largest single-week drawdown since early February and marks a significant change in direction for a market that had been steadily rebuilding inventories throughout the second quarter.
Total SHFE holdings now stand at approximately 886 tons, or 28.5 million ounces. The withdrawal was not confined to a single reporting period either. Inventories declined for five consecutive trading sessions, including a further daily reduction of 21 tons that brought total holdings to roughly 895 tons at one stage during the week.
The scale of the drawdown is notable because it interrupts what had become one of the strongest inventory accumulation phases in recent years. Earlier in the quarter, Shanghai inventories had nearly doubled as metal flowed aggressively back into China. The latest withdrawals suggest that demand may once again be catching up with available supply.
Whether this marks the beginning of a sustained depletion cycle or merely a temporary interruption remains uncertain, but it is the first meaningful sign in months that physical metal is once again leaving exchange vaults at a notable pace.
While China experienced inventory withdrawals, London continued telling a different story.
Physically backed silver ETFs shed another 11 tons during the week, extending a trend of modest investor outflows. However, the estimated free float moved in the opposite direction, increasing by approximately 11 tons to reach 7,166.3 tons, equivalent to roughly 230.4 million ounces.
Separate LBMA figures showed ETF holdings declining by approximately 660,000 ounces, while available free float inventories remained broadly stable. This suggests that while some investment capital continues leaving silver ETFs, the physical market itself is not experiencing significant stress.
The contrast between London and Shanghai is becoming increasingly important. London inventories remain relatively stable, while Chinese inventories have started declining again. Historically, such divergences often precede changes in regional pricing dynamics and physical flows.
Perhaps the most interesting development occurred within the options market.
For much of the recent correction, puts dominated positioning as traders aggressively sought downside protection. That picture is beginning to change. The 25-delta risk reversal has now flipped positive, indicating that calls are attracting stronger demand relative to puts.
This is often interpreted as a sign that market participants are beginning to reposition for upside potential rather than focusing exclusively on downside risks.
At the same time, implied volatility data suggests that momentum traders are preparing for a possible breakout. While overall volatility remains elevated, the structure of option pricing has become more constructive than it was only a few weeks ago.
This shift is particularly notable because it is occurring while total precious metals leverage remains extremely low. Aggregate open interest across the sector increased only modestly, rising 1.02% to approximately 516,100 contracts. Even after this increase, positioning remains near the bottom of its historical range, sitting in only the 3.8th percentile of observations over the past year.
In other words, bullish positioning is beginning to emerge from a remarkably clean base rather than from an overcrowded market.
The latest SHFE options positioning provides useful insight into how traders are currently viewing the market.
Silver futures closed around 15,416 CNY per kilogram, equivalent to approximately $70.75 per ounce on a COMEX basis. Following the recent decline, traders reduced downside hedging activity around the 15,000 strike, while significant new positioning emerged around the 16,000 strike. More than 3,600 lots were added at that level, making it the dominant near-term area of market friction.
At the same time, market participants continue viewing 17,000 CNY per kilogram as an important structural floor. As long as prices remain above that broader support region, the market appears to remain within a longer-term consolidation phase rather than entering a new bear market.
The combination of declining inventories, persistent premiums, and improving options sentiment suggests that traders are increasingly focused on identifying the next upside catalyst rather than preparing for another major liquidation event.
For bullion dealers, the most important development is the re-emergence of inventory drawdowns in China. The largest weekly SHFE withdrawal since February, combined with persistent Shanghai premiums above 10%, suggests that physical demand remains far stronger than headline price performance would imply. If inventory declines continue while premiums remain elevated, regional tightness could begin reappearing more quickly than many expect.
For conservative investors, the current environment presents a different picture than the one reflected in futures prices. Leverage across the precious metals complex remains near historic lows, physical demand remains healthy, and the market has already endured a substantial sentiment reset. While short-term volatility remains likely, the fundamental backdrop appears considerably stronger than the bearish tone currently dominating financial headlines.
For traders, the next major catalyst is likely to come from monetary policy and inflation expectations. The June FOMC meeting, Treasury yields, and U.S. inflation data will continue driving short-term volatility. Near term, silver appears capable of consolidating within a broad $68 to $75 per ounce range while markets digest these macroeconomic developments. The improvement in risk reversals and call demand suggests that options traders are beginning to position for upside surprises rather than further collapse.
Over the longer term, the outlook remains constructive provided physical demand continues absorbing available inventories. Chinese premiums above 10%, declining SHFE stocks, and historically low leverage create conditions that are far healthier than those typically seen near major market tops. If global growth expectations stabilize and industrial demand remains intact, silver could gradually rebuild momentum toward the $85 to $95 per ounce region. A sustained move beyond $100 would likely require renewed physical tightness across both Eastern and Western markets, but the latest inventory and premium data suggest that such a scenario remains entirely plausible. For now, silver appears to be transitioning from a market dominated by fear and liquidation toward one increasingly driven by physical demand and improving sentiment.
Hugo Pascal’s observation about the AU9999 contract hitting a 10-week volume high underscores the increasing significance of physical gold trading on the Shanghai Gold Exchange. This trend not only highlights robust domestic demand in China but also reflects broader shifts in the global gold market toward physical-backed assets.
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