Why silver prices in the US and China have diverged so sharply

• The price gap between silver in the US and in Shanghai has widened and is larger than normal.
• Western prices are driven mainly by futures and paper trading, while Chinese prices reflect physical supply and demand.
• Strong industrial and investment demand for physical silver in China supports a persistent price premium.
• Logistical and regulatory barriers limit arbitrage, allowing the divergence to last.

In recent weeks, the gap between silver prices in the United States and China has widened noticeably and is now larger than usual. According to the chart, silver is currently priced at around USD 94 per ounce in the US, while the equivalent price in Shanghai is roughly USD 104 per ounce after currency conversion. A spread of nearly USD 10 per ounce is not a minor discrepancy but a meaningful signal that the two markets are being driven by different forces.

This divergence is not primarily the result of exchange rates or transaction costs. Instead, it reflects fundamental differences in market structure, pricing mechanisms, and local supply and demand dynamics.

In the US and Europe, silver prices are largely determined on markets such as COMEX and in London, where futures contracts and financial instruments dominate trading activity. The vast majority of these contracts are settled financially rather than through physical delivery. As a result, prices tend to reflect liquidity conditions, speculative positioning, movements in the US dollar, and interest rate expectations more than the immediate availability of physical silver.

In China, pricing works differently. On the Shanghai Gold Exchange and the Shanghai Futures Exchange, physical delivery plays a far more important role. Prices in Shanghai are therefore much more closely tied to actual demand for metal that can be taken out of the exchange system. When demand for physical silver rises, this pressure is quickly reflected in higher local prices.

A key driver of the current premium in Shanghai is strong physical demand for silver in China. Silver is a strategically important industrial metal, used extensively in solar panels, electronics, and advanced manufacturing. In addition, Chinese investors tend to place greater emphasis on owning physical bullion rather than paper exposure.

When this demand intensifies, local supply can become tight. In such an environment, the market clears not through higher trading volumes in derivatives, but through higher prices for immediately available metal, pushing Shanghai prices well above Western futures-based benchmarks.

Differences in local inventories and logistics also matter. If physical silver stocks in China are relatively low while demand remains strong, prices must rise to balance the market. In the US and Europe, where inventories are larger and financial instruments dominate, similar demand pressures may not show up as quickly in prices.

At the same time, moving physical silver between regions is costly and complex. Transportation, certification, regulatory requirements, and capital constraints all limit how easily silver can flow from lower-priced markets to higher priced ones. These frictions allow price gaps to persist.

In theory, a USD 10 per ounce price difference should invite arbitrage. In practice, arbitrage in the silver market is far from frictionless. Access to deliverable metal, export and import rules, and the time and cost involved in moving bullion across borders significantly weaken the arbitrage mechanism.

As a result, the price link between COMEX and Shanghai is looser than many investors assume, allowing China to trade at a sustained premium.

The current situation - around USD 94 per ounce in the US versus about USD 104 per ounce in Shanghai - suggests that:

• physical silver is relatively scarcer and more highly valued in China than in Western markets,
• Western “paper” prices may not fully reflect physical market tightness,
• the physical market is sending an early signal of supply-and-demand stress.

Historically, such sustained premiums on physical markets have often preceded either higher global prices or periods of increased volatility as Western markets eventually react.

Since the start of the year, silver-focused exchange-traded funds have recorded substantial withdrawals. Data from Bloomberg show that ETF holdings of silver fell by around 528 tonnes within the first two weeks of the year. A significant share of this reduction came from the largest silver-backed ETF in the United States.

The rapid appreciation in silver prices appears to have prompted many ETF investors to lock in gains, although part of the decline in holdings may also be linked to physical metal being removed from ETF vaults. Notably, these outflows have not translated into downward pressure on prices, indicating that demand from other parts of the market has absorbed the metal.

A comparable dynamic was seen in the palladium market several years ago, when ETF inventories fell sharply even as prices continued to climb. At that time, ETF disinvestment contributed to alleviating tight physical supply conditions. That said, it remains premature to assume a similar outcome for silver, and the current developments should be interpreted cautiously.

The growing gap between silver prices in the US and in Shanghai highlights the contrast between a financially driven paper market and a physically driven commodity market. The unusually large premium in China indicates that real, deliverable silver is currently more valuable there than futures-based pricing in the West suggests. While this does not guarantee an immediate global repricing, it is a signal that the physical side of the silver market is under pressure and one that global investors would be wise to watch closely.