# COMEX Silver Futures COMEX futures drive silver price discovery with $50-100B daily trading volume. This paper market dominates despite physical spot volume being only $5-10B/day. ## How COMEX Works Contract size: 5,000 troy oz. Trading: Electronic, 23 hours/day. Settlement: Cash OR physical delivery. Typical trade: Trader A buys March contract at $70/oz (goes long). Trader B sells March contract at $70/oz (goes short). 95%+ close before expiry and cash settle on price difference. 5% "stand for delivery" and receive actual physical silver. ## Price Discovery Mechanism When March COMEX futures trade at $72, spot silver adjusts to match. The futures market is so liquid (150,000-300,000 contracts/day) that it overpowers the physical spot market. This is "the tail wagging the dog." The paper market is 10-20x larger than the physical market, so paper sets the price. ## The Normal System In a functioning market: Futures and physical prices stay aligned via arbitrage. If futures are at $73 and spot at $72, traders buy spot and sell futures until the gap closes. Physical backing: COMEX warehouses hold 300M oz for delivery. System works smoothly. ## The Breaking System Current reality: [[Silver Lease Rates|Lease rates 8.5%]] = Physical is scarce. [[Silver Swap Rates and Forward Curve|Swap rates -7.9%]] = Future delivery is stressed. [[Shanghai Silver Premium|Shanghai premium 12%]] = Geographic shortage. But COMEX futures still trade at $72-74. Why the disconnect? Futures traders trade contracts, not metal. They can sell for profit after a 120% rally without needing physical delivery. ## When Paper Must Converge to Physical The system breaks when: Industrial users "stand for delivery" and COMEX cannot deliver. Warehouse inventory depletes below working levels. Physical shortage becomes impossible to ignore. Then COMEX either raises margin requirements (forces liquidation), goes to cash settlement only (extreme), or lets price spike until physical supply appears. Historical precedent: Palladium in 2000, Nickel in 2022. When physical markets break, futures are forced to reprice violently. ## Current Warehouse Levels COMEX silver inventory: ~300M oz. Normal working level: 100M oz minimum. Available for drawdown: ~200M oz. At 230M oz annual [[Silver Structural Supply Deficit]]: Current inventory = 10 months of deficit. If drawdowns continue, COMEX hits critical levels by late 2026. When COMEX inventory drops below 100M oz, industrial users panic. They cannot rely on COMEX for physical delivery. They bid up futures to guarantee supply. ## Why This Supports Higher Prices The [[Silver Price Discovery - Paper vs Physical|paper vs physical disconnect]] cannot persist indefinitely. Either physical supply improves (unlikely with [[China Silver Export Restrictions 2026]]) or futures price rises to physical reality ($100-150). The longer lease rates stay at 8.5%, swap rates at -7.9%, and Shanghai premium at 12%, the more violent the eventual convergence. COMEX futures will reprice when industrial users discover they cannot get physical delivery at current prices. Then the paper market is forced to match physical stress. Links: [[Silver MOC]] | [[Silver Price Discovery - Paper vs Physical]] | [[Silver Arbitrage Breakdown]] --- #silver #markets #comex