# Silver Arbitrage Breakdown When [[Silver Lease Rates|lease rates hit 8.5%]], [[Silver Swap Rates and Forward Curve|swap rates go to -7.9%]], and [[Shanghai Silver Premium|Shanghai premium reaches 12%]], it means arbitrage mechanisms are broken. ## Normal Arbitrage Mechanisms Arbitrage keeps markets efficient by eliminating mispricings. Geographic arbitrage: If silver is $73 in London and $72 in New York, buy New York, sell London. Profit $1/oz minus shipping ($0.30). Repeat until prices align. Time arbitrage (carry trade): If spot silver is $70 and 1-year forward is $75, buy spot, sell forward, store for a year. Profit $5/oz minus storage/insurance ($1). Repeat until forward premium normalizes. Lease arbitrage: If lease rates are 2%, borrow silver, sell it, invest cash at 5%. Profit 3% spread. Repeat until lease rates rise to match interest rates. ## Current Broken Arbitrage All three arbitrage types are failing simultaneously. Geographic (Shanghai premium 12%): Should buy London $72, sell Shanghai $84, profit $12/oz. Reality: Cannot import silver into China fast enough. Breakdown: [[China Silver Export Restrictions 2026]] created a closed loop. Time (swap rate -7.9%): Should buy spot $72, sell 1-year forward $66.31, lose $5.69/oz? Reality: You cannot buy physical spot at $72 to arbitrage. Breakdown: Physical shortage means spot quote is nominal, not real. Lease (rate 8.5%): Should borrow silver at 8.5%, sell it, invest at 5%, lose 3.5%? Reality: No one has silver to lend at any rate. Breakdown: Banks' inventories are depleted or committed. ## What Broken Arbitrage Means When arbitrage fails, markets fragment and mispricings persist. The [[Silver Price Discovery - Paper vs Physical|paper price of $72]] reflects [[COMEX Silver Futures]] trading (contracts, not physical), traders taking profits after a 120% rally, and speculative positioning. The physical indicators reflect what industrial users must pay to secure actual metal, real scarcity in lending markets, and the true cost of future delivery. The gap between paper ($72) and physical (implied $100-130 based on lease/swap rates) represents the broken arbitrage. ## Why Arbitrage Broke Down Physical supply constraints: [[China Silver Export Restrictions 2026]] removed 60-70% of refining. [[Silver Structural Supply Deficit]] is depleting inventories. Industrial users are hoarding to avoid production shutdowns. Capital constraints: Requires large capital to arbitrage 100,000+ oz positions. Counterparty risk (what if supplier defaults?). Regulatory restrictions on commodity speculation. Time constraints: Shipping takes 30-60 days. Export licenses take 45+ days. Markets move faster than physical delivery. ## When Arbitrage Resumes Two ways to restore arbitrage. Physical supply improves: [[China Silver Export Restrictions 2026|China lifts restrictions]] (unlikely). Western refining comes online (3-5 years minimum). [[Silver Structural Supply Deficit|Deficit resolved]] (requires massive demand destruction). Paper price rises to physical reality: [[COMEX Silver Futures]] reprice to $100-130. Lease rates fall as price destroys demand. Swap rates normalize as future supply is secured. Shanghai premium compresses as Chinese users pay higher global prices. Option 2 is far more likely. Paper will converge to physical via a violent price spike. ## The Signal for Investors Broken arbitrage is rare. It signals market dysfunction at a structural level, significant repricing ahead, and opportunity for those positioned correctly. Historical examples: Palladium 2000 (arbitrage broke, price spiked $300 to $1,100). Nickel 2022 (LME arbitrage broke, price spiked $20k to $100k before trading was halted). Silver 2011 (arbitrage stressed, price went $17 to $49). Current silver arbitrage breakdown is more severe than 2011 because we have actual [[Silver Structural Supply Deficit]] and [[China Silver Export Restrictions 2026]], not just speculation. Position accordingly. Links: [[Silver MOC]] | [[My Silver Investment Thesis 2026]] | [[Why Silver Physical Indicators Matter]] --- #silver #markets #arbitrage #firstprinciple