Silver Borrowing Costs Surge: Understanding Tariff-Driven Supply Jitters & Investment Risks

Silver, often dubbed “the restless metal,” is experiencing a whirlwind. As of September 9, 2025, silver futures hovered around $41.2 per ounce, nearing levels unseen since 2011. This surge, however, is accompanied by a less publicized but equally critical phenomenon: a surge in silver borrowing costs. This blog delves into the confluence of factors driving this surge, primarily focusing on tariff-driven supply jitters and the inherent investment risks.

The Squeeze: Tariffs and Supply Chain Woes

The most immediate catalyst for rising silver borrowing costs is the specter of tariffs. The U.S. government’s recent designation of silver as a critical mineral has stoked fears that it could be the next target for import tariffs. This concern is not unfounded. The U.S. relies heavily on imports, with Canada and Mexico being major suppliers.

The potential imposition of tariffs has triggered a scramble for physical silver, particularly in London, a key trading hub. Traders are pricing in the risk of tariffs, leading to a dislocation between New York and London prices. Silver futures on the New York Mercantile Exchange (COMEX) are trading at a premium compared to the London spot price, incentivizing holders to ship silver to the U.S. to capitalize on the arbitrage opportunity.

This rush to secure physical silver is exacerbating an already tight supply situation. According to market expert Tracy Shuchart, the physical silver market was already experiencing a supply deficit. This deficit is a result of several factors:

Structural Supply Deficits: For five consecutive years, demand has outstripped supply, creating a cumulative deficit approaching 800 million ounces.
Mining Challenges: Silver mine production peaked around 2016 and has since declined due to underinvestment, declining ore grades, and increasing production costs.
Geopolitical Tensions: Trade conflicts and sanctions have slowed the movement of raw materials.

The surge in silver lease rates underscores broader concerns about supply chain disruptions. This situation mirrors challenges seen in other commodities, where protectionist policies have far-reaching impacts.

The Cost of Borrowing: Lease Rates Explained

Silver lease rates, or borrowing costs, reflect the price of borrowing physical silver for a specific period. These rates are typically very low, close to zero. However, when supply becomes constrained, and demand surges, lease rates can spike dramatically.

The recent surge in silver lease rates is a clear indication of market stress. Short-term silver borrowing costs in London have exceeded 5% multiple times this year, a level far higher than the historical average. This increase makes it more expensive for traders to obtain physical silver, further tightening the market.

Investment Risks: Navigating the Silver Landscape

Investing in silver, like any asset, carries inherent risks. While the current market dynamics present potential opportunities, investors must be aware of the challenges:

Volatility: Silver prices are notoriously volatile, often more so than gold. This volatility stems from silver’s dual role as both a precious metal and an industrial commodity. Market volatility can lead to portfolio losses if investors are forced to sell holdings at inopportune times.
Economic Downturns: Silver prices tend to decline during economic recessions due to reduced industrial demand.
Storage Costs: Physical silver requires secure storage, which can incur additional expenses.
Liquidity: Selling large quantities of physical silver can be challenging, and buy-sell margins can be high.
Credit Risks: Investing in silver through financial products like ETFs exposes investors to the credit risk of the issuer.

Silver’s Dual Role: Industrial and Monetary

Silver’s unique position as both an industrial metal and a monetary asset amplifies its price fluctuations. Industrial demand comes from sectors like electronics, photography, and solar energy. Investment demand stems from individuals and institutions seeking portfolio diversification and a hedge against economic uncertainty.

The industrial side of silver is heavily influenced by technological advancements and economic growth. For example, the push towards renewable energy, particularly solar power, is a significant driver of silver demand. Conversely, economic downturns can dampen industrial demand, putting downward pressure on prices.

Strategies for Investors

Given the current market conditions and inherent risks, investors should approach silver with caution and a well-defined strategy:

Diversification: Silver should be part of a diversified portfolio, not the sole investment.
Risk Tolerance: Investors should assess their risk tolerance and invest accordingly. Silver’s volatility may not be suitable for all investors.
Long-Term Perspective: Silver is often viewed as a long-term investment. Short-term price fluctuations should be expected.
Physical vs. Paper: Investors should carefully consider the pros and cons of investing in physical silver versus paper assets like ETFs. Physical silver offers tangible ownership but incurs storage costs. ETFs offer liquidity but expose investors to credit risk.
Stay Informed: Investors should stay informed about market trends, geopolitical events, and policy changes that could impact silver prices.

The Road Ahead: Scenarios and Predictions

The future of silver prices hinges on several factors, including tariff policies, economic growth, and technological advancements. Several scenarios could play out:

No Tariffs: If tariffs don’t materialize, risk premiums could unwind, leading to a normalization of lease rates and physical premiums.
Copper-Style Tariffs: If tariffs are implemented with exemptions for raw and refined products, a market reset similar to copper’s correction could occur.
Broad Tariffs: Broad tariffs without exemptions could trigger a sustained rally, potentially testing all-time highs.

Analysts’ expectations vary, but many anticipate silver prices to remain elevated in the near term. Trading Economics forecasts silver to trade at $41.86 USD/t. oz by the end of this quarter and $44.68 in 12 months.

Conclusion

The surge in silver borrowing costs is a symptom of a complex interplay of factors, primarily driven by tariff-related supply jitters and existing market deficits. While silver presents investment opportunities, it also carries inherent risks that investors must carefully consider. By staying informed, diversifying their portfolios, and adopting a long-term perspective, investors can navigate the silver landscape and potentially benefit from its unique characteristics.