The silver market is currently experiencing a structural shortage that has persisted for five consecutive years, a trend projected to continue through 2026, according to analysts at Metals Focus. By September, the amount of silver held in London vaults was as low as 136 million ounces. Although this figure later rose to 200 million ounces by the end of the year, it remains significantly below the 360 million ounces available during the Reddit-fueled rally in early 2021. Compounding the issue is a bottleneck in refining capacity, which has slowed the return of scrap metal to the market, despite increased efforts from recyclers.
While the physical tightness in the silver market is genuine, much of the recent price surge can be attributed to speculation. The gold-silver ratio reached 50-to-1 last Friday, marking the tightest spread seen in 14 years. Bank of America’s Michael Widmer posits that the fair value of silver is closer to $60, citing weakened demand from the solar energy sector and a general downturn in industrial activity at current pricing levels.
A prevalent behavior among investors has been driven by the “fear of missing out” (FOMO). Retail buyers are actively purchasing small bars and coins, while exchange-traded funds (ETFs) are experiencing notable inflows. Traders appear more inclined to chase price breakouts than to wait for potential pullbacks. Data from COMEX shows that inventories have decreased by 114 million ounces since early October, with another 113 million ounces needing to be removed for the market to return to pre-election levels.
Looking ahead, BNP Paribas strategist David Wilson anticipates that profit-taking might occur “sooner rather than later,” especially as the physical market begins to ease. This aligns with growing concerns regarding excessive speculation in the market. When silver prices hover near $5,000 for gold and geopolitical risks remain elevated, silver has emerged as a more affordable avenue for investors looking to engage with precious metals.
However, the heightened level of speculation has drawn the attention of margin regulators at the Chicago Mercantile Exchange, who may increase margin requirements similar to actions taken in December. Historical precedent suggests that significant margin calls can lead to swift and brutal sell-offs, reminiscent of the events surrounding the Hunt Brothers in 1979-1980.
Market analysts emphasize that the duration of price surges often correlates with the strength of their underpinning bases. If one considers a market base spanning 10 to 20 years, prices exceeding $100 could be rationalized. Conversely, using a more recent base of $54.49 to $45.55 shows that the current rally lacks foundational support and is thus prone to a correction. Based on this recent consolidation, analysts suggest a target value zone between $75.50 and $67.67 for silver prices moving forward.
