Silver’s breakout year: from monetary hedge to industrial powerhouse

The Fed, the dollar and the hedge argument

Monetary policy has also played a decisive role. Lower interest rates reduce the opportunity cost of holding non-yielding assets such as precious metals, and the Federal Reserve’s return to rate cuts in 2025 added an important layer of support. A softer dollar amplified this effect, making silver and gold more attractive to non-US investors.

Looking into 2026, the policy outlook becomes more complex. The Federal Reserve is likely to come under increased scrutiny as political pressure rises following the appointment of a new chair more closely aligned with the White House’s growth and low interest rates agenda. While higher long-end yields would normally be a headwind for precious metals, this time they may send a different signal—namely unease about inflation persistence and fiscal expansion. In that scenario, higher yields could paradoxically reinforce demand for silver and gold as portfolio hedges.

A historic squeeze and price-inelastic demand

Much has been said about a “historic short squeeze” in silver. While the term is often overused, the mechanics this year have been real. With around 58% of global silver demand coming from industrial applications—photovoltaics, electrification, EVs and advanced electronics—demand has proven largely price inelastic in the short term. For manufacturers, silver is essential but represents a relatively small share of total production costs. Running out of supply is not an option.

Just this week The Silver Institute released an update in which they wrote "Silver’s superior electrical and thermal conductivity properties are increasingly essential to the technological transformation driving the global economy. As a result, global silver industrial demand is poised to grow further as demand from vital technology sectors accelerates over the next five years. Sectors such as solar energy (PV), automotive electric vehicles (EVs) and their infrastructure, and data centers and artificial intelligence (AI) will drive industrial demand higher through 2030.

This creates a potentially self-reinforcing dynamic in tight markets: higher prices do not immediately destroy demand, and concerns about availability can lead to precautionary buying, pushing prices even higher. The main losers in this squeeze have been industrial consumers forced to pay up, and short sellers who underestimated the depth of physical tightness.

Inventories, lease rates and physical stress signals

Evidence of that tightness has been visible across key hubs. Inventories in warehouses linked to the Shanghai Futures Exchange recently hit the lowest level since 2015, while lease rates in London have remained elevated—both classic indicators of a shortage of readily available physical metal. Strong Indian jewellery demand, partly driven by substitution away from expensive gold, has further strained supply. At the same time, the pre-emptive movement of silver into the US ahead of potential tariffs has effectively removed metal from the global circulation pool.

Structural deficits and constrained mine supply

The World Silver Survey compiled by the Silver Institute expects the physical market to show a roughly 120 million ounce deficit in 2025, marking the fifth consecutive year of negative market balance, with forecasts generally pointing to a continued deficit in 2026. The challenge is that silver mine output is relatively unresponsive to price signals. As a by-product of gold, copper and base-metal mining, higher silver prices alone are often insufficient to trigger new supply. This inelasticity means deficits can persist far longer than in markets where primary production responds quickly.

India, ETFs, hedge funds and volatility

On the demand side, India has emerged as a key source of incremental buying. This has been driven primarily by retail investment and jewellery demand rather than purely seasonal factors, reflecting silver’s role as an affordable alternative to gold. Meanwhile, inflows into silver-backed ETFs have reached around 130 million ounces this year, lifting total holdings to roughly 844 million ounces—an 18% increase—led overwhelmingly by retail participation, with institutions still favouring gold.

Speculators in the COMEX futures market, including managed money and other reportables as defined by the CFTC, have steadily reduced their long exposure as prices and volatility increased. From a five-year peak of 332 million ounces in June, persistent selling has pushed the net long down to a 19-month low of 152 million ounces as of the latest reporting week to 4 November, highlighting a relatively lean position that could rebuild should price strength prove durable. 

Given that silver’s market turnover is roughly eight to ten times smaller than gold’s, this imbalance matters. It helps explain why relatively modest shifts in gold prices or silver sentiment in general can translate into outsized moves—both up and down.

Risks and levels to watch in 2026

The bullish case is not without risks. A sharp slowdown in AI-related investment—potentially triggered by a correction in stretched valuations—could soften demand for chips and data-centre infrastructure while weighing on broader risk sentiment. Relative valuation also warrants attention: with the gold–silver ratio now near 68, broadly in line with its 30-year average and well down from the April peak above 105, silver is no longer obviously cheap on a historical basis. That matters primarily under more ‘normal’ market conditions, where supply constraints are less dominant. In such an environment, a consolidation phase could see some capital rotate back toward gold rather than out of metals altogether, given their ongoing role as hedges against fiscal, inflation and geopolitical risks.

Policy risk is another wildcard. If the US ultimately decides against imposing tariffs on silver, metal currently warehoused domestically could flow back into the global market, easing tightness abruptly. 

Technically, the market will be watching whether silver can consolidate above the USD 54-55 area. A sustained break higher would reinforce the case for a higher trading range in 2026, especially given our supportive view on gold potentially heading towards USD 5,000. Failure to do so would not negate the structural story—but it would likely mean more volatility along the way.