Silver's Record Rally Masks Sharp Reversal Risk, Expert Warns
Silver prices have nearly doubled since August, driven by fears of potential US tariffs. This surge has caused global market disruptions, including inventory drains in London, high borrowing costs, and ETF subscription suspensions. Industrial demand, particularly from solar panels and EVs, now accounts for 58% of silver usage. However, experts caution that silver's volatile history suggests a potential sharp reversal, with past cycles showing declines of 50% or more when speculative positioning shifts.
*this image is generated using AI for illustrative purposes only.
Silver has delivered one of the most spectacular performances in global commodity markets, with prices nearly doubling since August and pushing the precious metal to record highs. The rally has allowed silver to significantly outperform gold, but market experts warn that such dramatic price increases rarely conclude without equally sharp reversals.
Tariff Fears Drive Unprecedented Rally
The current surge stems from an unusual catalyst: fears surrounding potential US tariffs that have yet to be officially announced. A critical minerals review launched by the US Department of Commerce under Section 232 raised the possibility of import duties ranging from 15% to 50% on silver. Rather than waiting for policy clarity, traders acted pre-emptively, shipping large quantities of silver from London to New York to avoid potential levies.
This massive movement created severe market disruptions:
| Impact Area | Details |
|---|---|
| London Inventories | Sudden drain triggering global shortages |
| Borrowing Costs | Surged above 30% in London |
| Indian Premiums | Reached 15% above international prices during Diwali |
| ETF Operations | Record inflows but forced subscription suspensions |
Global Market Disruptions
The shortage effects rippled across international markets. In India, physical silver scarcity coinciding with the Diwali festival pushed local premiums to extraordinary levels. Exchange-traded funds experienced record inflows but struggled to source adequate metal supplies, forcing temporary suspension of new subscriptions.
While pressures initially eased when silver began arriving in US markets, similar patterns emerged elsewhere. In mid-December, speculative buying in China forced UBS's silver ETF—the country's largest—to halt new subscriptions, followed by a 10% single-session price decline.
Industrial Demand Creates Double-Edged Impact
Industrial applications now account for approximately 58% of silver demand, primarily from solar panels, electric vehicles, and electronics. However, this growing industrial reliance may paradoxically limit further price appreciation. Silver's share of solar panel manufacturing costs has increased dramatically:
| Timeframe | Cost Share |
|---|---|
| One Year Ago | ~5% of manufacturing cost |
| Current | 11-13% of manufacturing cost |
This cost escalation is eroding manufacturer margins and prompting searches for alternatives or reduced usage patterns, making demand increasingly price-sensitive at current elevated levels.
Historical Patterns Signal Caution
Manish Banthia, CIO Fixed Income at ICICI Prudential Mutual Fund, points to silver's volatile history as a cautionary tale. The metal occupies an unusual market position, generating no income like equities or bonds while being heavily influenced by speculative positioning, making it comparable to cryptocurrencies in volatility.
Historical precedents reveal concerning patterns:
| Period | Price Movement | Subsequent Decline |
|---|---|---|
| 1979-80 | $6 to $49 per ounce | Over 90% collapse |
| 2011 Peak | Near $48 per ounce | 75%+ decline in following years |
| Since Pandemic | Sixfold increase | Pending |
| Past Year | Nearly tripled | Pending |
Timing and Valuation Concerns
The Section 232 report, originally expected in October 2025, has faced delays. Once published, the President will have up to 90 days to decide on tariff implementation. Regardless of the final decision, resolution of this uncertainty should eliminate incentives for US silver hoarding, potentially easing shortages and reversing speculative positions.
From an Indian investment perspective, silver's relative valuation against domestic equities has reached extreme levels. Two years ago, silver appeared inexpensive relative to the Nifty index, but current conditions have decisively shifted in favor of equities.
Market Outlook
Banthia emphasizes that silver's long history of violent reversals warrants significant caution. In speculation-driven markets, compelling narratives can unravel with surprising speed once momentum breaks. Past cycles suggest potential declines of 50% or more when speculative positioning reverses, making timing critical for investors. Record prices alone do not guarantee lasting returns, particularly in assets prone to such dramatic volatility swings.
Banthia warns that historical patterns suggest a potential decline of 50% or more once speculative momentum breaks. He notes that silver prices have nearly doubled since August on US tariff fears, but cautions that such dramatic increases often precede sharp reversals. Investors should be aware of the risks associated with silver's volatile nature and its susceptibility to rapid price changes driven by speculative positioning.
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