Setup: real scarcity, real speculation
Metals Focus reports that silver has been in a structural deficit for five years, a trend expected to persist until 2026. Currently, there are around 136 million ounces tucked away in London vaults, with projections reaching up to 200 million by year-end—still notably less than the 360 million ounces available during the Reddit rally in early 2021. It seems that scrap supply isn’t replenishing quickly enough, even though recyclers are swamped with demand due to high prices, primarily because refining capacity is lagging.
The situation feels quite constrained, yet much of it hinges on speculation. Just last Friday, the gold-silver ratio hit 50:1, which is the lowest it’s been in 14 years. Michael Widmer from BofA suggests that the fair value should be around $60, rather than $103, citing declining solar demand and industrial activity at these price levels.
Behavior: Pure FOMO
Fear of missing out is certainly pushing prices higher. Retail investors are scooping up smaller bars and coins, while ETFs are attracting capital. Traders seem eager to chase price spikes rather than waiting for a dip. With metals recently making their way into U.S. stocks, COMEX inventories have dropped by 114 million ounces since early October, and Reuters indicates that an additional 113 million ounces need to exit just to return to levels seen prior to the elections.
What happens next?
David Wilson from BNP Paribas might be onto something when he says that, eventually, profit-taking will kick in, especially with the ongoing easing in the cash market. While gold hovers around $5,000 and geopolitical tensions remain high, silver is likely to keep climbing as a more affordable option in the precious metals sector.
However, rampant speculation may draw the attention of margin regulators at the Chicago Board of Trade, who might increase margin requirements as they did twice last December. I’ve witnessed the fallout of massive margin calls—like the one with the Hunt Brothers in 1979-1980. When speculators are caught in a tight spot and have to sell off, it can lead to a wave of selling pressure.
It’s often said that how high the market climbs is linked to how long its base is. If we’re considering a 10 to 20-year base, then a jump to $100 or more doesn’t seem outlandish. But using the more recent base of $54.49 to $45.55, such a surge may not hold up and is vulnerable to a correction. Based on the latest consolidation, our target value zone lies between $75.50 and $67.67.
