Silver's record rally hides the risk of a sharp reversal: Manish Banthia
Silver prices have surged dramatically, nearly doubling since August and reaching record highs, driven by speculative fears of US tariffs. This rally, fueled by pre-emptive buying and inventory drains, has seen extreme borrowing costs and global shortages. While industrial demand supports the rise, its increasing cost may limit further gains, and historical patterns suggest a sharp reversal is possible.
Silver has staged one of the most dramatic rallies in global commodity markets. Prices have nearly doubled since August, pushing the metal to record highs and allowing it to outperform gold by a wide margin. Yet history suggests that such spectacular rises in silver rarely end gently.
The catalyst this time has been unusual: fear of US tariffs that have not yet been announced. A review of critical minerals launched by the US Department of Commerce under Section 232 raised the possibility that silver imports could face duties of 15-50%. Traders, unwilling to wait for clarity, acted pre-emptively.
Large quantities of silver were shipped from London to New York to get ahead of any potential levies. The result was a sudden drain on London inventories, triggering shortages across global markets. Borrowing costs for silver in London surged above 30%-an extreme signal of scarcity.
The knock-on effects were felt globally. In India, physical shortages around the Diwali festival pushed local premiums as high as 15% above international prices. Exchange-traded funds saw record inflows but struggled to source metal, forcing some funds to temporarily suspend subscriptions.
Once silver began arriving in the US, pressures eased and premiums normalised in London and Mumbai. But the pattern soon repeated elsewhere. In mid-December, a surge of speculative buying in China forced UBS's silver ETF-the country's largest-to halt new subscriptions. Prices subsequently fell 10% in a single session.
What stands out is that silver has risen roughly 90% since early September on the basis of tariff fears alone. Markets have effectively priced in a policy outcome that may never materialise. Such episodes of uncertainty often trigger exaggerated price moves-particularly in assets prone to speculative flows.
Industrial demand has reinforced the rally, but it may also limit further upside. About 58% of silver demand now comes from solar panels, electric vehicles and electronics. A year ago, silver accounted for roughly 5% of the cost of manufacturing solar panels. Today that figure has climbed to 11-13%, eroding margins and prompting manufacturers to seek alternatives or reduce usage. At current prices, demand is likely to become more price-sensitive.
Higher prices should also encourage supply. Although around 70% of silver is produced as a by-product of mining other metals such as copper, today's elevated prices improve the economics of increased production. This suggests that the present tightness may not be durable.
Silver occupies an unusual position in financial markets. It generates no income like equities or bonds, and while it has genuine industrial uses, its price is heavily influenced by speculative positioning. This makes it unusually volatile-more comparable at times to cryptocurrencies than to traditional commodities.