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Industrial Demand, a Sixth Deficit, and the Fed’s Shadow

Silver is trading near $66.77 an ounce as of this writing, holding a modest gain of 0.72% over 24 hours within a narrow range of $65.82 to $67.15. The metal has recovered from a low near $62.68 earlier in the month, but it remains below the late-August peak of $69.15. This is not a market in motion. It is a market in tension, caught between the macro forces that have dominated precious metals all year and a supply-demand imbalance that has been building for half a decade.

Start with the structural picture, because it is the foundation on which everything else rests. The global silver market is on track for its sixth consecutive annual deficit in 2026, with the shortfall projected to widen to 46.3 million ounces from 40.3 million ounces last year. The World Silver Survey 2026, published by the Silver Institute and Metals Focus, estimates that total demand will fall 2% to 1.11 billion ounces while supply declines by roughly the same proportion to 1.066 billion ounces. Mine production is expected to remain broadly flat, and because approximately 70% of silver output is a byproduct of lead, zinc, copper, and gold mining, supply is highly inelastic and cannot respond quickly to higher prices.

The consequence of five consecutive deficits is visible in above-ground inventories. CLSA estimates that around 762.1 million ounces of silver stocks have been drawn down since 2021, nearly equivalent to an entire year of global mine production. The market has been relying on existing inventories to bridge the gap between supply and demand, and those inventories are now substantially depleted. This is what CLSA describes as a structural scarcity rather than a cyclical price movement, placing silver within a broader "scarcity trade" thesis that includes copper, zinc, and other industrial metals.

The demand side is where the picture becomes more complex. The Silver Institute puts industrial use at roughly half of all annual demand, and that segment is softening in one important area. Photovoltaic demand declined 6% in 2025 to 186.6 million ounces and is forecast to fall a further 19% in 2026 to around 151 million ounces, as solar panel manufacturers work to reduce silver usage or find substitutes. Total industrial demand is projected to decline 3% to approximately 639.6 million ounces. The substitution effort is real and it is having an effect.

But a new source of demand is emerging that has almost nothing to do with monetary policy. AI data centers are becoming a meaningful consumer of silver. The metal conducts electricity and heat better than any other material, making it the default choice for the switchgear, busbars, and high-power connectors inside large data facilities. The International Energy Agency projects that global data center electricity demand will roughly double between 2025 and 2030, and capital spending by five of the largest technology companies topped $400 billion in 2025 and is expected to grow a further 75% in 2026. The Goldman Sachs Global Institute separately estimates total AI buildout spending at roughly $7.6 trillion across 2026-2031. Silver is not the largest input in that buildout, but it is a necessary one, and no substitute matches its conductivity.

The macro backdrop has been the dominant driver of price action in recent weeks, and it remains a headwind. The Federal Reserve raised its benchmark rate by 25 basis points to 3.75%-4.00% on September 16, its first increase in more than three years, and the accompanying dot plot signaled at least one more hike this year. Higher rates raise the opportunity cost of holding non-yielding assets, strengthen the dollar, and reduce the relative appeal of precious metals. Silver fell below $63 in the immediate aftermath of the decision as the 10-year Treasury yield climbed to 5.00%.

What has surprised some observers is how quickly the metal recovered. By Thursday morning, spot silver had rebounded beyond $65 as yields and the dollar eased. UBS strategist Dominic Schnider noted that silver "continues to track gold closely, with the gold-silver correlation near multi-year highs," and described the metal as trading primarily as "a higher-beta version of gold" rather than on its own industrial merits. The bank forecasts silver reaching $70 by December 2026, $75 by March 2027, and $80 by September 2027, though it acknowledges that a more hawkish Fed and further rate hikes represent near-term headwinds. Schnider recommends using periods of price weakness to build exposure rather than chasing short-term rallies, and he sees "limited scope for a sustained rise in the gold-silver ratio above 70x".

The speculative positioning data offers a more cautious read. According to the Commodity Futures Trading Commission, silver non-commercial net long positions stood at 12,632 contracts as of September 15, a reduction of 1,544 contracts or 11% from the prior week. The reduction was driven primarily by long liquidation rather than fresh short selling, which suggests that the decline in positioning reflects profit-taking and risk reduction rather than conviction in a bearish reversal.

The physical investment side is providing a counterweight. The iShares Silver Trust, the largest silver ETF, has attracted approximately $614 million in net inflows over the past three months and holds approximately $30.92 billion in net assets. That is not a flood of capital, but it is a steady bid that reflects ongoing investor interest in the metal as a store of value and an inflation hedge.

The technical picture shows silver trading above its recent low but below the late-August high. The immediate resistance sits near $68.09, with further layers at $70. The support zone below $63 has held on multiple tests, and the metal has not breached the $60 psychological level. Momentum indicators are neutral, neither overbought nor oversold, and trading volume has been moderate.

What should a careful observer watch in the weeks ahead? First, the trajectory of the US Dollar Index. UBS and other analysts have identified dollar weakness as a supportive factor for precious metals, and any sustained decline in the greenback would ease the pressure on silver. Second, the behavior of crude oil prices. The recent decline in oil has eased inflation concerns and reduced the probability of further aggressive tightening, which supports the metal indirectly. Third, the flow data for silver ETFs and the positioning data from the CFTC, which together provide the clearest read on how institutional and speculative capital is weighting the competing forces of supply scarcity and monetary tightening. The deficit is structural and it is not resolving. The question is whether the macro environment will allow the market to price it.

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