Silver's stubborn supply deficits and rising industrial and monetary demand offer ‘multiple avenues for future appreciation’ – Sprott’s Paul Wong

In a recent analysis of the precious metals market, Wong noted that silver prices recorded their largest monthly decline since September 2011 in June.

“For the quarter ended June 30, silver fell $16.57/oz, or -22.04%, the worst quarter since the first quarter of 2020 during COVID panic selling,” he noted. “Silver’s selling wave in June tracked gold’s plunge and was driven by the same macro forces: an expectedly hawkish Fed raising short-term rates and the U.S. dollar. Silver easily broke below support levels in a near-waterfall pattern, suggesting capitulation-driven selling sentiment.”

But Wong still sees silver in a very strong position from a fundamental as well as a technical standpoint.

“Despite the recent wrenching volatility, over a multi-decade period, the silver chart remains among the most bullish chart patterns we are aware of,” he said.

“Silver’s price behavior over recent weeks reminds investors that it is one of the most volatile parts of the precious metals complex,” Wong wrote. “The sharp correction may have tested sentiment, but silver’s long-term bullish fundamentals appear unchanged. These rest on the combination of constrained supply and growing demand.”

Wong noted that the silver market has been running persistent structural deficits for several years in a row. “Annual supply shortfalls have steadily reduced inventories,” he said. “Unlike many commodities, there are few large new mining projects that could materially alter the medium-term supply outlook. Silver supply is relatively inelastic even as demand continues to expand.”


In an interview with Kitco News this week, Wong said that Sprott projects these supply deficits will continue for the foreseeable future.

“Right now, it's been running deficits for seven or eight years, and it'll probably continue to run deficits for seven or eight years going forward,” he said.

Sprott believes that while silver's sharp price pullback has soured sentiment, it has not altered the structural bull case.

“Several secular growth trends support demand,” Wong wrote in the report. “Solar panel manufacturing, electrification, electric vehicles, AI infrastructure, data centers and a wide range of technology applications underpin industrial demand for silver. Military consumption is also becoming increasingly important as silver's conductivity and strategic importance gain recognition across defense supply chains. Even in a slower economic environment, many of these end markets are likely to remain supportive.”

Wong told Kitco News that massive bets in the options market played a big part in silver’s parabolic rally, and the unwinding of these positions also magnified the price decline that followed.

“Until you get rid of all these crazy options positions, it's more of a meme stock than a commodity in the short term,” he said. “But eventually what happens is you'll shake out the option guys.”

Wong said he’s encouraged to see that the silver options market is getting back to the normalized range.

“If you [look at] call options outstanding, open interest, and you run a standard deviation bar, I think it reached four or five standard deviations above their norm,” he said. “They're back to about close to mean now.”

And monetary demand for silver is also increasing alongside that of gold. “Investors often focus on gold as the primary monetary metal, but silver has historically participated in periods of currency debasement and monetary uncertainty,” he wrote in the report. “In this environment, silver benefits due to its growing appeal as an alternative store of value, essentially a higher-beta expression of the same themes that support the gold market.”

Silver’s physical market dynamics also remain constructive. “Tightness in physical inventories and ongoing delivery pressures have reinforced the view that physical demand remains strong relative to available supply,” he wrote. “As more metal flows toward Asian markets and physical ownership continues to gain importance, paper-market pricing mechanisms may become less influential over time.”

And despite silver’s dramatic selloff, he said this kind of dramatic price action is not unusual for the gray metal. “Silver has shown significantly greater volatility than gold due to its smaller and less liquid market,” Wong said. “Sharp drawdowns are a normal feature of silver bull markets, not evidence that the underlying fundamentals have failed. Historically, some of silver's strongest advances have occurred following periods of severe volatility and investor frustration.”

He also told Kitco News that in the same way that the gold price has enjoyed a rising floor as its relatively inelastic monetary demand has grown, the silver price will likely benefit from the same higher price floor as its essential industrial applications – and its own monetary demand – gradually crowd out less essential uses such as photography, silverware, and some jewelry applications.

“When the percentage becomes more essential input, its inelasticity will rise with it,” he said.

Sprott views the overall long-term price outlook for silver in a very positive light. “Silver's unique combination of persistent supply deficits, expanding industrial demand, increasing monetary relevance, and tight physical market conditions provides multiple avenues for future appreciation,” the report stated.