Silver's Contradiction: Structural Deficit Deepens Yet Price Sinks on Rate Fears and Geopolitical Jitters

Silver slides to two-month low under $67 after strong US jobs data and Iran-Israel escalation, yet supply deficit and AI data center demand offer long-term support.

Silver has slipped to its lowest level in over two months, trading below $67 an ounce after a one-two punch of unexpectedly strong US jobs data and a fresh escalation in Middle East tensions. The metal, still up roughly 84% from a year ago despite the pullback, finds itself caught between two opposing forces: a deepening supply deficit that should support prices and macro headwinds that are driving investors away.

The immediate catalyst was Friday's US jobs report, which showed 172,000 new positions created in May — more than double the 85,000 that analysts had forecast. The unemployment rate held steady at 4.3%. Markets swiftly repriced interest rate expectations, with the probability of a Federal Reserve rate hike by December surging to 70%, up from around half before the release. Higher rates diminish the appeal of non-yielding assets like silver, and the metal shed nearly 6% in response. Gold fell by only half as much, underscoring silver's dual nature: it behaves like a precious metal on monetary signals but tracks industrial fundamentals.

Over the weekend, geopolitical tensions added another layer of uncertainty. Iran fired rockets at Israel for the first time in two months, following Israeli strikes in Lebanon. Donald Trump called for de-escalation, but Tehran's threat to block oil tanker alternative routes in the Red Sea rattled markets. Unlike gold, which often benefits from safe-haven flows, silver saw no such bid — a reminder that its industrial demand profile currently dominates investor sentiment.

Yet beneath the price weakness, the physical market is telling a very different story. The global silver market is heading into its sixth consecutive year of supply deficit. In 2026, the shortfall is expected to widen to 46.3 million ounces, up from 40.3 million last year, even as total supply rises to a decade-high of 1.05 billion ounces — a 1.5% increase. Mine output is forecast at 820 million ounces, but ramping up production is difficult because 70-80% of global silver is produced as a by-product of copper, lead and zinc mining. Dedicated silver mines are rare, and output cannot be quickly expanded in response to price signals.

Demand patterns are shifting. The photovoltaic sector, long the largest industrial consumer of silver, is scaling back usage as the metal's share of cell costs has jumped from around 8% to over 20%. Producers are economising, dragging total industrial demand down 3% to 639.6 million ounces in 2026. But elsewhere, demand is accelerating. The build-out of AI data centres is creating a new, price-inelastic source of consumption: silver is used in switchgear, power distribution, connectors and thermal management systems. This niche is growing 15-25% annually, adding 20-30 million ounces of additional demand each year. Notably, data centre operators do not adjust their orders based on the silver price.

Physical investment demand is also staging a comeback, jumping 20% to 227 million ounces — a three-year high — after three consecutive years of decline. The gold-silver ratio stands at roughly 63, a historically neutral level. Betting on a return to earlier lows of that ratio amounts to wagering that the industrial engine will eventually outweigh the monetary drag. The deficit trend supports that view.

Analysts remain broadly optimistic despite the recent rout. A Reuters consensus pegs the average silver price for 2026 at $79.50, a view largely shared by J.P. Morgan. More bullish forecasts come from Citigroup, which has set a price target of $110 for the second half of the year, citing persistent physical tightness. If industrial demand holds up, the current sell-off may prove to be a temporary setback in a longer-term uptrend — but for now, macro forces have the upper hand.