Silver's Structural Deficit Deepens as AI Demand Outpaces Short-Term Macro Relief

Geopolitical tailwinds push silver above $76, but structural supply deficit fueled by AI and solar demand overshadows short-term macro headwinds from potential Fed rate hikes.

The silver market is caught between a fleeting geopolitical tailwind and a tectonic shift in industrial demand. Talks between Washington and Teheran have nudged prices above $76 an ounce, but beneath the surface, a chronic supply deficit is being supercharged by an unexpected source: artificial intelligence. The metal's unique electrical and thermal properties are making it indispensable for the server racks that power large language models, and the numbers are staggering.

Analysts at the Silver Institute project a supply shortfall of roughly 46 million ounces for the current year — the sixth consecutive annual deficit. Global above-ground inventories have been drained by more than 760 million ounces since 2021, with much of that metal absorbed by China's booming solar and semiconductor industries. Now the AI boom is adding fresh pressure. Training servers require approximately 3.5 times as many silver-coated components as conventional cloud hardware, Goldman Sachs notes, a figure that is only set to rise as hyperscalers expand their clusters at an unprecedented pace. The 800-volt architectures planned by Nvidia from 2027 onward will further favour silver over copper, thanks to its superior oxidation resistance and heat dissipation at high voltage.

Yet the short-term price action is dominated by a different script. Frustrated by sticky inflation, several members of the Federal Reserve's Open Market Committee have signalled a willingness to keep raising rates. The market now assigns a 50% probability to a rate hike by December, a prospect that curbs the appeal of non-yielding assets like silver. The metal's rally this week — nearly 1% on Thursday alone — is rooted in hopes that a US-Iranian deal will reopen the Strait of Hormuz, depress oil prices and ease the inflation pressure that has kept central banks hawkish.

This macro fog complicates the outlook. While silver has stabilised above the $74 support level, it remains below its moving average, capping near-term upside. The path back to January's record high of around $121 looks long. Analysts at J.P. Morgan expect an average price of $81 for the year, a view broadly in line with the LBMA consensus. But the forecast range is exceptionally wide at $42 to $165, reflecting the tug-of-war between robust industrial demand and unresolved geopolitical risks.

The supply side offers little relief. Most of the world's silver output is a by-product of copper, lead and zinc mining, meaning producers cannot easily ramp up production to meet rising demand. That inelasticity, combined with the AI-driven structural surge, suggests that even a few hawkish votes at the Fed will do little to undermine the long-term deficit narrative. For now, the market is balancing a temporary geopolitical calm against the steady hum of data centres — and the scales are tilting slowly in silver's favour.