Precious Metals Market in the Distance: The Structural Crisis Behind Silver's Technical Sharp Drop

Silver experienced a technical rebound after climbing to a record high of $84/oz, with Monday( December 29) seeing a single-day drop of up to 5%, forming a starkly different trend from gold—this divergence in the precious metals market reflects a deeper supply and demand imbalance.

Technical Signals: Overbought Warnings Emerge

Although silver remains above $80/oz, technical indicators have sounded alarms of overheating. The metal’s 14-day Relative Strength Index(RSI) reading approaches 80, well above the 70 level considered “overbought.” IG Australia market analyst Tony Sycamore bluntly states: “We are witnessing a generational bubble in silver.” Bloomberg attributes this correction to traders taking profits from a five-day consecutive rally, a typical market self-correction.

In contrast, gold prices fell more modestly, closing Monday at $4,495.73/oz, below last Friday’s record high of $4,549.92/oz. Platinum and palladium, which hit new highs the previous trading day, also retreated, leading to a divergence within the precious metals sector.

Structural Supply and Demand Imbalance: Silver’s Unique Dilemma

Silver’s performance relative to gold hinges on its fragile market structure. The silver market is much smaller than gold, with shallow market depth and easily evaporating liquidity. The London Gold Market supports about $700 billion worth of lendable gold bars; during liquidity squeezes, lending can alleviate pressure. However, there is no similar “reserve pool” for silver.

This round of supply tightening began in October, with the London vaults attracting large inflows of silver, causing shortages elsewhere. In China, silver inventories stored in warehouses linked to the Shanghai Futures Exchange have fallen to their lowest levels since 2015. Sycamore states: “The main driver recently is the severe structural supply and demand imbalance in silver, sparking a rush for physical metal.” He adds that buyers are now paying a staggering premium of up to 7% for immediate delivery, compared to much cheaper one-year delivery options.

Additionally, a large amount of readily available silver remains stranded in New York, as traders await the results of a U.S. Commerce Department investigation—aimed at assessing whether key mineral imports pose a national security risk—which could pave the way for tariffs or other trade restrictions on silver.

Macro Drivers: Central Banks, Federal Reserve, and Geopolitics

The nearly year-long rally in silver has been driven by multiple factors: central banks’ high-level purchases, inflows into exchange-traded funds(ETF), and the Federal Reserve’s three consecutive rate cuts. Lower borrowing costs favor non-interest-bearing commodities, with traders betting that the Fed will further cut rates in 2026.

Bloomberg’s U.S. dollar spot index fell 0.8% last week, marking its largest weekly decline since June, and a weaker dollar supports both gold and silver. Meanwhile, geopolitical risks are escalating—tensions in Venezuela have intensified, with the U.S. imposing sanctions on oil tankers, and Washington has launched strikes against “Islamic State” targets within Nigeria. These factors further boost the appeal of precious metals as safe-haven assets.

Industrial Application Concerns: Chain Reaction of Supply Shortages

Unlike gold, silver has multiple practical physical properties and is a vital component in industries such as solar panels, AI data centers, and electronics. As inventories approach their lowest levels in history, the risk of supply shortages increases, potentially causing a chain reaction across multiple sectors.

Elon Musk responded on X on Saturday to related tweets, saying: “This is not good. Many industrial processes require silver.” This highlights the market’s concern over actual supply crises.

Market Outlook: Divergence of Precious Metals to Be Watched

In Monday’s Asian trading session, spot silver surged by 6% to reach a high of $84.00/oz, then plummeted by 3.6%, with volatility significantly higher than gold’s 0.9% decline. This sharp fluctuation underscores the fragility and speculative nature of the silver market—compared to gold’s stability, silver exhibits markedly different market characteristics amid the divergence. Whether silver can maintain its strength depends on whether supply tightness eases and how much traders heed technical overbought signals.