Silver’s Year: From a Scarcity Narrative to an Interest-Rate Trade

A year ago, silver was trading at around $46. Four months later, it reached $121. Another eight months on, it was back near $60.

That rise and fall did not happen because silver had suddenly stopped being scarce. Six consecutive years of supply deficits remained a reality. What changed was the logic the market used to price it.

The Rally Began with Scarcity

Silver’s climb from $46 to $121 reflected a combination of long-term scarcity and a period of easier monetary conditions.

On the supply side, the deficit persisted. The projected shortfall for 2026 was 46.3 million ounces, while cumulative inventory drawdowns since 2021 amounted to 762.1 million ounces. About three-quarters of silver output comes as a by-product of mining copper, lead and zinc, gold and other metals, making it difficult for supply to increase quickly.

On the monetary side, the Fed cut interest rates repeatedly from September 2024 through the end of 2025. Lower funding costs made assets that pay no interest more attractive.

In simple terms, the rally traded on two expectations: tight supply over the longer term and better financing conditions in the near term.

A 26.83% Fall in a Single Day

On January 29, 2026, silver reached a peak of $121.488. The following day, it fell 26.83%. This sharp reversal was not caused by an abrupt change in silver’s underlying commodity fundamentals.

Over those two days, there was no material change in mine output, industrial demand from solar manufacturing or the inventory picture. The shift came from financial pricing.

The combination of scarcity and easier monetary conditions that had supported the rally began to unravel as interest-rate expectations changed. Investors recalculated the opportunity cost of holding an asset that pays no interest and began reducing the premium they were willing to pay for highly valued scarce assets.

Silver’s repricing therefore did not erase the actual supply deficit. It erased part of the valuation premium the market had paid for the scarcity narrative.

The Deficit Stayed; the Interest-Rate Backdrop Changed

Silver’s subsequent performance reinforced this point. The deficit had not disappeared, but the marginal force driving prices higher had changed.

In 2026, the market shifted from trading on rate cuts to pricing a higher-rate environment. As funding costs rose, the yardstick used to value silver as an asset that pays no interest changed with them.

Scarcity Is Real, but Scarcity and a High Price Are Different Things

The central question for silver has never been simply whether it is scarce.

Although the supply-demand deficit shapes its long-term value, prices over a given period often depend on the variable the market is currently trading. Over the past year, the scarcity argument did not cease to hold. The main driver of pricing shifted from tight supply to the cost of capital.

Markets cannot accommodate every narrative at once. Like a backpack with limited capacity, they alternate between scarcity and interest rates as the dominant theme. Price swings often occur at the moment that theme changes.

Studying an asset means looking beyond its favourable factors and identifying the central argument for which the market is currently willing to pay.