Recent extreme volatility in the silver market is eroding investor confidence, with its volatility rate soaring above 100% as the market urgently searches for a price floor. UBS has warned that the extreme volatility creates very high risks for short-term positioning, although the long-term fundamentals remain intact. On Friday, the spot price of silver plunged by as much as 10% before recovering those losses and rising over 2% to $73 per ounce. Meanwhile, silver futures prices fell more than 5% to $72.34 per ounce. After hitting a record high earlier this year, silver suffered a nearly 30% single-day drop last Friday and has struggled to regain stable footing since.
In a report released Thursday evening, UBS suggested the recent sharp declines were driven more by risk aversion rather than a breakdown in fundamentals. However, the bank emphasized that with the one-month silver volatility now exceeding 100%, significant price swings are likely in the short term. UBS also cautioned that without sustained investment demand, silver would find it difficult to sustain prices above $85 per ounce. According to Refinitiv data, silver has recorded 11 instances since the start of the year where its daily price movement reached or exceeded 5%. This frequent and severe two-way volatility has led institutional investors to diverge in their views on silver's near-term prospects.
Short-Term Positioning Risks Are Elevated UBS strategists stated that given the current extreme volatility, they do not find establishing long-term exposure to silver at current price levels attractive. With one-month volatility nearing 80%, the cost of silver options has risen significantly, creating opportunities for investors to profit by betting on a price floor rather than further price increases. UBS believes that strategies betting on silver staying above approximately $65 per ounce appear more attractive recently, reflecting a view that while prices may remain choppy, a deep drop below that level in the short term is unlikely. Nicky Shiels, Head of Research at MKS Pamp, noted that silver's recent performance bears little resemblance to past bull markets driven by physical supply constraints. "Silver has indeed been labeled a meme stock or commodity due to its excessive volatility," Shiels said, adding that while silver's absolute price is not cheap, the expansion of retail channels has amplified speculative fund flows. She expects silver to work off the excesses from its rally over the coming weeks rather than rebounding immediately, with prices potentially falling as low as $60 per ounce.
Long-Term Fundamentals Remain Supported Despite near-term caution, UBS believes silver's long-term fundamentals are still sound: "Lower nominal and real interest rates, global debt concerns, considerations of a weaker US dollar, and our expectation for a recovery in global economic growth by 2026 should support higher prices." UBS continues to forecast a silver market deficit of nearly 300 million ounces this year, with investment demand expected to exceed 400 million ounces. However, the bank warned that high prices could dampen demand for industrial uses. Vasu Menon, Managing Director of Investment Strategy at OCBC Bank, maintains that although recent market sentiment has been severely dented, the structural investment case for silver remains valid for investors who can withstand volatility. Menon stated that silver's hybrid nature often makes it vulnerable during sharp risk-off periods. "Silver can be viewed as a hybrid asset, possessing characteristics of a precious metal, an industrial metal, and a speculative element," Menon said. "It might appear like a meme asset, especially with significant retail fund inflows, but one should still remember it has fundamental drivers." Menon has a long-term price target of $134 per ounce for silver, which he expects to be reached by March 2027. Silver is widely used across a range of industrial and technological applications, including solar energy, catalysts, and electronics.
Comments