The sharp decline in XAG/USD has raised concerns among holders of recycled silver that prices may not return to $100 per ounce anytime soon. As a result, supply is increasing rapidly. Let’s discuss this and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The silver market remains in deficit.
- Supply is increasing.
- Chinese demand is declining.
- A break below 74 and 70 in XAG/USD signals selling opportunities.
Weekly Fundamental Forecast for Silver
Markets are cyclical and interconnected. The sharpest drop in US stock indices since November has weighed more heavily on precious metals than the strong US January employment data. Investors had to sell gold and other metals to meet margin requirements on equities. Capital outflows from silver prevented XAG/USD from holding above $85 per ounce. At the same time, volatility remains elevated, creating opportunities for short-term traders.
Silver Volatility Dynamics
Source: Bloomberg.
According to the Silver Institute, the market is heading toward a sixth consecutive year of deficit. Strong investment demand is expected to offset losses from the gradual replacement of silver in solar panels with alternative materials, as well as weaker demand in the jewelry sector due to high product prices.
This highlights the cyclical nature of commodity markets: the higher prices rise, the faster demand contracts. The sharp drop in XAG/USD at the end of January dealt a blow even to the once-reliable source of support — investment demand. Late buyers who entered long positions are beginning to doubt the rally’s continuation, despite calls from earlier bulls to stay the course.
Growing skepticism about further gains in XAG/USD is boosting supply. According to Metals Focus, recycled silver accounts for about 19% of the total supply. Many holders are selling coins, silverware, and other items, fearing that prices may not return to $100 per ounce for a long time.
Recycled Silver Supply: Dynamics and Structure
Source: Bloomberg.
While investors still believe in gold’s long-term prospects due to its strong investment appeal, silver’s cyclical market dynamics are prompting sellers to become more active.
The gold-to-silver ratio is also significant. At the end of January, it fell to 43.6 — a level last seen nearly 15 years ago. Since then, the ratio has climbed above 63, yet silver still appears overvalued relative to gold. The historical average exceeds 80.
Silver Premium Dynamics in Shanghai and London
Source: Bloomberg.
Declining Chinese demand is putting additional pressure on XAG/USD, as reflected in negative premiums in Shanghai and London. Has China cooled toward the white metal? Possibly. The Lunar New Year often reduces trading activity. Meanwhile, exchange inventories remain at their lowest levels in more than a decade. Once the holiday ends, will activity return?
Weekly Trading Plan for XAG/USD
In my view, silver’s overvaluation relative to gold, its cyclical market dynamics, and a stronger US dollar favor a bearish strategy. Shorts opened on the rally toward 85 can be increased if XAG/USD breaks below the 74 and 70 support levels.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAGUSD in real time mode
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