HSBC flags silver as fundamentally overvalued, warns volatility to continue in 2026

New Delhi [India], January 8 : Silver entered 2026 following an unprecedented rally in 2025, during which prices surged to record highs above USD 80/oz before retracing amid extreme volatility.
According to HSBC Global Investment Research, the rally was driven less by traditional industrial fundamentals and more by physical market tightness, investment demand, and macroeconomic uncertainty.
While prices are assessed as fundamentally stretched, ongoing supply dislocations are expected to sustain elevated volatility through at least the first half of 2026.
The report says a key driver of the recent price behaviour has been acute tightness in deliverable silver, particularly in the London market, it noted "tightness in the London market and extreme backwardation on the CME futures markets underscore the near-term shortage of deliverable silver."
HSBC cautions that while prices are elevated, "we regard prices as fundamentally overvalued," but adds that volatility is likely to persist until market tightness eases later in 2026.
Gold prices continue to provide important support for silver, though silver is increasingly trading on its own supply-demand dynamics.
The gold-silver ratio has narrowed materially, reflecting silver's relative outperformance. High gold prices have also encouraged substitution into silver, partially offsetting demand destruction caused by silver's own elevated price level.
"Gold prices are providing key support but are not the prime driver of silver as in past rallies," the report states, adding that silver has increasingly been "less driven by gold and more by its own market dynamics."
From a demand perspective, investment flows remain dominant. Exchange-traded funds recorded substantial inflows in 2025, and holdings are expected to rise further in 2026, though at a slower pace.
Nevertheless, the broader environment remains supportive, with "debate over future Fed rate cuts, Fed independence, and geopolitical risks" described as "price supportive."
A weaker US dollar is also expected to provide downside support, as "the likelihood of a soft USD... can support silver on downswings."
On the supply side, mine production is increasing only modestly despite historically high prices. Recycling is rising and represents the most elastic supply component, but even this is expected to lag prices until market conditions stabilize.
As per the report, overall market balances are projected to remain in deficit, though deficits are expected to narrow from approximately 230 million ounces in 2025 to around 140 million ounces in 2026, and further in 2027.
These moderate deficits help support high prices but do not fully justify the scale of the recent rally, which has been amplified by localized shortages and investor positioning.
Average silver prices are projected at approximately USD 68/oz in 2026 and USD 57/oz in 2027, with wide trading ranges reflecting ongoing volatility.
While further upside spikes are possible in the near term, easing physical tightness, rising supply, and softer industrial demand are expected to contribute to price moderation later in 2026.
However, the report cautions, silver remains in a high-risk, high-volatility phase. Near-term support is strong, but the market appears increasingly vulnerable to sharp corrections once supply constraints ease.