Silver Caught Between Solar Substitution and a Hawkish Fed

Silver investors are contending with two fundamentally different pressures that, when combined, are reshaping the metal's trajectory. On one hand, the solar industry's aggressive shift toward copper-based production is throttling a key demand driver. On the other, the Federal Reserve's tightening stance is amplifying the opportunity cost of holding the non-yielding asset. The result has been a sharp pullback — the spot price recently slumped 5% to around $74 per ounce, bringing its monthly decline to over 7%.

The Fed's FOMC minutes, due May 20 from the last meeting chaired by Jerome Powell, are the week's focal point. The central bank kept its target range at 3.50%–3.75%, but markets are now pricing in less than a 3% probability of a rate cut by June, according to the CME Group. The incoming chair Kevin Warsh is perceived as more inflation-conscious, and speculation has grown that rates could actually rise before year-end. Morgan Stanley, for its part, expects the Fed to hold rates steady through 2027. For silver, higher rates boost the dollar and raise the carrying cost of bullion, even as physical supply remains tight.

The industrial demand picture is shifting more rapidly than many anticipated. In 2025, photovoltaic manufacturers cut silver consumption by 6% to 186.6 million ounces. This year, the Silver Institute expects a further 19% drop, a remarkable figure given that global solar installations continue to grow. The culprit is cost: elevated silver prices and fierce competition have accelerated "thrifting" strategies. Longi Green Energy plans to replace silver with copper in its rear-contact cells, with mass production slated for Q2 2026. Jinko Solar is moving toward larger copper-based panel output, and Shanghai Aiko Solar Energy already offers silver-free cells.

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As a result, total industrial silver processing is forecast to contract 2% in 2026 to roughly 650 million ounces, with the photovoltaic sector leading the decline. Yet silver's superior electrical conductivity keeps it in demand elsewhere — electric vehicles, data centers, AI infrastructure and 5G networks all require the metal. These emerging sectors can cushion the solar slump, but not fully offset it. UBS strategists have slashed their 2026 industrial demand forecast to just 300 million ounces, pushing the global market deficit down to an estimated 60–70 million ounces.

Supply dynamics offer little relief on the upside — and the physical market remains structurally undersupplied. Registered COMEX inventories have tumbled from 531 million ounces last October to around 315 million ounces. The Silver Institute projects a sixth consecutive annual deficit in 2026, around 46 million ounces, bringing cumulative drawdowns since 2021 to nearly 762 million ounces. But mine output is sluggish: roughly 70% of silver is produced as a by-product of copper, lead and zinc mining, so higher prices do not quickly incentivize new supply.

Investment demand, however, is rebounding. Physical investment in bars and coins is expected to climb 20% to 227 million ounces this year, supported by strong price moves and macroeconomic uncertainty. That contrasts with the consumer side, where jewelry and silverware purchases remain soft.

Short term, the $76–$77 zone is the key technical support to watch. A clear break below that level could open the door to the $73 area. Despite the current weakness, most analysts remain cautiously optimistic. The Reuters consensus pegs the price near $80 per ounce, while Citigroup has set a target of $110 for the year. The next major catalyst arrives Thursday with the release of US purchasing managers' indexes, which could either reinforce the bearish mood or spark a rapid rebound.

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