Unlocking Silver's Undervaluation: Behavioral Economics and the iShares Silver Trust

In 2025, the silver market has become a battleground of behavioral economics, where investor psychology and structural fundamentals collide to shape price dynamics. The iShares Silver Trust (SLV), a physically backed exchange-traded product, offers a unique lens to analyze how shifting risk preferences in loss domains—driven by loss aversion and the reflection effect—have amplified silver's undervaluation. For investors, understanding these behavioral drivers is critical to navigating the volatility and identifying strategic entry points.

The Reflection Effect and Silver's Volatility

Prospect Theory, a cornerstone of behavioral economics, reveals that investors behave differently depending on whether they perceive themselves in a domain of gains or losses. In Q1 2025, silver surged 17%, pushing the price to $37.50 per ounce. Investors in the gain domain adopted risk-averse behavior, locking in profits and triggering a 16 million share outflow from SLV in April 2025. This panic selling was exacerbated by geopolitical tensions and the anticipation of Trump-era tariffs, which created a psychological shift from optimism to caution.

Conversely, during the 11.6% four-day price drop in April 2025, investors still in the loss domain—many of whom had been affected by the 2022–2023 slump—exhibited risk-seeking behavior. They doubled down on SLV, hoping to recoup earlier losses. This duality, known as the reflection effect, has created a volatile trading environment where sentiment swings rapidly between fear and greed.

Mental Accounting and the Dual Role of Silver

Mental accounting, the tendency to categorize money into distinct mental categories, further complicates silver's valuation. Unlike gold, which is predominantly viewed as a safe-haven asset, silver is mentally segmented into both a monetary and industrial category. This duality influences how investors allocate capital. For example, some treat silver as a speculative play on inflation, while others frame it as a strategic input for the energy transition.

The iShares Silver Trust (SLV) has become a focal point for this mental accounting. Investors who perceive silver as a “transition metal” for solar PV and EVs are more likely to allocate it under a “green technology” portfolio, whereas those viewing it as a fiat hedge may treat it as part of a broader precious metals strategy. This segmentation has led to divergent inflows and outflows, with industrial-focused investors showing resilience during geopolitical volatility, while speculative buyers retreat during downturns.

Structural Fundamentals and the Gold-Silver Ratio

While behavioral biases drive short-term volatility, structural fundamentals underpin silver's long-term undervaluation. The gold-silver ratio, currently at 92:1, is a key psychological trigger. Historically, this ratio averages 65:1, suggesting silver is significantly undervalued relative to gold. This disparity has been reinforced by a 182 million-ounce supply deficit in 2024, driven by stagnant mine production and surging industrial demand.

Solar PV manufacturing alone now consumes 20–30 grams of silver per panel, with projections indicating it will account for 20% of annual silver supply by 2030. Meanwhile, electric vehicles and consumer electronics continue to expand silver's industrial footprint. These structural trends create a hard floor for prices, even as behavioral dynamics cause short-term dislocations.

Strategic Implications for Investors

For investors considering SLV, the interplay of behavioral economics and structural fundamentals presents both risks and opportunities. The current RSI of 56 indicates a neutral zone, while the 20-day moving average at $34.48 offers a potential support level. However, the psychological weight of the gold-silver ratio and the reflection effect suggest that volatility will persist until silver's valuation aligns with its industrial and monetary value.

A diversified approach can mitigate behavioral extremes. Combining silver with other commodities like copper or platinum spreads psychological framing across multiple assets, reducing the impact of the reflection effect. Additionally, technical indicators can help time entries and exits, balancing emotional biases with objective data.

Conclusion: Positioning for the Energy Transition

Silver's dual role as a monetary asset and industrial input positions it at the intersection of two global megatrends: the energy transition and the de-dollarization narrative. While behavioral biases will continue to drive short-term volatility, the structural supply deficit and industrial demand ensure a long-term bull case. For investors willing to navigate the psychological pitfalls of loss aversion and mental accounting, the iShares Silver Trust offers a compelling vehicle to capitalize on silver's undervaluation.

As the market inches closer to $40 per ounce—a psychological threshold not seen since 2011—the question is no longer whether silver will rise, but how quickly it will do so. For those prepared to act, the time to position is now.