Silver: When a record rally turns into a record rout

Friday’s historic collapse in silver was the result of several developments colliding simultaneously. While a correction had been increasingly anticipated—and was arguably overdue—the speed and depth of the sell-off proved a stark wake-up call. Once again, it underlined how one-sided positioning can cause outsized damage when it begins to unravel.

As usual, social media quickly filled with conspiracy theories suggesting the move was orchestrated to bail out underwater shorts. These narratives are best ignored. The more straightforward explanation is that silver’s multi-week rally—while supported by strong Chinese demand—had become increasingly driven by FOMO and speculative excess. When gold and silver turn into hot topics at dinner tables and in workplaces, it is often a sign that a particular phase of the rally is nearing exhaustion.

The speed of the preceding rally itself warranted caution. It took 42 days for silver to rise from USD 50 to 60, just 22 days to move from 60 to 80, and only 12 days from 80 to 110. Such a parabolic and increasingly unhinged advance almost inevitably set the stage for sharp and painful corrections, as exit doors become too narrow to absorb a sudden wave of forced selling.

Extreme trading volumes across futures, options, and ETFs, combined with increasingly strained market plumbing, amplified the move. Eventually, the system buckled.

Volatility feeding on itself

On Thursday morning, I warned that the continued surge across metals—especially silver—had entered a dangerous phase. The core problem was volatility feeding on itself. As daily price swings expanded, liquidity thinned. Banks and market makers struggled to warehouse risk, particularly as their lifeline—the basis between physical and futures—became increasingly erratic. Once their willingness to quote prices in size faded, liquidity deteriorated further and volatility blew out.

The opening salvo came during Friday’s Asian session, following a turbulent European and US session on Thursday. Silver futures had earlier hit a record high at USD 121.78, before slumping by USD 15 into the close at USD 114.42. When Chinese markets opened, selling intensified—likely influenced by tighter margin requirements—with the SHFE silver futures contract ending the day down 17%.

Options gamma and forced futures selling

Much attention has rightly focused on Monday’s surge in options volume in the iShares Silver ETF, the largest vehicle offering exposure to COMEX silver futures. A significant share of this activity consisted of naked call buying.

As calls were bought, option sellers were forced to hedge their exposure by buying silver futures. As prices continued higher and option deltas increased, this hedging demand grew—leaving the market increasingly short downside gamma. Once prices started to fall, the process went into reverse. The need to unwind delta hedges accelerated, creating a purely mechanical feedback loop where risk had to be reduced at whatever prices were available.