Silver remains unsettled as volatility and cross-market risks collide

Key Points:

• Silver's attempt to stabilise after last week's historic rout has so far proven short-lived with fresh selling pressure emerging out of China
• A large, concentrated short in the Chinese futures market, and continued trouble at China's pure silver fund adding some gravity to the reversal
• Gold trades lower having struggled to gain a foothold above USD 5,000 with silver's renewed slump and outside market developments weighing on prices
• Until volatility subsides and price discovery improves, gold, and especially silver is likely to trade violently in both directions

Silver’s attempt to stabilise after last week’s historic rout has so far proven short‑lived. Prices reversed sharply during the Asian session, erasing two days of gains after earlier failing in London and New York to break technical resistance near USD 90.50 — the 38.2% retracement of the latest slump. Selling pressure intensified as Asian trading got underway, with Chinese participants exiting what until recently had been a popular trade for investors seeking alternatives to a range‑bound equity market and a weak domestic property sector.

The Shanghai spot premium over London remains positive but has retreated sharply from the extremes seen during last week’s frenetic rally. After briefly surging above 30%, the premium has fallen to a three‑week low below 10%, signalling waning marginal demand. With the Lunar New Year approaching — and the Shanghai Futures Exchange set to close from February 16 to 23 — further profit taking and position squaring look likely, temporarily removing an important source of price support for precious metals.

Positioning matters again

Beyond seasonal effects, growing attention is being paid to positioning dynamics in China’s futures market. Recent reporting by Bloomberg has identified Zhongcai Futures, linked to veteran trader Bian Ximing, as holding what appears to be the largest net short position in SHFE silver. The reported scale — equivalent to several hundred tonnes of silver — is notable in a market that is structurally small and prone to sharp price dislocations, and such news has probably helped reduce the euphoria among retail investors who up until recently was prepared to pay whatever price to gain exposure. 

The fund that became the story

Another development that has dented bullish sentiment among retail traders is the UBS SDIC Silver Futures Fund, China’s only pure‑silver product, which in recent weeks attracted such strong demand that its market price surged well above the value of its underlying holdings — predominantly local silver futures, with more recent exposure expanded to include major international contracts such as CME silver futures. 

Last Thursday, despite repeated risk warnings from its administrators, the fund traded at a premium of close to 60% to net asset value before trading was suspended on Friday amid broader market turmoil. With a daily price limit of 10%, the fund has since been limit down for four consecutive sessions without trading, effectively locking in investors who can only watch losses accumulate.

The episode highlights how the fund’s structure, combined with daily price limits in Chinese markets, allowed its secondary-market price to detach materially from underlying value during the rally. When volatility turned, the same features worked in reverse. A subsequent adjustment to the fund’s valuation methodology — aimed at better reflecting rapid moves in global futures prices — triggered a sharp drop in NAV and a visible investor backlash.

The plumbing needs fixing before an orderly market return

The battle between traders convinced prices can only move higher and those focused on demand destruction and unsustainably high valuations continues to dominate price action. The result has been persistently volatile market conditions that can only ease once a degree of order returns. Until then, volatility risks feeding on itself.

Banks and market makers have increasingly struggled to warehouse risk, having — like most participants — been repeatedly blindsided by violent price swings, not only outright but also in the spread between physical and paper markets. This has reduced their willingness to quote prices in size.

Silver is a relatively small market compared with the volume of capital now flowing through it. When volatility rises, market makers naturally widen spreads and reduce balance-sheet usage, leaving liquidity weakest precisely when it is needed most.

Gold steadier, silver still unsettled

In contrast, gold has remained comparatively resilient, supported by deeper liquidity, a broader investor base and continued central-bank demand. The widening divergence between gold and silver performance reinforces a recurring theme: silver behaves less like a monetary metal during periods of stress and more like a high-beta hybrid, amplifying both optimism and fear.

This does not invalidate silver’s longer-term role in portfolios, particularly against a backdrop of energy transition demand and constrained mine supply. However, it does argue for patience and discipline when volatility is extreme. History suggests that silver tends to stabilise only once realised volatility falls and speculative positioning is reset — conditions that are not yet fully in place.

Outlook

In the near term, the focus remains firmly on market mechanics rather than macro headlines. Key signposts include whether the Shanghai premium can stabilise, whether fund dislocations begin to normalise, and whether volatility begins to ease thereby allowing the internal plumbing to repair. Beyond silver-specific factors, broader risk sentiment also bears watching, with continued weakness in cryptocurrencies and an ongoing rotation among and out of US technology stocks and into emerging markets and other regions raising the risk of a wider correction that could weigh on overall risk appetite.