The historic rally in the silver market recently experienced a violent reversal, morphing into a crash that caught retail investors off guard. Driven by a speculative frenzy, the precious metal's volatility at one point rivaled that of "Meme stocks" during the COVID-19 pandemic, but it quickly turned downward, not only erasing massive market value but also severely impacting the retail crowd that chased the highs.
After hitting a high above $120 per ounce last Thursday, silver prices suffered a brutal three-day losing streak, plummeting over 40%. Although prices rebounded 9% on Tuesday, the extreme market volatility had already caused significant damage. Concurrently, gold prices also experienced sharp swings, falling 21% from their peak before rebounding 6%.
Triggers for this sharp decline included President Trump's nomination of Warsh as Federal Reserve Chair and exchanges raising margin requirements. However, traders widely believe the speed and brutality of the crash are primarily attributable to the rapid reversal of the recent speculative mania. In preceding months, particularly heavy inflows of retail capital from Asia had attempted to profit from this highly volatile asset.
Market data shows that ETFs tracking gold and silver have seen their market capitalization shrink by approximately $150 billion since the market peak last week. Among them, leveraged ETFs, favored by retail investors, were hit hardest. One double-long silver ETF collapsed nearly 70% in just two days, inflicting devastating losses on speculators active on forums like Reddit. Analysts warned that silver, often called "gold on steroids" due to its high volatility, made such extreme market moves an "accident waiting to happen."
While a physical silver buying frenzy emerged in January, even causing shortages at national mints and overtime at refineries melting down jewelry, market participants noted the most feverish speculation was concentrated in financial assets linked to the precious metal.
Data from Vanda Research shows retail investors poured a record $1 billion into silver ETFs in January. As a retail favorite, the silver ETF SLV set multiple trading activity records last week. On January 26th, as silver prices neared historic highs, trading volume for SLV reached a massive $39.4 billion, almost on par with the $41.9 billion volume for the popular S&P 500-tracking ETF SPY. On the same day a year earlier, SPY's volume was 70 times that of SLV.
Eloise Goulder, Head of Global Data Assets and Alpha at J.P. Morgan, pointed out that retail mentions of silver on social media in January were 20 times the five-year average. Nicky Shiels, an analyst at refiner MKS Pamp, stated, "January will be remembered as the month silver traded like a 'Meme stock'." She even received messages from people jokingly saying she was "officially working in a casino."
For retail investors who entered at high prices using leveraged instruments, this pullback has been catastrophic. Trevor Yates of Global X ETFs noted that leveraged ETFs are typically driven by retail fund flows, as institutional investors have more efficient ways to obtain leverage.
Among them, the popular double-long silver price ETF, AGQ, crashed 60% last Friday, followed by another 9% drop on Monday. This sharp, one-sided decline has caused severe losses for many who bought near the peak.
On Reddit forums, the lamentations of retail investors are widespread. One user who bought AGQ near silver's historic high last week reported a paper loss exceeding $25,000 by the weekend, writing, "I lost the equivalent of my post-tax annual salary today, almost my entire portfolio." Another user trading silver derivatives described themselves as "broken," having lost an "astronomical amount of money" during last Friday's record 27% single-day plunge in silver prices.
Rhona O’Connell, an analyst at StoneX, stated bluntly:
"Silver has always been a death trap. The parabolic move of the last few weeks was indeed an accident waiting to happen."
The sell-off was initially triggered by macro news. Trump's nomination of Warsh as a Fed Chair candidate led some investors to believe he would be less likely than other candidates to yield to pressure for rate cuts, somewhat alleviating concerns about central bank credibility loss—a key driver of the precious metal's rally over the past six months. Additionally, increased margin requirements for precious metals trading on exchanges in both China and the US, along with pre-Lunar New Year seasonal selling, accelerated the decline.
However, the lack of depth in the silver market amplified these effects. Analysts note the silver market is relatively niche and unable to handle the massive scale of hot money that flooded in this year. Kirill Kirilenko, an analyst at CRU, explained this is also why silver is called "gold on steroids"—it tends to overshoot in both directions. When investors rushed to exit bullish bets, the market lacked sufficient liquidity to absorb the selling, leading to a price collapse.
Despite the dramatic crash, current silver prices have only retreated to levels seen in mid-January. Investors who held gold and silver long-term over the past year still sit on substantial gains.
Some market participants view this decline as a correction within a deep rally. Sébastien Le Page of consultancy Acumet believes:
"This is just a knee-jerk reaction; we are still in a bull market area."
Meanwhile, in online investment forums, silver's most ardent supporters are still trying to maintain optimism. Even as the market turned sharply downward last Thursday, one Reddit user urged others to "keep stacking." Even after Monday's deepened losses, some posters remained bullish, calling it "the clearest long-term buy signal ever." The extreme divergence in market sentiment suggests volatility is likely to persist.
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