Silver soars 5% in a single day and then crashes again! The short squeeze spectacle that shocks the crypto world

On the morning of December 29, spot silver experienced a violent surge breaking through $83/oz, then sharply retraced, with an intraday increase of over 5%. Since the beginning of the year, silver has gained over 160%, while gold has increased by 72%, both hitting new all-time highs. However, bears are hesitant to increase short positions due to a severe shortage of physical silver, while bulls are gambling that counterparties cannot settle their positions. CME raised margin requirements again on December 26, a signal that has historically preceded two silver crashes.

The Deadly Dilemma of Short Sellers Lacking Physical Silver

(Source: Trading View)

The silver market is playing out a rare short squeeze, with the core issue being a severe shortage of physical supply. Historically, when silver prices approach record highs, large short capital would sell into the rally, leveraging futures to suppress prices. However, in this rally, short capital has almost “watched” as silver prices repeatedly break through $70 and $80/oz, continuously setting new highs. This abnormal behavior signals to bulls that the opposing side is facing a “big problem.”

The so-called “big problem” is a serious shortage of physical silver backing the short positions. In futures markets, short sellers must ensure delivery of physical silver at expiration or settle in cash. When physical supply is tight, shorts face a dilemma: if they cannot deliver physical silver, they are forced to close positions at high prices to cut losses; if they insist on delivery, they may need to buy silver in the spot market at prices far above the contract price. This predicament discourages shorts from increasing their short positions and instead provides bulls with an excellent opportunity for a short squeeze.

The bulls’ strategy is clear: continuously buy futures contracts and demand physical delivery, forcing shorts to buy in the spot market. Since the silver market is much smaller than gold, large buy orders can easily push prices out of control. More critically, ETF buying has become a major driver of physical shortages. Silver ETFs, after accumulating physical silver, tend to lock in their holdings long-term, permanently removing these ounces from circulation, further tightening supply. As shorts realize that available physical silver for borrowing is dwindling, their cost and risk of shorting skyrocket.

(Source: MacroMicro)

At the end of September, the gold-silver ratio once surged past 100, well above the historical average below 80, indicating that silver is severely undervalued relative to gold. This spread attracted a large amount of arbitrage capital to go long silver and short gold, further boosting silver demand. When this technical buying coincides with physical shortages, a price runaway becomes inevitable. From September to December, silver skyrocketed from below $30 to $83, a gain of over 170%, a momentum rarely seen even in crypto markets.

Industrial Demand Narrative and China Export Restrictions

The narrative behind the silver price surge has shifted from traditional monetary/hedge metals to a critical strategic metal indispensable for high-tech industries. Silver is the best conductor among all metals, with the highest thermal and reflectivity properties, making it irreplaceable in photovoltaics, AI data centers, electric vehicles, and 5G infrastructure. Unlike speculative demand, industrial demand is price inelastic; even if silver prices rise, solar panel manufacturers will not reduce usage because silver costs only a tiny fraction of the final product.

Market rumors suggest China will implement export restrictions on silver starting January 1, 2025, requiring special government approval for exports. While the credibility of such rumors is uncertain, the narrative aligns with current geopolitical tensions. China is one of the world’s largest silver producers; if export controls are enacted, global supply would tighten significantly. This geopolitical risk premium further elevates silver prices, making it not just an industrial metal but a strategic resource.

However, the industrial demand narrative may be exaggerated. While PV and EV industries do consume large amounts of silver, this growth is gradual and cannot explain a 170% price surge in just three months. The real driver of the price explosion is leveraged speculation and short squeeze activity in futures markets; the industrial demand story mainly provides a justification for speculative behavior. Once market sentiment reverses, these narratives will quickly lose their validity.

The Three Implications of CME Margin Hikes

Leverage purge about to begin: Raising margins forces futures traders to deleverage, with many highly leveraged speculators forced to close positions, often a precursor to sharp price declines.

Exchanges see the price as overheated: CME’s consecutive margin increases are clear risk warnings, indicating the exchange believes current volatility exceeds normal levels and needs to cool the market.

Historical patterns strongly resemble past crashes: Before the silver crashes in 1980 and 2011, CME repeatedly raised margins. The pattern suggests a high probability of a similar disaster unfolding now.

The Bloody Lessons of 1980 and 2011

The current silver short squeeze is not unprecedented; at least two similar episodes in history ended catastrophically. In the 1980s, the Hunt brothers attempted to manipulate silver prices, accumulating over 200 million ounces since the late 1970s, accounting for about one-third of global private holdings at the time. They heavily used leverage to buy futures, pushing silver from around $6 in early 1979 to nearly $50 in January 1980, a rise of over 700%.

But the frenzy ended abruptly in January 1980. CME issued the “Silver Rule 7,” strictly limiting margin requirements and position sizes for silver futures, requiring nearly 100% cash collateral, effectively eliminating leverage. Silver prices plummeted from $50 to $10 within weeks, an 80% crash. The Hunt brothers went bankrupt, marking the infamous “Silver Thursday” collapse.

The 2011 scenario was eerily similar. After the financial crisis, the Fed implemented zero interest rates and QE, and silver, as a high-beta hedge, soared from $8.50 to $50 over two years, a 500% increase. CME then raised margin requirements five times in nine days, forcing massive deleveraging, causing silver to crash nearly 30% in weeks, followed by a multi-year bear market.

These lessons reveal a key rule: when exchanges start restricting leverage, the mania is nearing its end. The current CME actions closely mirror these historical patterns. On December 12, CME increased silver margin requirements by 10%, and on December 26, announced further increases effective December 29 for multiple metals, including silver. Such consecutive moves historically foreshadowed catastrophic crashes.

Retail Traders’ Dilemma and Survival Rules

For retail investors, the current silver market is a classic “shorts fuel the fire, longs become bagholders” trap. Shorts face short squeeze risks; silver could continue soaring to $100 or higher in the short term, with forced liquidations before they can cover. Longs risk a crash triggered by CME margin hikes; if leveraged funds withdraw, prices could halve within days.

The most rational approach is to wait and see. History shows that during extreme volatility and regulatory interventions, both long and short bets are high-risk gambles. The real opportunity lies in waiting for the dust to settle and deploying capital at lower levels, or shifting to assets that market makers are building positions in but have not yet surged. For those already holding silver, strict stop-losses are essential; if key support levels break, exit immediately—don’t rely on “value investing” to rescue losses.