I believe everyone has seen that so far, silver has been continuously falling throughout the day, with a decline that far exceeds other types of assets. In the morning, everyone fell together, and in the evening, silver fell sharply on its own. So what exactly is it falling for?
This brings us to the futures market
(The following content is purely speculative; if you have other opinions, you might be right)
Futures Exchange
This collapse of silver is almost entirely unrelated to the spot market; it is purely caused by futures trading.
Everyone should have heard that in response to the continuous rise of silver, various exchanges have imposed considerable restrictions on silver futures. For example, the Shanghai Futures Exchange has set a limit on the maximum quantity that each user can purchase, which is still considered normal, as it restricts both long and short positions simultaneously. The goal is to avoid overheating and speculation that could create a bubble. Although it is unsatisfactory, it is still fair. However, the continuous restrictions have led the silver market's trading to increasingly move away from the exchanges to over-the-counter or private trading, which has occurred.
1. The price difference between paper silver and physical silver is becoming larger.
Then the CME recently introduced a genius-like regulation: the margin for precious metals will automatically rise and adjust with prices.
If you have seen related news reports, the CME claims that this regulation will be a nightmare for short sellers, forcing them to bear pressure and possibly be forced to close positions quickly, which also causes increased volatility. This is the second point.
2. The volatility of silver futures is expanding.
And does the current 9% margin (meaning your actual leverage cannot exceed 11.11 times) really put pressure on short positions? It does not. Once the regulation is introduced and allowed to ferment over time, it puts increasing pressure on long positions. The upward momentum of silver is continuously declining, moving from directly approaching $120 per ounce to taking four days and three attempts to break through the $120 integer level. After breaking through, the momentum is exhausted, and it does not follow the expected smooth path to the next integer level to create a new peak, but instead, it falls back to $112 for consolidation.
When people are optimistic about the prospects or value of a commodity, a [positive price difference] occurs between futures and spot, meaning the futures price is higher than the spot price. But what about silver? The off-market spot market is larger than the on-market futures market.
As the price difference between futures and spot continues to widen and volatility continues to increase, the volatility of silver at the end of January has nearly equaled the normal volatility of DOGE. How can the volatility of a precious metal approach that of a MEME coin? There is a huge problem in the market, resulting in significant arbitrage opportunities.
The demand for silver in solid-state batteries for Japanese and Korean cars, solar photovoltaic batteries, and advanced semiconductor materials is continuously rising in the foreseeable future. However, currently, spot is more expensive than futures. How will futures traders find physical silver for delivery? Consortiums will not engage in losing trades. If they can't find silver, they will find ways to make it drop. Physical silver is originally a commodity with a large price difference; if you buy it for $110, it's even difficult to sell for $100. Recently, the market has been booming, making traders willing to buy at market prices. Once prices drop, spot buyers cannot use market prices to buy silver from you, and they will quickly revert to purchasing silver at buy prices, causing spot prices to drop faster, reversing the price difference, and futures prices will again be higher than spot prices.
Although the spot market is vast, it is fragmented and lacks a unified price. For instance, in the largest spot market, India, there may be several different price levels within one state. When the market, dominated by bulls (like India and China), shows optimism toward silver, it becomes more evident in physical trading, which also means that longs are not the dominant force in the futures market; the shorts are.
It is somewhat like two armies facing each other, with the main force of one army going to the rear mountains to gather resources, leaving their camp empty. Suddenly, the air force commander unexpectedly pulls out a magic wand and directly creates an ice wall to block the other army on the mountain, then fires a shell that sinks the other army's main camp. Although the other army has a greater number of troops, they have no chance of close combat due to rules, humiliatingly swallowing a historically significant defeat. This is the current situation.
Who has the most silver? Buyers in the silver spot market.
Who has the most demand for silver? High-tech companies and automotive companies.
So who determines the market price? Futures traders.
This is the paradox of the market, and this is where the consortiums are both clever and despicable.
They only used a few billion dollars, yet overnight shattered the entire silver market's trillion-dollar value.
Profiting immensely, yet turning back to mock long positions for chasing high prices, is a symbol of greed, and failure is self-inflicted.
This is capitalism; those with the power to set rules are the winners.
We can only adapt, understand it, and then find ways to use it. Silver has given us an expensive lesson today.
Recently, Binance has gradually become popular for #TradFi trading.
But we must remember, in the TradFi system, we are price guessing gamblers, not shareholders, not real futures traders. We do not have pricing power, so to continue smoothly, we need more information to get closer to the correct price interpretation. Everyone should pay attention to KOLs or Binance News for accurate information; these are good methods. I will also strive to find first-hand information to provide to everyone.
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