Silver Surge: 25% Increase in 10 Days, Should You Chase or Run Now?

Author: Campbell

Translation: Deep潮TechFlow

Since our last analysis on silver was published, 10 days have passed.

The market dynamics from 10 days ago seem to be a quarter in the past. In this short period, the silver market has experienced a series of significant events:

China announced that starting January 1 next year, it will implement a licensing system for silver exports.

Shanghai physical silver prices soared to $91, while the COMEX (New York Mercantile Exchange) settlement price was $77.

The London forward curve remains deeply in backwardation, although not as extreme as in October, it still remains inverted.

CME (Chicago Mercantile Exchange) has increased margin requirements for silver.

After experiencing a deserved digital detox, I spent the entire afternoon watching Bloomberg and Rose, trying to figure out whether these changes would impact our market outlook.

Short-term conclusion: Now is not a good time to buy anew.

I will wait for the upcoming pullback opportunities to continue positioning and stay flexible when trading options.

This is the part that trading books won’t tell you—when your investment logic works, or even works too smoothly, you need not only to manage capital but also to manage your emotional resilience. At this point, the mathematical models on paper are no longer just probability distributions but become “realized gains” in a bullish option.

This stage can be unsettling because it requires doing more homework: re-verifying your calculations, assessing potential adverse narratives.

This is the current situation.

Bear Market Warning (or: Potential “Lethal” Risk Factors)

In the next two weeks, silver bulls will have to face some narratives and pressures that could trigger short-term bearish sentiment.

Don’t be surprised by the upcoming “red candle”; it is very likely to happen. The key is whether you will choose to buy at the lows. We have already shifted part of our “Delta” (price exposure) into gold, readjusted our trading portfolio, currently holding about 15% in gold positions and 30%-40% in silver positions, whereas previously this ratio was closer to 10:1.

Additionally, we have purchased some upside butterfly options and significantly bought USD call options. The logic behind these moves will become clearer gradually.

In any case, here are the main factors that could currently exert downward pressure:

Tax-Related Selling Pressure

The trade you hold now has already made a good profit, possibly even enough to make your accountant uneasy. For investors who bought silver through long-term call options, they might resist selling their holdings before December 31.

Especially when these positions are held for less than a year, because this involves not only capital gains tax but also potential differences between short-term and long-term tax treatments.

This means there will be bullish pressure now, but after January 2, it will turn into bearish pressure.

Dollar and Interest Rate Issues

Latest GDP data shows strong performance, which could weaken the easing expectations of the 2-year Treasury yield curve, forcing policymakers to choose between a stronger dollar and higher short-term interest rates. Whatever the choice, it’s not good news for dollar-denominated precious metals like silver and gold in the short term.

Margin Increase

CME announced that starting December 29, margin requirements for precious metals will be increased.

If you are using leverage in the futures market, this change could have a significant impact on you. Higher margin requirements = higher capital needs = forced liquidation for undercapitalized investors. This is similar to the 2011 silver market crash, when CME raised margin requirements five times in 8 days, causing leverage to plummet and abruptly ending the silver rally.

So, is this worth worrying about? Actually, the situation isn’t that bad. The reason is that silver’s margin requirements have long been well above 2011 levels, so the recent hikes, while impactful, are relatively less disruptive. Moreover, most of the current demand in the silver market is physical demand, which is very different from 2011.

Looking back at 2011, the initial margin for silver was only about 4% of its nominal value, meaning you could control $100 worth of silver with just $4 of capital—equivalent to 25x leverage, very risky. Then, CME increased margin requirements to about 10% within weeks, reducing leverage from 25x to 10x, and a chain reaction of forced liquidations abruptly halted the rally.

And today? The current margin requirement for silver is around 17%, roughly 6x leverage, even stricter than during the most severe period in 2011.

The current market environment has entered a “margin squeeze” phase. What happens if margins are further increased? The answer is: it will no longer trigger panic selling among speculators because there’s hardly any speculative leverage left to clear. Instead, these adjustments will have a bigger impact on hedgers, such as producers trying to lock in prices, refiners managing inventory risks, and commercial players relying on futures.

If margin ratios are raised to 20%, you won’t see the chain of forced liquidations like in 2011. The real effect will be reduced liquidity, wider bid-ask spreads, and a shift of commercial activity to OTC markets. The market’s operational mechanism has fundamentally changed.

Therefore, those warning about margin hikes are actually fighting the “last war” (assuming the previous analysis is correct). While this narrative might help build a “contrarian” story in the short term, its practical significance is limited.

“Overbought” Sentiment Emerges

When these factors start to show, you’ll hear the “chart astrologers” on FinTwit repeatedly talk about “overbought.” Technical sell-offs often trigger more technical sell-offs, creating a negative feedback loop.

But the question is: overbought relative to what?

The investment logic of silver is not based on technical chart “lines” or “tea leaf readings.” Its core drivers are fundamental supply and demand: the economic viability of solar panels (demand inelastic, with silver costs accounting for only about 10% of solar panel prices) and the rigid supply of silver (75% of silver is a byproduct of other metals). These are the real factors driving short-term price fluctuations.

Moreover, silver has just hit a new all-time high. Do you know what else is hitting new highs? Assets that are still rising.

Copper Substitution Argument

This is one of the most common arguments from opponents: “They will substitute copper for silver.”

Well, this idea has some merit, but let’s do the math carefully.

The Reality of Copper Substitution (or: Four Years Is a Long Time)

The bearish case for copper substitution does exist, but the problem is: it’s very slow.

Here are actual calculations, not just intuitive guesses:

Time is the key limiting factor

Even with unlimited funds, conversion is constrained by physical conditions:

Approximately 300 solar panel manufacturing plants worldwide;

Converting each plant to copper plating takes 1.5 years;

Maximum parallel conversion capacity is about 60 plants per year;

It would take at least 4 years to achieve 50% copper substitution.

From these return cycles, a 1.5-year conversion time is an obvious capital allocation decision. In other words, CFOs should be rushing to approve such upgrades.

But the problem is: even then, it takes at least 4 years to complete half the conversion.

Factories need to be retrofitted one by one, engineers need retraining, copper plating formulas need re-verification, and supply chains need reorganization—all of which take time.

Demand Elasticity Calculation

Solar manufacturers have already absorbed the impact of a threefold increase in silver prices. Let’s see how this affects their profits:

When silver is at $28/oz (2024 average), the entire industry profits are $31 billion;

When silver rises to $79/oz (current price), industry profits drop to $16 billion. Despite halving, they continue to buy.

Break-even point?

Demand destruction begins when silver hits $134/oz. That’s 70% above current spot prices.

Note that $134/oz is not a target price but the starting point of demand destruction.

Urgency Threshold

As silver prices rise further, the economics of copper substitution become more attractive:

When silver reaches $125/oz, the return cycle for copper substitution shortens to less than a year, and by then, every board meeting might discuss copper substitution. However, even if all companies decide tomorrow, it still takes 4 years to reach 50% substitution. Meanwhile, $125/oz is still 50% above current spot.

Capital is “screaming” to “act fast,” but physical reality says “wait.”

The Paradox of Strength

Interestingly, while everyone talks about “copper substitution,” the solar industry is actually shifting toward using more silver in panels:

Weighted average silver usage:

2025: about 13.5 mg/W

2030: about 15.2 mg/W

The shift from PERC to TOPCon to HJT (heterojunction) technology actually increases silver usage per watt, even as copper gradually replaces silver in some aspects. But note: although silver efficiency per technology improves over time, without large-scale copper investments, the industry overall is moving toward more silver per watt, not less.

Short Sellers Talk About Copper Substitution, But Industry Is Actually Moving Toward HJT

The conclusion on copper substitution:

Time is passing, but very slowly.

Silver prices are rising faster than factory conversions can happen. The 4-year window is a protective umbrella for silver bulls: a 70% increase in silver price is needed to trigger demand destruction, and even if copper substitution starts today, it cannot catch up with silver’s rally in the short term.

Silver Bullish Logic (or: Why This Rally Might “Rip You Apart, But Be Delightful”)

Alright. The bad scenarios are managed. Now, let’s talk about why I remain bullish.

China is “weaponizing” silver

Starting January 1, China will implement a licensing system for silver exports. This is crucial because China is the world’s main net exporter of refined silver, exporting about 121 million ounces annually, almost all flowing through Hong Kong to global markets.

Now, this export flow will require government approval.

A strategic resource game is unfolding.

Physical silver premiums are astonishingly high

Shanghai: $85/oz; Dubai: $91/oz; COMEX: $77/oz

You live in a dollar-denominated world, but marginal buyers do not. They pay premiums of 10-14 dollars and don’t mind.

When physical silver prices diverge so significantly from paper prices, one side is wrong. Historically, it’s usually the physical market that’s correct.

London Market “Screaming”

The London OTC market is the core of physical silver trading among banks, refiners, and industrial users, and currently, it’s in the most severe backwardation in decades.

What is backwardation?

Simply put, the market is willing to pay a higher price for immediate physical delivery than for future commitments. That is, spot > forward. This phenomenon is abnormal and usually indicates significant market stress.

One year ago: spot at $29, with the price curve gradually rising to $42, a normal contango.

Now: spot at $80, with the curve inverted to $73, indicating backwardation.

Meanwhile, the COMEX paper market still shows sluggish contango, pretending everything is normal.

Three markets, three narratives:

Volatility has been re-priced

Implied volatility (ATM Volatility) for at-the-money options has risen from 27% to 43% YoY. Call options’ implied volatility is even steeper—out-of-the-money (OTM) options have implied volatilities of 50-70%. This indicates the options market is pricing in tail risks of significant price surges.

We are gradually building positions by continuously buying call spreads along the volatility curve, specifically: buying at-the-money implied volatility while selling higher strike calls to hedge costs. Recently, we even adopted a strategy of buying 6-month butterfly options:

Buy 1 SLV (iShares Silver Trust ETF) call option with a strike of $70;

Sell 2 call options with a strike of $90;

Buy back 1 call option with a strike of $110.

This reflects our short-term view: aiming to reduce Delta exposure when prices rise sharply.

Speculators are not yet crowded

Currently, speculative net long positions in gold account for 31% of open interest, while in silver it’s only 19%. This suggests that despite the rally, speculative positions are not at extreme levels, leaving room for further upside.

ETF Demand Is Catching Up

Investment demand increases with rising prices, confirming our previous prediction: silver will exhibit Veblen Goods characteristics, where higher prices boost demand.

The circulation of SLV ETF shares, after years of outflows, is now rising again. As prices go up, demand also increases.

This is not typical commodity market behavior but reflects growing demand for silver as a monetary asset.

Meanwhile, the premium in the Chinese market for silver still exists:

Western ETFs are starting to buy silver again;

Eastern physical demand for silver has never stopped.

The Solar Industry’s “Consumption” of Silver

25 years of no demand growth, no supply growth, then solar came

Over the past 25 years, silver demand in the market has hardly increased, nor has supply. But everything changed with the rise of the solar industry. The decline of silver demand in photography has been replaced by explosive growth driven by solar.

Current solar industry demand for silver is 290 million ounces;

by 2030, this number is expected to exceed 450 million ounces.

AI → Energy → Solar → Silver

A demand chain from AI to silver has formed:

Sam Altman (OpenAI CEO) is reaching out to companies, urgently seeking power supplies;

Data centers, to avoid grid connection delays, are even installing jet engines as emergency power sources;

Every AI query consumes electricity, and the marginal contribution of new power comes from solar;

And solar development depends on silver.

This chain is now a closed loop.

Key Price and Signal Focus

Risks to Watch

January tax-related sell-off: Investors may sell for tax reasons at the start of the year, causing short-term volatility;

Dollar strength: A strong dollar may exert pressure on dollar-priced silver;

Margin hikes: Although the “kill switch” has been exhausted, further margin increases should still be watched.

Signals to Watch

Deepening spot premiums, price consolidation: Indicating market accumulation;

Relief in spot premiums, price decline: Indicating easing of squeeze;

Persistent premiums in Shanghai: Indicating structural issues rather than market noise.

Observation Framework:

Focus on the curve, not just the price.

If pressure in the London physical market persists while the COMEX paper market remains indifferent, arbitrage opportunities will continue to widen until a “break” occurs:

Either supply suddenly surges (price skyrockets to release accumulated silver);

Or paper prices are forced to realign to reflect physical market realities.

Final Summary

In the short term, bearish logic does exist, and these factors could impact the market:

Tax-related sell-offs: Year-end tax-related selling may cause short-term swings;

Margin hikes: Potential margin adjustments could influence market sentiment;

Dollar strength: A rising dollar could pressure dollar-denominated silver prices.

However, the long-term structural factors supporting silver remain strong:

London spot premiums are at multi-decade extremes;

Asian premiums are as high as $10-$14;

China will implement export restrictions within 5 days;

Solar demand’s elasticity for silver is extremely low—demand destruction only begins at $134/oz;

At least 4 years are needed to achieve 50% copper substitution;

72% of silver supply is a byproduct of other metals, not easily increased through simple production hikes;

Speculative positions are not overly crowded, and ETFs continue to accumulate physical silver;

Volatility has been re-priced, and the market is pricing in tail risks of significant price surges.

This is the most interesting and also the most frightening part of the market.

Recommendation: Adjust your positions based on this information, invest rationally. See you next time!