Is the future of silver at risk of collapse? The liquidity crisis behind precious metal fluctuations

Recent metal markets have experienced intense volatility, with gold, silver, and cryptocurrencies all declining simultaneously, driven by complex liquidity contractions and changing policy expectations. The future trend of silver has become a market focus, as this correction may signal a new risk landscape in the precious metals market.

Policy Shift and Margin Double Blow: Liquidity Tightening Ahead

Last week, the market saw a clear correction, with gold plunging over 10% at one point, breaking below the $4,700 per ounce level; silver also fell sharply by 36%, approaching $74 per ounce. This was followed by a synchronized downturn in the crypto market, with Bitcoin trading around $63,150, down 4.55%.

Two main factors are driving this shift. First, the confirmation of the new Federal Reserve chair candidate, advocating for balance sheet reduction, has sparked concerns about tightening dollar liquidity. Compared to the supportive environment for precious metals under easing policies, the tightening outlook directly impacts demand for assets like gold and silver, which rely on low interest rates.

Second, the CME has significantly increased margin requirements for precious metals futures, raising gold margin rates from 6% to 8%, and silver from 11% to 15%. This move has forcibly altered the market leverage structure in the short term, forcing high-leverage traders to liquidate positions, intensifying selling pressure and further deteriorating liquidity.

Repeating History or Technical Adjustment? Lessons from 1980 and 2011

This correction prompts the market to revisit two historic precious metals crises.

In 1980, gold soared to a high of $850/oz, and silver approached $50/oz. In the following months, gold was halved, and silver fell by two-thirds. Similarly, in 2011, gold reached $1920, and silver again approached $50 before gold retraced 45%, and silver plummeted by 70%.

The common background of these crises was the Fed initiating rate hikes, combined with improving economic fundamentals and central banks reducing gold holdings. Notably, each crisis was exacerbated by continuous margin hikes, which became the final straw that triggered systemic deleveraging.

However, industry analysts believe this time is different: the fundamentals for gold have not fundamentally worsened. The current decline is more due to a mild shift in Fed easing expectations and investors taking profits at high levels, rather than deep economic shocks. The likelihood of a full-blown repeat of the crisis is relatively low.

Diverging Wall Street Views: Resilience of Gold vs. Concerns over Silver

Wall Street investment banks show a clear split in outlooks for precious metals.

Goldman Sachs senior traders note that despite recent market volatility, investors should not overinterpret this “position cleansing.” The core logic driving the market since the start of the year—war, inflation, protectionism, and wealth redistribution—has not fundamentally changed, implying the long-term upward trend for gold remains intact.

Bank of America’s chief investment strategist emphasizes that, although short-term volatility has increased, the macro fundamentals supporting gold and physical assets remain solid. They believe the 2020s will be dominated by multiple risk factors, and the asset appreciation driven by currency depreciation still holds. Unless more destructive macro events occur, this bull market is unlikely to end easily.

However, this optimism mainly applies to gold. Most institutions have issued clear warnings regarding silver.

How Will Silver’s Future Unfold? Leverage Risks and Demand Variables

Silver’s predicament lies in its inherently fragile market structure.

First, the silver market is relatively small, yet its leverage ratio is much higher than gold. Under the CME’s ongoing margin hikes, silver is more prone to trigger systemic deleveraging, becoming a priority for capital withdrawal. This structural risk makes silver inherently more volatile than gold, especially during liquidity contractions.

Second, the industrial demand story faces potential disproof. If growth in solar and new energy vehicle sectors underperforms, silver demand support will weaken significantly. Notably, many solar companies are pushing to replace silver with copper, and JPMorgan research indicates that high silver prices can suppress some industrial demand, creating a negative feedback loop.

Given these factors, JPMorgan has explicitly expressed a preference for holding gold over silver. This reflects a cautious market attitude toward silver’s future: in the short term, silver may face further deleveraging pressure; in the medium term, actual industrial demand performance needs to be observed; and in the long term, whether new demand growth points can be found remains uncertain.

For investors, the key now is to distinguish the divergence between gold and silver trends. Gold’s fundamentals are relatively stable, but silver’s future remains highly uncertain, with risk-reward ratios less favorable.