Before the silver market crashes in 1980 and 2011, there were instances of margin increases, a move that will intensify pressure on leveraged traders as the market approaches a critical decision-making week.
The CME Group announced the second increase in margin requirements for silver futures within two weeks, with the new rules taking effect on Monday, December 29. This development marked a pivotal week for the silver market.
The exchange has raised the initial margin requirement for silver futures contracts expiring in March 2026 from $20,000 at the beginning of this month to approximately $25,000. With silver prices currently hovering near historical highs, this adjustment has further increased pressure on leveraged traders.
CME's intervention raises concerns about a repeat of history.
This decision has sparked intense market debate: Is the silver rally overheated, or has it merely entered a volatile consolidation phase driven by structural supply tightness and global capital flows?
Cryptocurrency investor and macro analyst Qinbafrank warned that CME's move evokes memories of two iconic peak moments in the silver market—1980 and 2011. During both periods, aggressive margin hikes occurred near the top of historic rallies, triggering forced deleveraging.
In 2011, amid zero interest rates, quantitative easing policies, and the European debt crisis, silver prices surged from $8.50 per ounce to $50 per ounce.
As prices peaked, the CME Group raised margin requirements five times within nine days, forcing leveraged funds to exit the futures market. This led to a nearly 30% plunge in silver prices within weeks.
The events of 1980 were even more severe. The Hunt brothers had stockpiled over 200 million ounces of silver, driving prices close to $50 per ounce through leveraged futures trading.
The 'Silver Rule 7' introduced by the CME effectively eliminated leveraged trading. Combined with then-Federal Reserve Chairman Paul Volcker’s interest rate hikes, this move decisively ended the silver rally, leading to the bankruptcy of the Hunt brothers.
Qinbafrank noted that although the current intervention is relatively moderate, raising margins will still reduce market leverage. This will force traders to either inject more capital or exit their positions, often irrespective of their long-term holding beliefs.
The divergence between physical silver and paper silver has intensified, with supply constraints becoming a key support for silver prices.
Unlike previous cycles driven by speculation, the current rally in silver prices is supported by tightening physical supply. China, which controls 60%-70% of the global refined silver market, plans to implement a silver export licensing system starting January 1, 2026.
This move will restrict overseas sales rights to large-scale producers certified by the state. According to reports, COMEX silver inventories have declined by approximately 70% over the past five years, while domestic silver inventories in China are nearing a decade-low.
Analysts noted that this situation has widened the spread between paper silver and physical silver, as reflected by deeply negative silver swap rates, indicating growing demand for physical delivery among buyers.
This imbalance has become highly pronounced: China’s sole silver fund recently suspended inflows from new retail investors due to a price surge far exceeding the value of its underlying assets.
This phenomenon highlights how excessive speculative sentiment has compounded upon a foundation of constrained real supply.
Industrial demand supports bullish sentiment, but a clear tipping point exists.
Silver’s growing applications in electric vehicles, AI chips, and solar panels continue to bolster demand growth. The solar manufacturing industry alone accounts for a significant share of annual silver consumption.
However, analysts caution that when silver prices approach $134 per ounce, they will erode the entire operating profit margin of the solar industry, potentially leading to slower growth in solar installations.
Meanwhile, critics argue that part of the current rally resembles a futures short squeeze—limited deliverable inventories are supporting an oversized paper silver market.
Silver Prices Face Ultimate Test
As the increase in margin requirements took effect on Monday, hedge funds are under pressure to rebalance portfolios by year-end. The adjustment of commodity indices is approaching, and overall market volatility is also rising.
Whether leveraged selling will overwhelm physical buying or merely clear excessive speculative sentiment will determine silver's next major move.
Thus, silver stands at the crossroads of historical trends, leverage, and real scarcity. This makes the next few trading days crucial for both bulls and bears in the market.
Editor/Rocky