Why did silver suddenly plunge? Veteran hedge fund managers warn of five short-term risks

After a 25% surge in silver prices in a single month, veteran hedge fund manager Alexander Campbell, who accurately predicted the rise in silver prices back in February, has issued a new warning. He stated that while the long-term bullish logic remains unchanged, investors should be cautious of five major risk factors that could trigger a pullback in the short term.

On Monday (December 29), spot silver experienced significant volatility, initially soaring by 6% in the morning before plummeting, currently down over 5% to $75.10 per ounce, with an intraday low of $74 per ounce, just a week after setting a record for the largest single-day dollar gain.

Alexander Campbell, a veteran hedge fund manager, former global macro investor at Bridgewater Associates, and current founder and CEO of Black Snow Capital, pointed out in his latest Substack article that as the new year approaches, the market is facing multiple pressures including tax-related selling, a rebound in the dollar, margin increases, technical overbought conditions, and threats from copper substitutes.

Notably, in addition to Campbell's warnings, a "technical storm" from passive funds is also approaching. According to Wind Trading Desk news, the Bloomberg Commodity Index (BCOM) will undergo its annual weight rebalancing in January 2026. Due to silver's significant outperformance over other commodities in the past three years, passive funds will be forced to sell positions that account for about 9% of the total open interest in the futures market, a scale far exceeding previous years, which could exacerbate market volatility in January.

Despite the short-term risks, Campbell's long-term bullish stance on silver remains intact. He pointed out that the current significant price disparity between the spot and futures markets, along with the deepest spot premium structure in the London market in decades, indicates a structural supply-demand imbalance.

Five Major Short-Term Risks

Campbell detailed the short-term pressures facing silver.

The primary risk comes from tax-driven selling.

For investors holding substantial unrealized gains, selling before December 31 will incur short-term capital gains tax, prompting traders to hold positions until year-end to benefit from the lower long-term capital gains tax rate. This means there will be selling pressure in the last three trading days of 2025, but concentrated profit-taking may occur after January 2, 2026.

The second risk is a stronger dollar.

Recent GDP data shows strong economic growth in the third quarter, which could drive a rebound in the dollar in the short term. A stronger dollar typically puts pressure on commodities priced in dollars.

Third, the Chicago Mercantile Exchange announced an increase in silver margin requirements starting December 29.

Campbell acknowledged that this would reduce leverage and speculative demand, but he pointed out that the current margin level has reached 17% of the nominal value, significantly higher than the peak level of 10% during the 2011 silver price crash. The current leverage ratio is only 6 times, compared to as high as 25 times at the beginning of 2011 Therefore, the impact of this margin increase is far smaller than the continuous hikes in 2011.

The fourth risk comes from the technical aspect.

Many analysts point out that silver has entered the "overbought" zone, and technical selling may trigger more sell-offs. However, Campbell questions this judgment, believing that the rise in silver is driven by the rigid demand from the solar industry and the inelastic supply, rather than purely technical speculation.

The fifth risk is the threat of copper substitution.

As silver prices soar, solar manufacturers may turn to using copper. Although Campbell points out that substituting copper for silver in industrial applications requires at least a four-year cycle, these narratives are sufficient to trigger technical selling in the short term against the backdrop of skyrocketing prices.

Index rebalancing may exacerbate volatility

In addition to the five major risks mentioned by Campbell, the market also faces another technical pressure.

According to news from the Chasing Wind Trading Desk, JP Morgan pointed out in a research report released on December 12 that the Bloomberg Commodity Index will undergo its annual weight rebalancing in January 2026. Due to gold and silver outperforming other commodities for three consecutive years, their weights in the index have naturally risen to excessively high levels.

To bring the weights back to target allocations, passive funds tracking this index will be forced to sell precious metal futures positions. JP Morgan expects that silver will face a sell-off equivalent to about 9% of its total open contracts in the futures market, while the sell-off for gold will be around 3%. This forced selling will be concentrated during the index roll period from January 8 to 14, 2026.

The assets tracking the Bloomberg Commodity Index exceed $60 billion, and such a large concentration of funds adjusting will inevitably amplify market volatility. This highly coincides with the time window for tax-driven selling warned by Campbell, potentially creating a resonance effect.

Long-term fundamentals remain strong

Despite the short-term risks, Campbell's enthusiasm for silver in the long term has not diminished, as he cites deep structural factors supporting silver prices.

The spot market shows structural tightness. Campbell states that the current spot price of silver in the Dubai market is $91/ounce, in Shanghai it is $85/ounce, while COMEX futures are only $77/ounce. The physical market premium is as high as $10-14.

Campbell points out, "When there is such a large divergence between the spot market and the futures market, one of them is wrong, and historically, it is not the spot market that is wrong." The spot premium structure of the London over-the-counter trading market has reached its deepest level in decades. A year ago, the market was in a normal futures premium state (spot at $29, forward curve rising to $42), but it has now turned into an inversion (spot at $80, forward curve declining to $73). This inversion structure, where spot prices are higher than forward prices, typically indicates physical tightness in the market.

Investment demand resonates with industrial demand.

From the perspective of investment demand, the position data shows that the silver market has not become overly crowded. According to the Commodity Futures Trading Commission data, speculative net long positions account for 19% of open contracts, while gold is at 31%. This suggests that there is still room for silver to rise.

The holdings of silver ETFs such as iShares Silver Trust have climbed again after years of outflows. The price increase has actually driven demand up, and this characteristic similar to "Veblen goods" indicates that silver is gaining monetary attributes rather than being merely an industrial commodity.

The options market is also re-pricing tail risks. The implied volatility of at-the-money options has risen from 27% a year ago to 43%, while the implied volatility of out-of-the-money call options has reached 50-70%. This indicates that the options market is pricing in a significant rise in silver.

From the perspective of industrial demand, the solar energy industry's demand provides long-term support. The industry's silver demand is projected to be 290 million ounces in 2025, expected to reach 450 million ounces by 2030. Campbell emphasizes that the rise of the solar energy industry has completely changed the silver market landscape after 25 years without demand growth.

The power demand from data centers and artificial intelligence further reinforces this logic chain: "Every AI query requires electronics, and the marginal electronics come from solar energy, which requires silver." Campbell states that the breakeven point for the solar energy industry is $134 per ounce, about $70 higher than the current spot price.