Investing and speculating in commodities is not for the faint of heart. At any moment, you can see prices vault higher, then crash just as quickly.
It’s an emotional roller-coaster for the ill-prepared. One that can drive you to the brink of insanity.
And there’s no better example of this than the recent action in the price of silver.
If there’s anything I know, though, it’s that things don’t always make sense in the financial markets. Especially markets like metals, where price isn’t actually due to physical demand. It’s not buyers of silver bars or coins that push the price around.
It’s the paper market that dictates what happens.
Pump and Dump
When I say paper market, I mean futures contracts.
For those that don’t know how futures work, each contract on a specific asset lets you control a large amount of that asset for far less than physically buying it. You basically take on a massive amount of leverage. And if the bet works, it can pay off handsomely.
The main futures contract in the silver market is for 5,000 ounces. At the beginning of December, it cost about $4.00 per ounce to control that contract with silver priced at about $60 per ounce. (It was technically a fixed $20,000, which at the time worked out to about $4 per ounce. This fixed price will come into play later.)
That $4.00 per ounce is the margin requirement. Meaning instead of putting up about $300,000 for 5,000 ounces, all you needed was a fraction of that.
Each tick on that silver futures contract is worth $25. One tick is half a penny. So for every one cent move, you make or lose $50.
Imagine putting up $20,000 to buy a silver contract when silver was at $60 per ounce, then seeing silver double in price. You potentially pocketed $300,000 on that move. More than 10-times your money. Assuming you sold at the top.
But it’s not that simple.
If you’ve traded futures before, you know the rules can change at any time. Meaning the exchange that offers the contract – in this case, the CME – can force you to put up more margin knowing that may force traders to sell.
Which is exactly what happened.
In fact, the CME raised its margin rates on the silver futures contract five times over the past two months.
At first, the CME raised margin rates by 10%. That first hike meant traders had to pony up another $2,000 to maintain the position. For most people, that’s not much of a problem. And the price didn’t react much.
The CME did it again on December 26, hiking the rate another roughly 10%.And on December 30, it hiked the margin rate another 30%.
If you’re counting, that’s an additional $12,500 per contract by the end of December.
Yet silver continued powering higher. It was like a runaway train.
So the CME changed the rules completely. Instead of a fixed amount of margin – or $32,500 by the end of 2025 – it changed to a percentage of the notional. Meaning the requirement changes day-to-day depending on the value of 5,000 ounces of silver.
That rate is 11% of the value of that contract. With silver at its highs, your margin requirement jumped from $20,000 fixed to nearly $65,000. And it would remain a moving target.
So what happened with silver? The recent crash price action was all a function of paper trading. It was a hard crash due to forced selling by traders that wouldn’t – or couldn’t – put up more margin. But it’s hardly the end of the story.
The Coming Super Spike
Back in December, we talked about commodities in our 2026 Prediction Series. More specifically, we said that we believe this year is going to be an inflection point for commodities in general. And it could kick off what we call a commodities Super Spike. Especially with commodities at a historic low valuation relative to stocks.
In fact, we said that in most cases, gold takes off. Then everything else follows. Including silver.
But along the way, there will be huge spikes up. Followed by massive corrections.
These corrections – especially ones that happen fast – are the signs of a healthy bull market. Even if they come from margin hikes that force selling.
That’s true for silver. That’s true for gold. And it’s true for all other commodities.
What happens next is anyone’s guess. We may see a cooling off period where silver trades in a range.
But in my view, we’ll look back on this recent crash as just another bump in the road as silver, gold – and a whole host of other commodities – shake it off and power higher once again.
Regards,
Editor, Strategic Trader