Following the Drop but Not the Rise! Silver Trapped in Difficulties

The silver market is currently facing a rare double bind: positive news cannot push prices higher, while negative news suppresses them precisely. Under the dual pressure of a strengthening dollar and rising real interest rates, the industrial demand logic for silver is being systematically suppressed by macro forces. Speculative capital is withdrawing on a large scale, with short-selling forces reaching their highest level in recent years.

During Friday's Asian trading session, silver prices fell more than 2% to $58.70/oz, while gold only edged down 0.4% to $4,120 in the same period. Robert Quinn, analyst at Goldman Sachs Commodities Trading Desk who tracks Comex metals fund flows, titled his latest report "Silver Futures: Stuck", pinpointing the core of silver’s current dilemma: The support for silver from AI and solar demand is materializing, but the market is unmoved, as the upward forces of the dollar and real interest rates are even stronger.

The direct consequence of this is that silver prices have halved from a January high above $115 to below $60, while speculative net long positions have shrunk from about $24 billion to $12 billion. At the same time, there is a clear divergence between the physical and paper silver markets—China is buying on dips, while short positions in the paper market have climbed to at least the highest level in a year.

Speculative Capital Offloads $1.6 Billion in One Week, Largest Sale of the Year

Capital flow data reveals the direct cause of pressure on the silver market.

According to Quinn citing the CFTC Commitment of Traders report, for the week ending September 29, managed funds, other categories, and non-reportable accounts collectively net sold about $1.6 billion in silver futures, the largest one-week sell-off since February. Notably, this sell-off was not just long liquidation, but showed a more pessimistic structure: roughly $800 million came from long liquidation, and another $800 million from new short positions.

Viewed over a longer timeframe, managed funds’ net long positions in silver are now down by 29,500 contracts from a year ago. Speculative net long size has dropped from a January peak of about $24 billion to around $12 billion, a near halving that closely matches silver’s price drop from above $115 to below $60.

Against this backdrop, previous bullish bets in the market have all but evaporated. According to ZeroHedge, Goldman Sachs' trading desk observed on August 21 massive client purchases of three-month-dated digital silver options with a strike price of $90/oz—implying silver would need to rally 52% in about six weeks for the options to pay off.

Bullish Logic Fulfills, but Price Moves Lower

The most puzzling phenomenon in silver’s current predicament is the severe disconnect between its industrial demand logic and price movement.

Quinn tracks two equity baskets as real-time "barometers" of structural demand for silver: the Goldman Sachs Data Center Basket (a proxy for AI infrastructure construction) and the Solar Basket (photovoltaics being one of silver’s largest industrial uses). Over the past six months, these two baskets have correlated positively with changes in managed funds’ long silver positions.

However, between September 29 and October 7, the Data Center Basket rose 4.2%, the Solar Basket rose 2.4%; historically, this should attract speculative capital back to silver. But the opposite happened—silver fell 1.4% over the same period.

The reason lies in US real interest rates creeping higher during the same period, and the dollar index rising 0.8% to a six-month high at 102.5. Quinn notes that historically, a stronger dollar and higher real rates coincide with managed money long liquidation. As the chart below shows, since August, managed money long positions and the (inverted) dollar index have moved almost tick for tick, with long positions dropping from about $6.9 billion in early September to $5 billion.

This is a mirror image of the situation in mid-September. At that time, in a report titled "Silver Futures: Hawkish Enough?", Quinn recorded that the Data Center Basket plunged 6.9% as industry leaders questioned AI expansion, with silver falling 4.7% as well. There, the AI logic was in question, yet now with the AI narrative intact, silver still cannot rise. This clearly indicates that silver’s price action is dominated by the Fed and the dollar, not by fundamentals.

Options Market: Bearish Sentiment Hits Two-Year Extreme, CTA Shorts Reach New Yearly High

Structural changes in the options market further confirm the sharp deterioration in market sentiment.

Quinn points out that standardized 25-delta put/call option skew has reached the top 2% of its two-year range, meaning investors are paying a historically high premium for downside protection in silver relative to upside calls. Meanwhile, three-month implied volatility has plunged from over 100% in January to about 33%, the lowest in nearly a year.

This combination sends a clear signal: the market widely expects silver will not experience large swings, and for those expecting volatility, the bias is for further downside.

The shifts in trend-following funds (CTA) positions are just as striking. According to Goldman Sachs' futures strategist framework, CTA net longs have flipped from about $1.2 billion in early September to about -$1.4 billion net short in just five weeks—a swing of roughly $2.6 billion, and the largest net short in at least a year.

Quinn’s historical data provides a reference: on August 6, managed funds' net longs were at the bottom 3% of their two-year range, with short-term momentum then reversing, triggering a cascade of CTA short covering. Subsequently, between July 28 and September 8, December silver contracts jumped 15.2%, with managed funds net buying $1.8 billion, mainly new longs. Current CTA short positions have now exceeded that level.

The Dollar Is the Last Line of Defense, but Goldman Sachs FX Team Issues Warning

When can silver break free? Quinn turns his attention to the dollar’s movement, but with an important warning. He writes in his report:

“Goldman Sachs FX research team believes that one pillar of silver’s resistance—the rising dollar—may be nearing a plateau. Given positioning is clearly stretched across multiple currency pairs and the Fed has recently signaled a patient stance on further policy tightening, the team is cautious on the outlook for sustained dollar strength in the near term.”

Goldman Sachs FX team including Stuart Jenkins and Michael Cahill point out in "US Outperformance and the Dollar" that the dollar’s September rally was mainly driven by relative US stock market strength, with the trade-weighted dollar just hitting a yearly high; but with crowded long positioning and the Fed's dovish communication, they are cautious about further dollar strength in the near term.

However, this week’s fresh news has put renewed pressure on silver: Brent crude spiked more than 5% above $105/oz after reports that the White House asked the Pentagon to draft plans for strikes against Iran, sending 10-year Treasury yields toward 5.3% and the dollar strengthening again. In addition, minutes from Wednesday’s FOMC meeting showed “most” officials view another rate hike this year as “possibly appropriate,” and Goldman Sachs economists still expect a December hike. This is exactly what Quinn calls a “macro headwind,” which will not dissipate before the midterm elections.

Physical vs. Paper Markets Diverge, China Buys on Dips

While paper silver is in a stalemate, the physical market is showing a markedly different picture.

Goldman Sachs commodity strategists Lina Thomas and Daan Struyven warned last month that tariff concerns have brought large amounts of silver into the US ahead of schedule. “We expect most of the metal inflow into the US to remain there, tightening inventories outside America; should investor demand pick up, volatility like late 2025 to early 2026 could recur.” The arbitrage gap between New York and London has started to appear—as reported by ZeroHedge on social platform X, citing JPMorgan’s Willig, traders' willingness to trade silver across New York and London is decreasing.

Meanwhile, ETF flows are showing a general pattern of buying gold and selling silver. On Thursday, Goldman Sachs trading desk picked up a notable signal from Asia: “China bought on dips overnight.” The desk labels “Chinese physical buying” as a key support factor, and puts forth a blunt question:

“If you believe rates have stopped falling, why not buy precious metals?”

With the current gold/silver ratio at around 70—widening further from 66 in early September—silver continues to underperform gold, and this cheapness could itself be a potential mean-reversion catalyst.

Bottom Line: Shorts Near Limits, Asymmetry Points Upward

Summing up the four key charts in Goldman Sachs' Quinn’s report, the current silver market positioning structure is approaching historical extremes:

Speculative Funds: One-week sell-off of $1.6 billion, half in new shorts; net longs at about half of January's peak;

CTA: Net shorts at around -$1.4 billion, highest in at least a year;

Options: Put skew in the top 2% of two-year range, implied vol near one-year lows;

Fundamentals: Barometers for AI and solar demand are rising, physical inventories outside the US are tightening.

The last time Quinn spotted such a “clean-out” in silver positioning was in late July, after which silver rallied 15% in six weeks. Quinn believes that currently, shorts hold three cards: the dollar, real rates, and Iranian tensions; if Brent crude continues to surge, silver dropping to the mid-$50 zone cannot be ruled out.

However, from an asymmetry perspective, with CTA shorts at extremes, option skew at extremes, and Goldman Sachs’ FX team sounding alarms on the dollar outlook, silver doesn’t need good news to break out—it merely needs bad news to stop piling up. And when the 30-year Treasury yield hits 5.67% and the Fed openly debates how many more rate hikes the economy can withstand, bond market bad news could ultimately become good news for all assets that “cannot be printed.”