Silver Speculators Hit 2-Year Bearish Extreme as Deficit Persists

Speculative positioning in silver has plummeted to its most pessimistic level in two years, highlighting a significant disconnect between the sentiment in the paper market and the ongoing physical deficit of the metal.

Data from the Commodity Futures Trading Commission, as reported by Goldman Sachs, indicates that speculative investors have liquidated a net $2.3 billion in silver futures during the five weeks leading up to November 3.

The exodus was primarily fuelled by a significant increase in short-selling, with $2.6 billion in new shorts compared to only $300 million in new longs.

Record Short Build Meets Structural Supply Gap

Hedge funds and retail traders have both decreased their exposure by approximately $1.4 billion, whereas the “other” category, encompassing family offices and proprietary desks, discreetly acquired $470 million during market dips.

Current net long speculative positioning, or bets in favour, has reached around $8.0 billion, marking the lowest level since January 2025 and reflecting a decline of over $16 billion from the peak observed in January 2026.

According to Goldman’s analysis, optimistic sentiment is currently in the second percentile of the last two years - the market has shown a more favourable outlook on silver 98 percent of the time.

The broader economic environment accounts for a significant portion of the recent sell-off.

Federal Reserve officials have adopted a clearly aggressive stance, as markets now assign an approximately 80 percent likelihood to a rate hike in December, spurred by a robust employment report that exceeded expectations.

Increased real yields elevate the opportunity cost associated with non-yielding assets, exerting downward pressure on precious metals overall.

Silver's remarkable ascent to a record $121.67 an ounce in late January - a nearly 70 percent increase in just a few weeks - positioned it precariously for a potential correction as monetary policy expectations began to change.

Solar Demand Cracks as AI Demand Emerges

However, the physical market presents a contrasting narrative. The Silver Institute anticipates a sixth straight year of supply shortfall in 2026, projecting that demand will surpass supply by 35 million ounces.

Industrial demand beyond photovoltaics is projected to increase by 4.5 percent, driven by advancements in vehicle electrification, investments in grid infrastructure, and the expansion of data centres.

Solar demand is experiencing a significant contraction, with projections indicating a 21 percent decline this year as manufacturers intensify efforts in cost-cutting and shifting toward copper alternatives.

The political aspect is significant.

Silver's initial surge this year can be linked to China's export-approval policies for the metal, reflecting similar limitations that were previously imposed on rare earths, along with the US classification of silver as a vital mineral.

Following the midterm elections, the anticipation of a more favourable trade landscape for solar manufacturers in China led to a 7.1 percent surge in a Goldman collection of Chinese solar equities, alongside an approximate 6 percent rebound in silver from November 3 to November 9.

That correlation indicates that signals from industrial policy, rather than solely Federal Reserve pricing, will influence silver's upcoming trajectory.

Positioning Washout Signals Exhaustion Risk

The options market is currently making adjustments. The three-month 25-delta put-call skew, an indicator of the appetite for downside protection, has decreased from its peak level since the pandemic.

Historically, such extremes in both futures positioning and skew have signalled reversals rather than supported additional declines.

Philip Newman, managing director of Metals Focus, observed that “weak institutional positioning leaves room for investors to rebuild exposure if sentiment improves.”

The pessimistic scenario hinges on a prolonged tightening cycle by the Federal Reserve that could last until early 2027, alongside a solar industry relinquishing its position as the marginal demand influencer for silver.

The optimistic scenario hinges on an ongoing deficit, constrained inventories, and a speculative market already set for additional downturns.

Neither side holds a clear advantage. However, the expense of maintaining a short position is increasing as the short base becomes more congested.

(Edited by Rahul Karunakar; rahul.karunakar@skaah.media)