The silver market remains in a critical phase of the ongoing squeeze, characterized by a sharp divergence between paper and physical dynamics. As of early February 2026, spot silver trades around $76–$78 per ounce (following a volatile pullback from January’s peak near $120–$121), reflecting recent leveraged unwinds but not a collapse in underlying fundamentals. This period has been marked by aggressive interventions from exchanges, particularly in the form of margin requirement hikes, which have amplified volatility in the paper arena while physical tightness persists.
Paper Market vs. Physical Reality
The paper market (primarily CME/COMEX futures) relies on high leverage—often 10:1 or more—with exchanges controlling margin requirements. These requirements dictate the minimum capital traders must post to hold positions, acting as a buffer against losses. In times of heightened volatility, exchanges raise margins to mitigate risk, but this can force liquidations among over-leveraged participants, creating downward price spirals. Recent repeated hikes (up to 40% in some cases during peak turmoil) have exemplified this, triggering cascading sales and a ~35% drop from highs. Open interest has declined significantly (to levels not seen in years in some reports), signaling a purge of speculative positions rather than fading demand. This “flush” creates temporary oversold conditions in paper prices, often disconnected from real-world supply constraints.
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In contrast, the physical market shows resilience and tightness:
- Shanghai premiums remain elevated, with buyers paying substantial markups for actual metal, sometimes exceeding $40 above spot.
- London lease rates have spiked (recent reports indicate 6–8.5% or higher for short tenors), a clear sign of borrowing costs surging due to physical scarcity—lenders demand premiums to part with bullion.
- COMEX registered inventories are strained relative to open interest, raising delivery risks in near-term contracts (e.g., March 2026).
Physical silver cannot be printed or margin-called into existence, highlighting the manipulation vulnerability in paper trading. While paper prices can be influenced by exchange policies, physical demand from industries like solar and electronics continues unabated, underscoring the market’s dual nature.
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Recent Margin Increases Across Global Exchanges
Over the last fortnight (from late January to early February 2026), margin requirements for silver futures have risen sharply, primarily driven by the CME Group to curb volatility amid the squeeze. These adjustments followed an incremental hiking pattern throughout January, reflecting exchanges’ efforts to maintain collateral coverage as prices swung wildly.
On January 27, 2026, the CME announced an increase in silver margins to 11% of notional contract value from the prior 9% for standard (non-heightened risk) profiles, with heightened-risk margins rising to 12.1% from 9.9%. This change, effective January 28, was justified as a “normal review of market volatility” and affected contracts across expiries, including March 2026. The hike forced many traders to post additional collateral—equivalent to thousands of dollars per contract—or face liquidation, contributing to intraday price drops of up to 6%.
Just days later, on January 31, 2026, the CME implemented a more substantial adjustment, boosting margins to 15% from 11% for non-heightened profiles and to 16.5% from 12.1% for heightened-risk ones. This 36% relative increase (from the January 27 levels) was the steepest in the period, pushing maintenance requirements per 5,000-ounce contract to over $45,000 at prevailing prices around $80–$90. The move came after silver briefly retested $112, amplifying forced selling and exacerbating the pullback to current levels. Analysts note this as part of a broader shift initiated in mid-January, when CME transitioned from fixed-dollar margins to percentage-based ones, automatically scaling requirements with price surges.
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Globally, while the CME has led these changes, synchronized actions echo in other markets. The Shanghai Futures Exchange (SHFE), a key hub for physical silver trading in Asia, had aligned earlier with a December 26, 2025, adjustment raising margins alongside a 15% daily price limit—its third such move that month. Although no new SHFE hikes were reported in the last two weeks, sources indicate ongoing monitoring, with potential for further tweaks if volatility spills over. The London Metal Exchange (LME), which offers silver contracts under LMEprecious, maintained stable margins but increased clearing fees indirectly tied to risk in late January. Similarly, Japan’s TOCOM (now part of JPX) and ICE Futures have not announced fresh increases but are watching CME cues, as global arbitrage links these venues. These hikes, totaling over 60% cumulative rise since early January on CME, have flushed out weak hands, reducing leverage from 10:1 to as low as 6:1 effectively, and setting the stage for a cleaner rally once stabilized.
Core Fundamentals Driving the Squeeze
- China’s Drain Accelerates — Chinese stockpiles (via SHFE and broader vaults) continue depleting rapidly, with reports of inventories falling below critical thresholds (e.g., under 400 tons in some exchange data, down sharply week-on-week). Export restrictions implemented in 2026 treat silver as a strategic asset, limiting outflows and intensifying global deficits. At current rates, key vaults could approach emptiness soon, while industrial demand (solar, electronics, AI-related) shows no slowdown.
- Geopolitical and Macro Pressures — Escalating Iran tensions, potential oil sanctions, and broader uncertainty reintroduce a risk premium to precious metals. Silver benefits as an inflation hedge and industrial play amid monetary easing expectations from central banks.
- Structural Deficit — Annual supply shortfalls persist, now projected at ~200 million ounces in 2026 under constrained exports and rising consumption. This erodes above-ground stocks faster than replenishment, with mining output lagging due to underinvestment.
Outlook and Investor Perspective
The recent paper crash is a leverage flush, not a fundamental reversal. Miners lag significantly and offer asymmetric upside as prices stabilize and rise. Long-term trends point to retesting triple-digit levels, with analyst targets in the $90–$120 range (bull cases higher) through 2026. The margin hikes, while painful short-term, may ultimately benefit the market by reducing speculative froth, allowing physical realities to drive prices.
Bottom line: Ignore daily noise from margin-driven volatility. Focus on physical indicators—lease rates, premiums, and inventory drains—which signal tightening supply that paper cannot indefinitely suppress. This remains one of the most compelling asymmetric setups in commodities: buy the physical reality, not the manipulated headline price. Investors should consider allocating to physical bullion or undervalued miners, hedging against further exchange interventions in this high-stakes game. (You can reach out to the author at srinivasbg@invictusfinserv.com)
