A sudden, brutal reversal in precious metals trading at the end of January laid bare how retail demand, speculative leverage and changes in exchange margining can interact to produce systemic market stress. On the night of January 31, international silver plunged about 36% intraday — the largest single‑day fall since 1980 — and London gold tumbled as much as 13% in the same session, triggering what traders called a "silver liquidation night." The rout rippled through Chinese commodity markets in early February, where a slate of futures contracts hit daily limits and exchanges posted widespread declines.
The violent downdraft followed an extraordinary rally that began in mid‑2025. From late October 2025 to January 30, 2026, spot gold rose roughly 26% while silver surged more than 100%, and many base metals also spiked as narratives about monetary easing and industrial demand — notably for AI and energy transition projects — swept markets. Dealers and analysts describe November 2025 as an inflection point: narratives and momentum, rather than clear demand growth, began to drive prices, and small investors piled in alongside hedge funds.
Chinese retail interest played an outsized role in that demand story. Traders and market researchers report substantial physical purchases by mainland investors from late 2025, especially through Shenzhen’s Waterbei bullion market, where Q4 sales of physical silver are estimated at roughly 1,000 tonnes — an annualised run‑rate near 4,000 tonnes. That retail buying, sometimes dubbed a return of the "China Dama" phenomenon, helped tighten spot availability and feed price gaps between physical London and futures markets.
Technical market mechanics amplified the squeeze. In autumn 2025 a tight London spot market and elevated spot premiums relative to New York futures prompted some market participants to fly physical metal to London rather than ship it, and ETFs began to contract as redemptions drained inventories. The resulting spot tightness forced shorts to cover at elevated prices, fueling a short squeeze; but squeezes tend to reverse, and when liquidity evaporated the subsequent collapse was swift.
Exchanges and clearing houses added another twist. The Chicago Mercantile Exchange’s January 12 decision to switch margining for some precious metal contracts from fixed amounts to value‑proportional margins meant required collateral rose as prices climbed. When markets turned, quickly rising margin calls drained liquidity and forced position liquidations across venues. Traders and analysts say that confluence — leveraged speculative positions, physical tightness and procyclical margining — explains why the fall outpaced many risk managers’ scenarios.
The sell‑off was not confined to metals. On February 2 China’s commodity complex suffered a "black Monday," with a raft of industrial and precious metal contracts hitting limit‑down. That day’s moves underscore how interconnected derivatives markets are with local physical hubs and with retail flows in China, and how quickly stress can propagate between global pricing centers and domestic exchanges.
Looking forward, analysts are divided. Some point to enduring structural buyers — notably central banks — as a floor for gold, arguing that geopolitical uncertainty and continued reserve purchases should underpin prices. By contrast, metals with higher industrial content, such as copper or aluminium, may see pricing revert toward fundamental demand and supply balances as speculative froth is squeezed out. Silver is the hardest to call because it straddles investment and industrial use; a correction that removes speculative excess could coexist with longer‑term industrial demand growth.
The episode has wider implications. It exposes the systemic risks of a leveraged retail participation in complex derivatives, reveals vulnerabilities in the plumbing that connects physical markets and paper markets, and will likely prompt closer scrutiny from regulators and exchanges. For ordinary investors the lesson is stark: futures magnify outcomes in both directions, and markets driven by narratives can produce rapid, large losses when liquidity seizes up.