Up over 8% in a week, is the silver "short squeeze" making a comeback? Goldman Sachs: The short squeeze may have just begun

The precious metals rally driven by a weaker US dollar is changing the previously bearish capital structure in the silver market.

As of Friday's publication, COMEX silver futures had risen 8.5% this week, gold futures were up 5.68%, and both platinum and palladium prices had risen by more than 6%.

The main driver behind this round of precious metal gains comes from the weakening US dollar. The market believes the shift in Federal Reserve policy expectations, Japanese yen intervention, and the pullback in international oil prices have jointly weakened the dollar’s performance.

Goldman Sachs top futures trader Robert Quinn stated, the rapid rebound in silver prices has already triggered a systematic short-covering mechanism, and a new round of forced short-covering may be underway.

This means that even without new fundamental catalysts, a mere breakout above key technical levels could force some strategy funds to re-enter silver, further amplifying the short-term rally.

Institutional Silver Positions at Lows, Long Money Fueling the Rally

Before this rally began, institutional investors’ holdings in silver were already at extremely low levels.

According to the US Commodity Futures Trading Commission (CFTC), as of July 28, the managed funds’ net long positions in silver—by notional scale—were near the 3rd percentile over the past two years.

This means institutional investors’ allocation to silver was previously at its lowest level in nearly two years, and this extremely crowded short or underweight structure laid the groundwork for subsequent short squeezes.

Quinn believes that the rebuilding of long positions by managed funds “is very likely the main driver of this rally.”

Position changes show that total open interest in the silver market increased by about $2.4 billion during the rebound, and the largest single-day increase occurred when prices approached recent highs—this is a typical sign of momentum chasing, indicating that longs were not pre-positioned but instead added significantly while prices were rising.

Data from the past six months also show a significant negative correlation between changes in managed funds’ long silver positions and the US dollar index. The current weakness in the dollar has directly opened a window for new long positions, and the process of rebuilding positions from extremely low levels is highly explosive in itself.

The options market is also reflecting an uptick in bullish sentiment.

Silver’s three-month implied volatility has risen markedly, and the 25-delta put-call skew has flattened, indicating the market is pricing in greater upside risks, with investors willing to pay a higher premium for call options.

CTA Momentum Signals Reverse, Systematic Buying May Expand

A deeper impact of this price increase is the triggering of another class of passive buying—systematic strategy funds (CTA) short-covering orders.

According to Quinn, based on Goldman Sachs’ futures strategy team’s momentum model, the short-term momentum signal for silver officially flipped as of the close on August 5.

“CTA short covering has already begun.” Quinn stated.

CTA fund trading logic is mechanical and emotionless: when prices cross a specific momentum threshold, programs automatically trigger covering orders, completely independent of any fundamental assessment.

This mechanism means price increases themselves can generate more buying. Once short-term signals are triggered, forced covering of shorts turns into long-side momentum, pushing prices further up and potentially nearing medium-term momentum thresholds to trigger a cascade effect.

However, Quinn also cautioned: “The medium-term momentum threshold has not yet been broken, and further recovery is needed.” In other words, only the short-term signal has been activated so far; the scale and sustainability of systematic buying remain limited. Whether this rally will evolve from a short squeeze to a larger trend reversal still requires prolonged price advances for confirmation.

Physical Market Lags Behind, Dollar Trend Remains Key Variable

Although futures markets have seen a strong rebound, there are no obvious signs of tightness in the physical silver market—this divergence is noteworthy.

Goldman Sachs data shows that during the silver price rally, three-month silver lease rates actually declined.

Silver lease rates are usually used to gauge the cost of borrowing physical silver in the market. Declining rates mean demand for the physical metal has not caught up with the pace of price increases, and market supply remains relatively ample.

This indicates the latest rally in silver has been driven more by financial capital inflows, rather than by industrial demand or a tightening spot supply.

Three-month silver lease rate

At the same time, the US dollar’s trend remains an important factor influencing silver’s future performance.

Goldman Sachs FX strategists said that in the absence of clear signs of deteriorating inflation data, the downside for the dollar is limited. If US inflation remains resilient in the future, or if the market raises expectations for a more hawkish Federal Reserve, the dollar may strengthen again and put pressure on precious metal prices.

For investors, the current silver market is at a delicate crossroads: short-term momentum signals have ignited CTA short covering, but medium-term signals are yet to confirm, and physical fundamentals haven’t kept pace with prices. Against an uncertain dollar outlook, whether this position-driven, systemically amplified rally marks a new trend or is merely a short-lived squeeze remains to be proven by the market.