Silver rout worsened by ‘destabilizing’ leveraged ETF spree, BIS says

The worst silver sell-off in history at the end of January was accelerated by the growing footprint of retail investors in leveraged exchange-traded funds, according to the Bank for International Settlements.

The white metal collapsed as much as 36% on Jan. 30, its biggest one-day wipeout on record. The abrupt plunge, following a rapid surge of more than 50% in just a few weeks, points to the destabilizing role of retail flows that were amplified by forced sales from leveraged ETFs, the Basel-based institution said in its quarterly report on market developments.

A wave of speculative buying helped push silver to fresh records at the start of the year, aided by geopolitical upheaval and concerns about the US central bank’s independence.

As prices retreated, the largest ETF tracking silver had to quickly shed more than $3 billion worth of futures, according to Bloomberg calculations, unleashing a wave of selling into an already crowded market. The 2x ProShares Ultra Silver ETF, known as AGQ, has to mechanically adjust futures exposure as part of its daily leverage reset, which targets daily investment returns of twice the move in silver futures.

“This predictable, momentum‑like trading creates feedback loops that reinforce prevailing trends and can distort prices,” the BIS said. “The footprint of leveraged ETFs’ destabilizing trading appears to have grown amid the retail-driven exuberance in precious metal markets.”

Margin‑triggered liquidations further amplified the sell‑off, the reports authors said. Futures selling combined with leveraged ETF rebalancing to “create a self‑reinforcing loop of lower prices and further margin calls,” they added.

Leveraged ETFs have surged in popularity, with nearly a third of those launched last year featuring some form of leverage, according to data compiled by Bloomberg Intelligence. The US Securities and Exchange Commission recently asked issuers not to move forward with a new wave of planned funds, citing concerns over increasingly aggressive fund structures, according to people familiar with the matter.

(By Jack Ryan)