A Harsh Reflection from the Silver Trench: On Leverage, Games, and the Shackles of Human Nature

Original Author: Alexander Campbell

Original Compilation: Shenchao TechFlow

Introduction: After experiencing a historic washout in precious metals last Friday, former Bridgewater researcher Alexander Campbell wrote this deeply reflective piece.

The article not only dissects the mechanical principles that led to a 6-Sigma drop in silver from a financial engineering perspective— including short gamma effects, leveraged ETF rebalancing, and the pricing game between the Shanghai and New York markets—but also rarely reveals the emotional struggles of a professional investor when faced with the conflict between fan responsibility and rational decision-making.

The full text is as follows:

Last Friday was a painful day.

This is my reflection.

In the latter part of this article, we will follow the standard process to analyze the historic washout of precious metals on Friday: what actually happened? Why? What impact did it have on portfolios? And where do we go from here?

But first, here are my reflections. If the content becomes a bit… philosophical, please bear with me.

The quote at the beginning of this article (Note: referring to "Pain + Reflection = Progress") is not just a motto for me; it is a way of life. It is one of the most profound lessons I learned during my time at Bridgewater, and it is a way to contextualize all the pain in life.

On the road to achieving goals, you will face challenges. On the road to financial goals, there will inevitably be drawdowns.

In terms of drawdowns, I have experienced worse. Perhaps not in a single day, but certainly throughout my life. Of course, things could get worse; perhaps the volatility in silver and gold is a "canary in the coal mine," signaling a series of cascading "liquidity competitions" that push down asset prices and increase demand for safe-haven assets like the dollar, bonds, and Swiss francs. That is indeed a possibility.

In the coming days, you will undoubtedly see a plethora of experts emerge from the woods saying, "I told you so!" Peddling this or that viewpoint, throwing screenshots in your face. To some extent, I have done similar things when the trade direction was the opposite (up), so I am no different.

But the reality is that no one knows the future. There are always some unknowns; the world is chaotic and dynamic. While this makes it possible to gain an edge, even the top investors only have a win rate of 55-60%. Gödel's machine will never truly be complete. That is why diversification is important, why hedging is necessary, and why you see the best investors maintaining a sense of humility almost all the time, despite the compliance jargon that often makes it difficult to read their true intentions.

Nonetheless, I believe it is crucial to focus on the moments when you make mistakes, diagnose what happened, and try to learn—about the world and about yourself. When your annual returns are up 130%, it is hard to reflect. But when you lose 10% in a day on a portfolio with an expected annual volatility of 40%, reflection becomes a necessary requirement.

From Thursday night to Friday afternoon, many thoughts flashed through my mind. Later, we will discuss the rational process of trying to track the evolution of the world, piecing together the truth of the story, analyzing the causes, and determining the responses. But before that, I want to talk about the emotional side.

All professional investors, or at least those taking substantial risks in the public markets, will understand what I mean when I say "investing is often emotional." You have two demons in your head: greed, telling you to keep pressing and further leverage your alpha; it wrestles with fear, which is the recognition of "I might be wrong, and there is a lot I don’t know."

What particularly interests me is a new feeling that evolved from Thursday night to Friday: a sense of responsibility.

You see, many of the people reading this blog are newcomers. Eyes are always chasing returns, and the price fluctuations from $60 to $120 attracted a lot of attention to these pages, filling my inbox with messages. Some thanked me, while others sought my opinions. In my comment section, it seemed like an endless stream of people were asking for minute-by-minute updates, support levels, and so on. This process may be familiar to well-known public figures, but it is relatively new for me.

If you follow my Twitter/X, you will know that I try to adopt an irreverent tone. This is a style I learned during my time debating at the Oxford Union—walking the line between insouciant and incisive. It is not entirely acting; it is a worldview: I usually strongly believe I am right, while also knowing that I am often completely full of shit, and that these views can evolve rapidly in the face of new information. I think this perspective resonates with many professional "shitposters."

When you become "micro-viral," what changes is that even if you strive to maintain that irreverent tone to convey information, the actual audience listening becomes increasingly larger. You transition from friends, colleagues, and internet personalities to countless strangers reading your articles, interpreting you, and interacting with you. Besides knowing that as the reach widens, the context of your message may be diluted (like the game of telephone on the internet), there is also a lag issue.

I first started writing about the relationship between silver and solar energy in 2023. About 18 months ago, I began "banging the table" to recommend it. At that time, my portfolio was 100% long. As prices rose from $25 to $40, then to $60 and $80, I gradually reduced my risk exposure from "irresponsibly long" to "dangerously long," and then to "still quite long." I sold a little or rolled options, trying to lock in profits while maintaining exposure. The problem is that as silver climbed, its volatility also increased. So I was still performing reasonably well. To this, detractors would say it was a red flag, and indeed it was (we will discuss this later in the section on "signals"), but the point is that you ultimately find yourself in this awkward position: even though many people were on board at $25 or $40, you realize that due to the lag in people writing articles and reading information, the eye-weighted average entry price could be as high as $90.

This puts you in a very interesting position. You feel that if you "cut and run" just because of a chill down your spine, you would feel guilty, just as I felt at certain moments over the past week. You feel you owe those who appreciate your work a duty to stick with this trade, putting yourself in their shoes.

From a risk management perspective, this is utterly foolish. You can tell yourself that if you were managing other people's money, you would have cut all positions on Friday morning when the Chinese market opened and instead of stabilizing, it massively sold off gold. You could rationalize that if you were managing other people's money, you wouldn't hold so much exposure in copper. You would have exited risk when it rose 10% on Friday morning. But ultimately, a portfolio is a portfolio.

Before we get to the part you care about most, let me say one more thing.

Some of you subscribed because you liked my views on silver and the market. Some did so because you enjoyed my rambles.

Looking ahead, I am considering separating them. The rambles—about philosophy, worldview, and reflections on the process—will remain free. If I start publishing specific, actionable trading ideas and providing real-time updates, that may become a paid project. This would create real accountability on my end and real value on yours.

Now, just know that not every post will be about "the rock." Some of you may not like that. That's okay.

Given all this, what exactly happened?

How Historic Was This?

Before diving into a detailed analysis, let’s put last Friday's situation into context. Because I don’t think people realize how rare such magnitude of volatility is.

That is the daily return data for silver over 275 years. The volatility last Friday was one of the largest single-day declines in the entire history of that metal. We are talking about events comparable to the end of the gold-silver bimetallic standard, the Hunt brothers' collapse, and the volatility of March 2020—only this time it happened on an unremarkable Friday in January.

The volatility surface pricing before Friday indicated that a 3-Sigma move was considered a tail event. What we got was about 6-Sigma. Such an occurrence should not happen according to historical distribution, but it does happen when everyone’s positions are aligned and liquidity disappears.

Specific Details

If you track this story from a narrative perspective, even before Friday, the past few months have been a wild journey. Silver opened in November at over $40, rebounded 74% to about $85 by the end of the year, and then pulled back 15% before year-end. As we mentioned in the previous article, the bulls then defended the trend, initiating another monster-level 65% rebound, peaking at about $117 on Monday (note, this was in the New York market), after which Western sellers entered to sell off, causing prices to drop again by 15%.

Gold largely mirrored these movements, with the trend of "New York selling, Shanghai buying, metals flowing east" appearing intact.

Even until Thursday morning, the news was dominated by copper's overnight 10% rise. (This was another warning sign indicating that things were becoming a bit out of control, which we will discuss in a subsequent article about the red metal).

Feeling this intense chop, I reduced some positions and posted this tweet. It was more of a message to myself. The number 30% had been lingering in my mind, just pushed aside as a voice of fear rather than reason.

Later on Thursday, Kevin Warsh appeared, confirmed/leaked to be nominated as the Federal Reserve Chair on Polymarket.

Warsh is seen as a sort of "hard money" advocate, and I took it in stride. You see, I briefly met him at Stanford University about ten years ago. At that time (around 2011-2015), he was known for calling for the normalization of the Fed's massive quantitative easing (QE) policies post-financial crisis. Back then, he seemed more like a politician than an economist, and I always felt his hawkish stance was a way to gain fame among the sea of loose monetary advocates. After all, it is easy to call for rate hikes and balance sheet reductions when you are not in the driver's seat.

So, despite having significant risk exposure in commodities (in fact, more in copper and gold than silver), I thought I would only get a little hurt and then wait for the Chinese market to open. Just a reminder, as I have been posting for months, it seems to me that Western metal investors do not realize that "you are the tail, the dog is in Shanghai" today. They underestimate:

a) How concentrated the actual demand for these metals is in the East:

b) How much of the total returns from these metals comes from the "overnight" market (measured by the returns from yesterday's close to today's open):

c) How much actual capital China has compared to the West:

Yes, there is a lot of confusion online about how much of the "China premium" is due to the VAT imposed on retail physical delivery. There are many things in the macro space that are both difficult and chaotic, so people online do not go to calculators but rather throw charts at each other, with bulls ignoring this and bears using it as a weapon, sowing doubt in the narrative that "China is pushing prices up." To me, this is a classic case of "looking at changes rather than levels," because it is clear: a) this premium (or discount) has increased recently, b) this situation has also appeared in India.

But I can feel the bearish narrative gaining momentum. Even with demand backing it up, the only pure onshore silver fund has shown an outrageous premium.

Moreover, there is indeed some evidence that physical buying pressure has eased, most directly reflected in the "front end" of the London silver curve. Over the past month, its "spot premium" has significantly decreased.

Before nightfall, I reduced my delta (hedge value) to nearly flat, but I thought, "let's wait and see how China opens." This may have been my biggest mistake.

China opened, and not only did it not rebound, but it also faced selling. Not just silver, gold also dropped 8%. This was the first strike (Strike one). At that time, I did not know that the local Chinese silver ETFs had actually suspended trading.

This meant that retail investors in China were not stepping in to stabilize the market.

This was a signal to retreat. I checked my portfolio, drafted a position list, and felt satisfied because most of my long exposure was in options, so if there was a complete washout, I would feel pain but not get liquidated. This was the second strike. Not just because I should have sold futures directly (at that time, GLD and SLV had not yet opened, and I have a distaste for futures due to painful lessons from forgetting to roll over in the past few years), but because I should have committed to immediately reducing my positions when the market opened. Yes, I had a full schedule of meetings that day, making it impractical to flatten a portfolio of 20 options positions, but I did not want to sneak away like a dog running away in the night, as there were so many people still long. This was the third strike, perhaps my worst decision.

You probably know the rest of the story. The U.S. market opened with a sharp decline and then plummeted. The sell-off was relentless, and by the time I realized what was happening, it was too late. Because as the day progressed, my fourth strike immediately became apparent.

We were in a "short gamma" market.

This Is What Short Volatility Feels Like

"Short volatility" is not just a mysterious state; it actually represents a mechanical process where market movements are exacerbated by machine-like market behavior.

The most obvious example is 1987, when portfolio protection put the market in a short volatility state (or "short gamma" in options terminology), as insurance plans were forced to sell more and more futures as "spot" prices deteriorated.

Looking back, it is crazy that I was actually familiar with this dynamic because in October, when GLD and SLV fell below the bottom strike price of my options, I had suffered from this.

In simple terms, the mechanism works like this: you and I go buy call options. Typically, the person selling you the options needs to hedge. They are not betting on direction but rather betting that the premium you paid is greater than their expected loss from "delta hedging" on the other side. They sell call options and buy stock as a hedge. If the price rises and breaks the strike price, the delta of the options increases, and they must buy more stock. Conversely, if the price falls below the strike price, the delta decreases. Now they have more stock on hand, so they must sell into a declining market.

This behavior operates almost mechanically and can usually be observed in asset price movements that seem to have no bottom. Markets are particularly susceptible to short gamma effects as they approach monthly or quarterly options expiration. If you look at the history of flash crashes, I would bet that most of them occurred near or around these expiration dates.

This happens in the options market and is also realized through leverage. When investors buy assets with leverage, they typically need to provide collateral to facilitate the trade. When prices fall, exchanges or their market makers will require them to "post collateral," which means adding more cash. When there is too much leverage in the market, they often have to sell certain assets to realize that cash. Essentially, this puts them in a short volatility position.

The third way this market was in a "short volatility" state surprised me. I did not realize that the "double leveraged" silver fund AGQ had accumulated $5 billion in assets. This means it holds $10 billion in silver (through futures). The fund "rebalances" daily, so when people woke up to find silver down 15%, the fund effectively lost 20% * $10 billion, or $2 billion. This left the fund's value at $3 billion before redemptions. This means their new delta is $6 billion, and they must sell $4 billion of silver!

The options expert Kris outlined this dynamic here:

My friend Andy Constan reminded me of this dynamic and told me that the "rolling" occurred at 1:30 PM.

Just a few minutes after I had been waiting for some tentative bottom signals, I bought SLV at the $71 level and doubled my position by buying stock, buying call options, and selling put spreads below the strike price. Even if I couldn’t outperform my own work, I wanted to profit by leveraging market relationships' alpha.

In fact, I had a fourth way of being in a "short volatility" position. Because I tend to buy call spreads and flys, I had been "rolling" my options as the strike prices increased. This gave me a false sense of security. By the end of that day, I had lost 2% on silver and 2% on gold. Including losses in copper and other positions, we were down 8% overall, hurt but not down. This brought our year-to-date (YTD) returns to 12.6%, with cumulative returns of 165% since January 25.

Alright, if you are still reading, we now have an answer to why silver was destroyed; we have a mechanism—short volatility—operating through three channels: excessive leverage, short options gamma, and leveraged ETFs.

But where do we go from here?

The Fog of War

First, we need to clear the fog of war. Given that the Chinese market closed before the worst moves in the U.S. occurred, the current simple estimates of the "China premium" are completely disconnected.

The same reasoning applies to the claim that "SLV is trading below its net asset value (NAV)."

This seems more because SLV uses the London clearing price to calculate its NAV (and when the worst case occurred, London was already closed). From Friday's intraday prices, the ETF appeared to move very consistently with the futures prices.

Currently, aside from a possible rebound on Monday, the real question is "how does China open on Sunday night?" If you believe the rumors online, the physical prices in the East are still at the $136 level, which means we might see a +5-10% increase on Monday.

My fiancée is currently hiking, and she reports that jewelers in the West are still selling 925 silver (92% purity) at $1.90 per gram (or about $64 per ounce of pure silver). So the basic situation seems to be that silver is cheap in the West and expensive in China.

Whether this will lead to a price increase will depend on local conditions. As Merridew pointed out, it is very likely that Chinese leveraged investors will be forced to liquidate at the opening on Sunday night/Monday morning.

Additionally, the CME raised margins again on Friday, but keep in mind that due to prices dropping about 30%, even higher margins may mean negligible net cash withdrawals for longs. The margin per unit of silver has increased significantly, but the total amount of futures margin remains roughly the same.

Source:++@profitsplusid++

Bitcoin pricing here does not look bullish and seems to be the result of a combination of forced selling, ongoing concerns about quantum computing, and expectations regarding the MSTR issue.

Based on an analysis of its peculiar business model 14 months ago, we still hold short positions.

What Are the Bullish Reasons?

First, the stock price of SLV (the silver ETF) had already started to decline before the big drop on Friday. As prices fell, this means that the nominal risk exposure has significantly decreased.

Unless there is some extreme deleveraging action in the Chinese market on Sunday night, the sell-off of AGQ (the double long silver ETF) has become a thing of the past. Any significant rebound or recovery will have a counteracting effect—just like short call options, forcing those people to buy additional shares when prices rise. As for me, I bet that the Chinese market will not fall all the way to the bottom. And if we really see some sort of forced liquidation, the stock market will likely not be spared either.

One last point worth noting—the geopolitical backdrop has not become more tranquil. If anything has changed, signals from Tehran indicate that we are not further from some confrontation but closer. Historically, precious metals perform well in such environments, even if the road to success becomes extremely chaotic. Considering all these potential deleveraging forces, you should view current positions as highly tactical. I reserve the right to completely close out or go short delta (negative delta) across the entire commodity curve as the situation evolves.

Perhaps I have overbet on short positions, but I am increasingly concerned that the stock market will experience a substantial drawdown as people begin to price in the "air gap" between the cash flow required for data centers and the actual revenues of these companies. Yes, the age of AI agents is coming, and yes, Moltbook is indeed interesting (if operated correctly, it will consume a lot of tokens), but deploying AI in enterprises still faces enormous logistical, compliance, and operational hurdles. Much of what you see on Twitter/X about workflow revolutions comes from independent hackers, creators, or small companies with flexible and easily renovatable business processes. My estimate remains that agents will primarily start rolling out on the enterprise side by the end of Q2, followed by revenues. This makes U.S. stocks highly susceptible to the kind of dynamics that severely impacted Microsoft last week.

Thus, from a relative value perspective, I still remain bullish on metals. But I am willing to admit that I might be wrong and seek to respond more timely to market conditions.

It all started with that saying about pain and reflection. Friday brought a lot of pain, and this article is my attempt at reflection. The core thesis has not changed—photovoltaic demand, capital flight from China, supply constraints. What has changed are the prices and positions, as well as my realization that in a market that feels like it will only go up, there is so much hidden "short gamma" risk.

Pain + Reflection = Progress. Let’s see how this progress manifests when the Chinese market opens on Sunday night. Wishing everyone successful trading and safety. Until next time.