As extreme market conditions drive tremendous volatility in silver spot prices, buyers are exerting unprecedented pressures on retail physical bullion products.

Record-setting buying volumes pushed the silver price toward a multi-year breakout on Monday. Silver hit an eight-year high of over $30/oz during the day, closing at $29.41.

On Tuesday, however, the silver market got slammed – along with stocks that had been heavily bid up based on internet discussion board campaigns. As GameStop (GME) shares suffered a 60% meltdown, silver plunged by close to 10% to just under $27/oz.

As of Wednesday morning, silver has recovered slightly to $27.15. Meanwhile, coins, bars, and rounds continue to be in very short supply, and premiums are elevated.

Image Source: Pixabay

For an in-depth discussion on the developments in recent days, watch my interview on Arcadia Economics here.

What happens next? Was the recent price spike and demand surge in silver a fleeting Reddit-driven fluke?

Much of the mainstream financial media’s coverage of the moves in the silver market has focused on the “WallStreetBets” angle – implying silver is just another ticker symbol subject to being pushed higher by day traders for no fundamental reason.

In fact, real physical demand for the white metal is manifesting outside of Robinhood accounts. While exchange-traded funds linked to silver saw enormous inflows, so did bullion dealers. By Monday, inventories of most common silver bullion products were cleared out.

Buyers of coins, rounds, and bars aren’t the sort to trade in and out of their holdings based on daily blips. By and large, they are long-term holders who believe in the fundamental value of physical precious metals as contrasted with nontangible financial assets that trade on exchanges.

If you have recently bought or plan to buy silver solely because you hope internet chatter will quickly drive prices higher, then quite frankly you may be making a mistake.

The fundamental case for higher silver prices has nothing to do with GameStop or other faddish trading frenzies.

Instead, the case for investing in silver is based on the realities of exploding U.S. currency supply, COVID-strained mining output, rising industrial demand from solar energy, electric vehicles, and other high-tech applications, and, yes, rising retail demand for physical bullion.

That said, there is also a case to be made for a “short squeeze” event that breaks the overhanging concentrated selling pressure (manipulation) in silver futures. This is a point many in online trading communities have been harping on.

They are not wrong to do so.

After Monday’s big pop in silver prices, the CME Group sprung into action to help short sellers. Its COMEX futures exchange announced it would raise margins on silver trading by 18%.

That had the predictable effect of forcing traders to pare back their positions. And as prices began to fall precipitously, some sold in a panic.

Newcomers to silver trading learned a hard lesson. Those who control the levers over the paper silver market are still, for now, able to manipulate the market – sometimes openly in the case of the CME’s margin tightening; sometimes secretly in ways that are illegal.

“Over the past few years, some of the biggest banks in the world have paid hundreds of millions of dollars in fines for rigging and manipulating the precious metals markets,” notes Zacatecas Silver CEO Bryan Slusarchuk.

In an interview with FoxBusiness earlier this week, Slusarchuk provided some insider context that is normally missing from Wall Street-centric discussions of gold and silver.

He pointed out that “the paper silver market is hundreds of times the size of the actual market for physical silver. And what you continue to see are these open contracts get kicked further and further down the road with most participants in the silver market having no real ability nor inclination to ever deliver physical.”

“Now physical is in short supply,” he added. “And that leads us I think to the potential for the mother of all short squeezes.”

In such a scenario, the “squeeze” would be driven by demand for delivery of actual physical silver. That’s what many newbies who recently jumped into exchange-traded instruments linked to silver or mining companies are missing.

It’s not enough to target paper markets with “buy” orders. In order to truly break the backs of the short sellers, they need to be confronted with a surge in real physical demand.

The scenario is starting to take shape, but it won’t play out fully in a matter of just a few days. Silver investors would be well served to avoid succumbing to either extremes of greed or fear during periods of heightened market volatility.

Unleveraged longs enjoy the benefit of being able to play the long game, riding out the wild swings within their emerging major bull market.

As mining executive Bryan Slusarchuk put it, “I hope that the ultimate outcome here is that a new generation of investors and speculators realize that silver is money. Silver was money thousands of years ago. Silver remains money today. And silver will be money in a thousand years from now.”