The rebalancing of important commodity indexes begins on Friday. Two major investment banks predict that

# Source: Wall Street Insights

By Zhao Ying

The annual rebalancing of the Bloomberg Commodity Index (BCOM) will kick off this Friday, running from January 9 to January 15. Two investment banks, Deutsche Bank and TD Securities, predict that a silver sell-off worth $7.7 billion will flood the market in the next two weeks, equivalent to 13% of the total open interest in the COMEX silver market, potentially triggering a sharp price correction. Goldman Sachs, however, argues that extreme price volatility will persist as long as the tight inventory situation in London remains unresolved.

The annual rebalancing of the Bloomberg Commodity Index (BCOM) is set to start this Friday, putting silver under massive selling pressure. Deutsche Bank and TD Securities project that a $7.7 billion silver sell-off will hit the market over the next two weeks, accounting for 13% of the total open interest in the COMEX silver market, which may lead to a significant price pullback.

According to Bloomberg data, this rebalancing will lower gold’s weight from 20.4% to 14.9%, while silver will also face a weight reduction. Michael Hsueh, an analyst at Deutsche Bank, points out that in terms of open interest size, silver will bear the heaviest selling pressure from the rebalancing, followed by aluminum and gold. The rebalancing period will span from January 9 to January 15.

Daniel Ghali, an analyst at TD Securities, warns that the trading volume of the largest silver ETF has reached extreme levels only seen at previous historical market peaks, with its premium over net asset value (NAV) hitting an all-time high, reflecting speculative frenzy among retail investors. He believes that silver’s recent surge is "similar to a squeezed carry trade, and what follows will be the sharp repricing common in the history of commodity cycles".

From a supply-demand perspective, Goldman Sachs offers a different view, arguing that liquidity in the London market is the key factor determining silver’s price trend. Lina Thomas, the bank’s analyst, expects extreme price fluctuations to continue as long as the tight inventory condition in London is not alleviated.

## Index Rebalancing Triggers Large-Scale Sell-Offs

The Bloomberg Commodity Index adopts an annual rebalancing mechanism, with weights calculated based on two-thirds trading volume and one-third global production, and weight caps set at the commodity, sector and group levels. Under the index rules, the weight of a single commodity cannot exceed 15% to maintain diversification.

Deutsche Bank’s analysis shows that the sharp cut in gold’s weight is exactly due to hitting this cap limit. Measured by open interest size, the commodities facing the biggest selling pressure during the rebalancing are silver, aluminum and gold in that order; in terms of average daily trading volume, the order is aluminum, silver and gold.

Michael Hsueh, the Deutsche Bank analyst, estimates that a 2.4 million-ounce gold sell-off could drive gold prices down by 2.5% to 3.0%, depending on the ETF sensitivity model and time window used. He reviews index rebalancing events over the past five years and finds that between 2021 and 2024, major weight changes were consistent with price movement directions, but in 2025, the reduction in gold’s weight was accompanied by a rise in gold prices.

This rebalancing will have a negative impact on precious metals but will benefit crude oil. The commodities with the highest rebalancing demand are WTI crude oil, natural gas and low-sulfur diesel in sequence.

## Retail Frenzy Drives Silver to Dangerous Levels

In a December 31 report, Daniel Ghali of TD Securities notes that the trading volume of the largest silver ETF has reached extreme levels only witnessed at prior market tops. The product’s premium over its net asset value (NAV) is at a record high, reflecting speculative mania among retail investors while also highlighting liquidity constraints.

Ghali emphasizes that silver’s "parabolic blow-off top" since November does not reflect demand, supply or fundamentals. He predicts that 13% of the open interest in the COMEX silver market will be sold off in the next two weeks, resulting in a sharp price repricing amid an ongoing liquidity vacuum.

This $7.7 billion sell-off and related trading activities will stem from broad-based commodity index rebalancing, with trading volume potentially far exceeding the extreme levels previously set by the largest silver ETF.

## Tight London Inventories Amplify Price Volatility

Lina Thomas of Goldman Sachs provides a different perspective from a supply-demand structure angle. She expects extreme price volatility—both on the upside and downside—to persist, advising risk-averse clients to exercise caution.

Thomas points out that recent price movements have indeed reflected private investor capital inflows amid Fed rate cut expectations and the potential "diversification" theme, but these fluctuations have been amplified by a liquidity squeeze in the London market, which is the setting for silver’s benchmark price.

Speculation surrounding U.S. trade policy—silver is included in the critical minerals list and could theoretically face tariffs of up to 50% (though granted an exemption in April 2025)—has prompted market participants to pre-ship the metal into the United States earlier in 2025, leading to inventory outflows from London and a reduction in available circulation. As demand for silver ETFs has risen rapidly, absorbing more physical silver, a temporary shortage of deliverable silver has emerged in the London market.

To address the temporary shortage in London, traders have turned to the lending market, where holders of physical silver lend it out for a fee. Silver borrowing costs (lease rates) have surged sharply, indicating the recent tightness.

## Thin Inventories Create Squeeze Conditions

Goldman Sachs data shows that low inventories have created conditions for a squeeze: rallies accelerate when investor flows absorb remaining metal in London vaults, and reverse sharply when tightness eases. Typically, a weekly net demand of 1,000 tons of silver drives prices up by about 2%, but amid tight conditions, this sensitivity has surged to 7% (and vice versa).

Thomas believes that as long as the silver mismatch in the United States persists, London liquidity is not restored by silver from other regions, and investor enthusiasm continues, prices could rise further. ETF holdings are still below their 2021 peak and could climb higher amid Fed rate cuts and the potential "diversification" theme. Net managed money positions on COMEX are below historical averages, indicating that investor demand has not been excessively stretched despite a 138% gain in 2025.

However, Goldman Sachs warns that if London liquidity is restored, the downside risks to silver prices are significant. For example, if silver currently stranded in the United States flows back to London, it could ease tightness in the city and trigger a price correction.

Goldman Sachs believes the probability of the U.S. imposing tariffs on silver remains low, so policy clarity could trigger some metal to flow back from the United States, alleviating London tightness and pushing prices lower. Nevertheless, despite the explicit statement in August last year that gold is exempt from U.S. tariffs, most gold remains in New York COMEX vaults, reflecting lingering policy tail risks. If silver follows the same pattern, most of it may continue to stay in New York COMEX vaults, and extreme price volatility could persist even after clarity is achieved on U.S. silver tariffs.

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