Short squeeze unlikely as Reddit comes for silver

Silver prices have rocketed to their highest since 2013 as retail investors, egged on by messages on Reddit, pile into the market in an attempt to push up prices, although most analysts and traders say the rally will run out of steam.

Spot silver vaulted as high as $30.03 an ounce on Monday, February 1, from $25 on Thursday morning, January 28, while shares of silver miners surged and retailers of bars and coins around the world struggled to meet demand.

But analysts say it will be extremely difficult to subject silver to the kind of short squeeze engineered last week on companies like US video game store chain GameStop, which sent its shares up by hundreds of percent, and there is no shortage of the precious metal, so the market is likely to calm.

What happened?

The furore began on Thursday after posts on the r/wallstreetbets Reddit message board – the same one used to spark frenzied buying of GameStop shares – urged investors to buy physical silver.

An early post, which quickly spread across social media, encouraged buying of iShares Silver Trust, an exchange traded fund (ETF) whose shares represent ounces of silver sitting in vaults.

This would force the fund to create new shares and buy silver to back them, exposing a shortage of supply and pushing prices up, said the post under the headline “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$.”

ETF boom

Exchange traded funds are the easiest way for retail investors who tend not to have access to futures and interbank markets to generate unlimited immediate demand for silver.

Investors can also buy from retailers of bars and coins, but these are relatively small compared to the wholesale market and stock is limited. Buying shares in mining companies has no impact on silver demand.

Nonetheless, silver mining equities leaped and bar and coin sellers were swamped with orders, in addition to the almost $1 billion that flowed into the iShares Silver Trust in a single day on Friday, January 29.

As a result of these inflows and to back new shares, the ETF added 34 million ounces of silver to its stockpile, taking it to a total of 601 million ounces.

Smaller silver ETFs also saw a boom in activity.

Silver prices were up more than 9% on Monday, their biggest daily gain since 2008.

This is not the first attempt to bid up silver. In 1979-1980 the brothers William, Nelson, and Lamar Hunt amassed billions of dollars’ worth of the metal, pushing prices to record levels before regulators stepped in and the market collapsed.

Will the rally accelerate this time?

Most analysts say no.

A short squeeze is unlikely. Unlike GameStop, there are no holders of massive silver short positions who can be forced to abandon them in big enough numbers to send prices though the roof.

While many bullion-trading banks have large short positions in US silver futures, these tend to be balanced against long positions in the London Over-The-Counter (OTC) market.

Most hedge funds and other money managers with positions in silver were already long, betting that the coronavirus pandemic and its aftermath would lift prices.

It will also be hard for retail investors to create a lasting supply squeeze, analysts and traders say.

Around half a billion ounces of silver trade each day in the London OTC market, the world’s biggest, of which two-thirds are spot contracts, and around 1 billion ounces are produced and consumed each year with surplus supply for most of the last decade, consultants Metals Focus said.

The market may face short-term issues moving silver in the right forms to the right vaults, but draining liquidity enough to send prices to $100 or $1,000 will be difficult.

“It’s like trying to drain the ocean,” said a trader in London. – Rappler.com