Retail investors turn attention to silver as GameStop shares retreat

A social media-driven buying spree lifted silver to an 8-year high on Monday, February 1, though prices later pared gains on doubts about the ability of retail traders that have been focused on stocks to sway prices in the bigger, more liquid commodity.

Silver prices climbed to an 8-year peak of just over $30 an ounce before cooling off a little to trade up 6.3% at $28.70.

At the same time, video game retailer GameStop Corporation, at the center of last week’s “Reddit rally,” slid 30.8% to $225, but other shares caught up in the frenzy that has battered short sellers extended their advance, including BlackBerry Ltd.

A lot of people who were anticipating a GameStop-like rally in silver “now realize there is not as much buying pressure pushing it up like some had thought,” said Michael Matousek, head trader at US Global Investors.

It was not clear how long the Reddit-fueled rally in stocks shorted by hedge funds would last. It could mean more losses in the wider market this week if funds have to keep selling to meet redemptions or right their portfolios. Longer-term, they may have to shift strategies.

Share prices swung wildly last week when small-time traders, who organized in online forums and traded with fee-free brokers such as the Robinhood online brokerage, saddled several powerful hedge funds with losses on their short positions.

On Monday, however, the effect of the struggle on the wider US market abated, with stocks ending sharply higher. AMC Entertainment Holdings Incorporated was flat, having risen more than 500% this year. BlackBerry shares were higher in New York and Toronto trading.

Robinhood continued to roll back trading restrictions on some retail-driven stocks on Monday, raising its trading limit on GameStop to 20 shares from 4. It also raised trading limits on AMC and Koss Corporation.

Investors who have been shorting shares of GameStop cut their year-to-date losses on Monday with a mark-to-market gain of $2.71 billion after the stock tumbled, according to analytics firm S3 Partners. Mark-to-market losses for short sellers year-to-date stand at $12.6 billion, the firm said.

The showdown has drawn scrutiny from financial regulators, lawmakers, and the White House, concerned about possible market manipulation.

The US House of Representatives Financial Services Committee said on Monday it will hold a hearing on recent market volatility on February 18. Politico, citing people familiar with the matter, reported that Robinhood chief executive Vlad Tenev was expected to testify on Capitol Hill on that day.

Robinhood raised another $2.4 billion from shareholders just days after existing investors pumped in $1 billion, it said in a blog post. The company, which faced anger last week for curbing the purchase of some stocks, raised trading limits on GameStop, AMC, Koss, and Express Incorporated.

The firm is preparing for an initial public offering but it was not clear if it will push forward with those plans.

Cold water

Traders and analysts poured cold water on the chances of a prolonged rally in silver, saying unlike in GameStop, there is no excessive short positioning and that the options market is fairly well balanced.

Speculative financial investors were already positioned fairly bullishly, dealers said. Net long positions in COMEX Silver futures and options rose to about 44,320 lots as of January 26, data from the US Commodity Futures Trading Commission (CFTC) showed.

“Unlike single stocks, the market for silver is much larger and more complex and therefore more difficult to manipulate,” said Raffi Boyadjian, senior investment analyst at XM, in a note.

Traders were growing concerned that the Reddit effect could extend to less liquid commodities markets. However, traders said exchange-traded funds that focus on commodities were more likely to be targets.

The iShares Silver Trust ETF, the largest silver-backed ETF, jumped 7.1% on Monday. Data showed its holdings rose by a record 37 million shares from Thursday to Friday alone, January 28 to 29, each representing an ounce of silver.

Mining behemoths BHP Group, Glencore Plc, and Anglo American Plc were the top 6 gainers on the FTSE 100 in London. Miner Fresnillo rose 8.95%, and US small-cap miners Hecla Mining Company and Coeur Mining Incorporated surged 28.3% and 23.1%, respectively.

Small silver miners in Australia, which had leapt on Monday, retraced some of their gains on Tuesday, February 2.

Natural gas rose about 10% on Monday, in part due to expectations for colder weather, though such moves are not out of the norm for that market.

Late on Monday, the Chicago Mercantile Exchange increased margins for several commodities contracts, including silver futures which was hiked by nearly 18%, as part of “normal review of market volatility to ensure adequate collateral coverage.”

The CME typically raises margins when there are big price moves to account for the increased risk.

Get out there and buy

The silver furore began on Thursday after posts on the popular Reddit online forum WallStreetBets urged investors to buy physical silver.

“Get out there and buy at least 4 ounces of silver as soon as you can,” one forum participant posted.

Retail traders poured a record A$40 million ($30.6 million) into Australian ETF Securities’ Physical Silver fund by the afternoon. A silver ETF in Japan surged 11%.

Other investors expressed concerns on WallStreetBets on Monday that silver was undercutting their focus.

“By buying silver…you would be directly putting money into the pockets of the EXACT HEDGE FUNDS ON THE OTHER SIDE OF $GME,” wrote one user who urged investors to continue to buy GameStop.

“It will put you on the sidelines from this righteous and glorious war we are in.” – Rappler.com