The Silver Squeeze & Breaking The Manipulation: How Will This All Play Out?

Our Reddit activist friends can cause a lot of volatility and without question can influence a…

by Richard Horswill

The Devils metal stirs

The “short squeeze” has become mainstream news since the Reddit retail investment community chat room found the hedge fund community wanting. Over confidence and over leverage did for Melvin Capital who were then bailed out by another hedge fund, Citadel, to the tune of two and a half billion dollars according to the media. This seems in a way, a version of the Long-Term Capital Management fiasco in the late 90’s which required a much bigger bailout from Wall Street due to a combination of overconfidence, over leverage and the Asian and Russian financial crises. Suffice it to say, the common enemy in both cases was greed.

A short squeeze is an event when an asset, in the current media frenzied case, a stock called Gamestop is pushed significantly higher by speculators forcing the trader on the opposite side of the trade who has bet on a fall in the price of the asset to cover. The subsequent scramble to buy pushes the price even higher creating a bubble. Short squeezes typically start and end suddenly as we will probably see with Gamestop.

The Reddit community had a clear investment strategy and with the ability to glean information on market positioning that was once the preserve of the financial community. They were able to execute and deliver a retail investor victory which has sent a shockwave through the hedge fund industry suggesting that future caution is required in the overuse of leverage in short selling ventures even if the short selling is perceived as a reasonable strategy.

The most recent chatter on the Reddit pages is of Silver which has very swiftly provided a strong rally in the metal hitting highs not seen since February 2013. Some relevant fundamental reasons for silver to be a target could be based on silvers utility as industrial usages surges in electronics, solar green energy, battery technology, electrification of cars, photography, and its use in medicine. From that standpoint the future looks bright for silver. With approximately 60% of current production in industrial applications and growing, the balance is provided for in jewellery and bullion coin and bar as investment. This is only part of the silver story. Its current value in real terms by many is seen as cheap particularly in our current world of high asset values. Also, it is highly correlated with gold and as such has not kept pace with the rise of gold in recent years. At one point the gold silver ratio blew out to 128:1. Historic ratios point to 16:1 and even 12:1 which to be fair is a throwback to Roman times. Currently priced well below its nominal 1980 and 2011 high of $50 per troy Oz. it’s cheap and when inflation adjusted its fair value should be nearer $118 per troy Oz. That aside, the silver market in global terms is tiny which sets it up nicely for manipulation of all types including a short squeeze.

Apart from the above, why would a merry band of financial activists want to target silver. This answer has long been the one of myth and conspiracy. Silver as with gold are markets that have long been manipulated. Most recently, the big bullion banks have been the culprits receiving fines and a slap on the wrist from the regulators. This has been borne out by the record fine of $920 million of JP Morgan Chase in 2020 for precious metals and treasury manipulation between 2008-2016. Sadly, the same old game continues as the profits are hard to beat, the manipulation of markets continues and the regulators, asleep at the wheel, never really pin down the real culprits. This is thus a prime target for the Reddit brigade who clearly have an axe to grind against any manipulators in any markets.

So how may all of this play out?
The well touted axis of the silver serpent, J P Morgan Chase, is SLV the silver ETF which is a proxy for silver investment. A proverbial wolf in sheep’s clothing! This is in essence a paper holding backed by a silver inventory that is not accessible to the individual investor. So, the investor may think they are investing in silver but they’re not. They are investing in the price of silver. If the Reddit cohort buy SLV to shock the price upward the custodian of the product should have to add physical silver to provide for the new underlying shares purchased. The SLV prospectus is somewhat opaque when it describes silver holdings/investments. Thus, SLV will not likely be the Achilles heel of the silver market. The investment community are better off targeting the physical metal stocks in the form of bars and coin. This is the marginal supply that will put the market into deficit. By stripping the retail outlets of the physical metal, a true squeeze can occur as the investment market scrambles to keep up with demand. This would ultimately target the sellers/lenders of last resort. Mine supply for 2020 was disrupted by Covid 19 to the tune of 45 million Oz. compared to the previous year’s total. Add to this the new paradigm we are living in with the need for more home technology due to the work from home mantra industrial demand should be moving higher. Based on these factors, a silver squeeze is a real possibility. This one however may start slowly and build as the lag in the physical market bleeds through to the financial markets. Looking online today at a well-known bullion dealer, the message that is coming back loud and clear is awaiting stock. A clear sign of stress in the retail sector are premiums blowing out.
Tight supply will place pressure on the LBMA and Comex as our Western precious metal’s hubs are requested delivery by the retail outlet who need the supply to cover booked investment demand. The big question is how big the overall silver float attains to be. In the meantime, our Reddit activist friends can cause a lot of volatility and without question can influence a stressed market by attacking all aspects of the silver market.

In conclusion, I’m drawn to Star Wars – A new hope. The rebellions last chance to destroy the Death Star. A single blast on a small duct on the exterior of the space station would trigger a chain reaction leading to the destruction of the Death Star. Truth is stranger than fiction at times. Discount the Reddit rebellion at your peril.