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Jan 31, 2021

Silver spikes past US$30 as retail investors swarm biggest target

Silver soars on GameStop retail frenzy

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Silver broke above US$30 an ounce as the precious metal took center stage in the retail investor frenzy sweeping through markets.

Most-active futures jumped as much as 13 per cent to US$30.35 an ounce on the Comex, the highest in eight years. That followed a weekend buying binge that overwhelmed online sellers of silver coins and bars from the U.S. to Australia. BlackRock Inc.’s iShares Silver Trust, the largest exchange-traded product tracking the metal, recorded an unprecedented US$944 million net inflow on Friday.

Like the buying stampede in GameStop Corp. and other small-cap stocks that has captivated the financial world in recent weeks, silver’s advance can be traced to Reddit’s WallStreetBets forum. One post last week declared the metal “THE BIGGEST SHORT IN THE WORLD” and encouraged traders to pile into the iShares trust as a way to stick it to big banks.

Yet silver differs in important ways from stocks like GameStop. For one, the scope for a short squeeze in silver is far less obvious: money managers have had a net-long position on the metal since mid-2019, futures and options data from the Commodity Futures Trading Commission show.

The market for silver is also by some measures much deeper than those for smaller stocks like GameStop. The bricks-and-mortar video game retailer had a market capitalization of about US$1.4 billion in mid-January, before the Reddit frenzy sent the company’s value soaring more than 16-fold. By contrast, London vaults held 1.08 billion ounces of silver at the end of November, according to LBMA data. That’s worth almost US$32 billion at current prices.

What’s more, it’s unclear how long retail investors will stick to the silver trade. Already some prominent members of the WallStreetBets forum have advised against it, with some noting that Ken Griffin’s Citadel Advisors LLC, a favorite bogeyman of the Reddit crowd, is listed as one of the biggest shareholders of the iShares silver trust.

Whether or not the rally fizzles, it could have ramifications beyond what has typically been a relatively niche corner of the commodities world. As the first high-profile target of the retail frenzy to start trading on Monday, silver may help set the tone this week for managers trying to gauge how Reddit-fueled volatility will impact their risk models and potentially cascade from one asset to the next.

Momentum Trade

“Last week’s events have shown it to be unwise to doubt the purchasing power of retail investors, and this has been sufficiently demonstrated again on the silver market,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “They may find it a bit harder to squeeze the silver market than they did with GameStop -- the former is much bigger and more liquid -- but the momentum looks like it rests with them at the moment.”

Early trading pointed to more gains for SLV on Monday. The ETF was up about 9 per cent in the pre-market session, on huge volumes. As of 7:03 a.m. in New York 5.4 million shares had changed hands, about eight times the second most-traded fund.

Futures were trading 11 per cent higher on the Comex, after rising more than 5 per cent last week. Spot silver climbed to as high as US$30.1003 an ounce. Other precious metals also advanced. Spot gold rose 0.9 per cent, while platinum jumped 4.1 per cent.

The buying frenzy also fed into mining shares. Mexican silver miner Fresnillo Plc surged as much as 21 per cent in London trading. China Silver Group Ltd. rose as much as 63 per cent in Hong Kong, while Australia’s Silver Mines Ltd. gained as much as 49 per cent.

The calls to buy silver began appearing on WallStreetBets as early as Wednesday, when the mania surrounding GameStop reached a fever pitch. Some of the posts touched on a similar David-vs-Goliath theme that has inspired individual investors to take on short-selling hedge funds: “Any short squeeze in silver paper shorts would be EPIC. We know billion (sic) banks are manipulating gold and silver to cover real inflation.”

But that narrative isn’t as straightforward as the one surrounding GameStop, one of the most-shorted stocks in the U.S. before it began surging this month.

Silver has performed well over the past year, rallying more than 60 per cent on a weaker dollar and hopes for an end to the pandemic. It has also attracted bullish commentary from some of the biggest Wall Street banks. Goldman Sachs Group Inc. described silver as the “preferred precious metal” in a Jan. 27 research note that had a price target of US$30 an ounce. Net-bullish bets by money managers rose to a three-week high in the week to Jan. 26, according to CFTC data compiled by Bloomberg.

Short-term forward rates on the London silver market flattened on Monday, indicating strong demand for the metal in coming weeks.

“I can envisage a scenario where maybe a hedge fund has purchased maybe a short-term tactical long position, so the upside could be a combination of several factors now,” said Philip Newman, managing director at consultancy Metals Focus.

Locking Up

Still, that hasn’t stopped some retail investors from piling in. By Sunday, sellers of physical silver including Apmex -- often called the Walmart of precious metals products in North America -- said they were unable to process orders until Asian markets opened because of record demand. “It’s been nuts,” said John Feeney, business development manager at Guardian Vaults in Sydney.

Ken Lewis, Apmex’s chief executive officer, said the decision to temporarily suspend silver sales was unprecedented in the company’s history and that it may take longer then usual to fill orders going forward.

“As we evaluate the markets, it is difficult to know where silver’s price and demand will go in the coming day and weeks,” Lewis said, adding that his firm is “locking up any metal we can find in the marketplace.”

--With assistance from Matt Turner, Yvonne Yue Li, Ranjeetha Pakiam, James Thornhill, Sam Potter and Martin Ritchie.