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Here We Go Again: Retail Investors Now Targeting Silver for Short Squeeze

Retail investors put the squeeze on hedge funds last week by pumping up the value of GameStop stock. They may be doing it again with silver, which worries some analysts.

Retail investors put the squeeze on hedge funds last week by pumping up the value of GameStop stock. They may be doing it again with silver, which worries some analysts. 

FILE - In this file photo dated Wednesday, May 9, 2007, Silver bullion, bars weighing five kilograms each, are displayed in the trading room of the stock exchange in Frankfurt, Germany. Silver futures jumped more than 10% on Monday Feb. 1, 2021, following strong gains over the weekend.(AP Photo/Michael Probst, FILE)

MANHATTAN (CN) — Silver has caught the eye of the populist investor movement that boosted shares of GameStop last week, much to the chagrin of short-selling hedge funds and institutional investors.

Prices of the precious metal jumped 10% on Monday morning, at one point hitting $30 per ounce, the metal’s highest mark since early 2013. Prices per ounce of silver have been steadily growing since late last week, mostly due to a swarm of interest by retail investors, and were a bit higher than $29 per ounce by the closing bell.

This latest target by retail investors now could create yet another bubble for both commodity and equity markets, with similar bubbles to come. 

“There is no doubt that retail participation has jumped markedly in the metal with some spot dealers providing anecdotal evidence of record demand,” wrote Boris Schlossberg of BK Asset Management, adding that institutional investors also have gotten in on the action. “Given the recent record of the short squeezes we’ve seen, the move in silver may be just beginning.”

The current short squeeze of silver is an echo of last week when retail investors swarmed GameStop stock, causing investment platforms like Robinhood to rein in buying and regulators to scrutinize transactions. Shares of the company hit nearly $450 per share at one point last week — a far cry from the $20 per share it was worth a couple weeks ago — after message boards and chatrooms drove up intense interest among investors in recent days.

Robinhood has since raised their daily trading limit on GameStop shares from one share per day to four. The platform has similar but higher limits on other highly traded stocks, such as AMC Entertainment. 

The brunt of the GameStop rush was felt heaviest last Wednesday, when the three major U.S. indices saw their worst day since October. Markets righted themselves on Thursday when brokerages installed limits on purchasing GameStop stock, though they dropped again on Friday.

In contrast to the GameStop pandemonium, however, investors posting on WallStreetBets and on Twitter are split on the silver squeeze.

Among those approving of it is Cameron Winklevoss, a cryptocurrency trader who along with his twin brother brought fought Mark Zuckerburg over credit for creating Facebook. “The #silversqueeze is going to tell us just how bullshit the Silver and precious metals markets are,” he tweeted, also hinting that the gold market could be next for a short squeeze.

Gold also saw a marginal increase in its trading price on Monday, gaining somewhat to hit about $1,860 per ounce for its March contract. The World Gold Council, a London-based international association of gold mining companies and investors, did not return an email seeking comment about a potential gold bubble.

Others have referred to the silver squeeze in video game terms, calling it an almost unwinnable “ultimate boss fight,” or argue it is actually helping hedge funds cover their losses from last week’s GameStop short squeeze. 

Unlike with the GameStop frenzy, this time investors are not caught off guard. “If the past few days have taught us anything, it is that the Reddit mob can be very influential when it comes to certain markets,” wrote David Madden, a market analyst at CMC Markets.

On Monday, the Dow Jones Industrial Average finished the day’s trades by gaining 229 points, a 0.77% increase, while the S&P 500 rose about 1.6% and the Nasdaq rocketed up 2.5%. 

Shares of GameStop were trading at $225 by the closing bell, while AMC Entertainment shares fell slightly to trade for $13.

Many on Wall Street seem to welcome this new short squeeze, as it has taken attention away from GameStop and other equities and lumped it on precious metals, Madden says. “It is remarkable that a band of retail players can help lift an enormous market like silver by such a large extent,” he wrote. “The wider markets are in good shape, probably because a high single-digit percentage move in silver poses less of a threat to certain hedge funds than a colossal short squeeze on selected stocks.”

But some say the two recent short squeezes could mark a pattern of new bubbles driven by cheap money shoveled into the economy by the Federal Reserve and stimulus funding keeping small investors flush in cash.

“What sets last week’s short squeeze apart is that this time there appears to be as many losers as there are winners,” James Meyer of Tower Bridge Advisors wrote. “The danger isn’t some little guy going broke or even a hedge fund or two. The risk is the system breaking down.”

Meyer pointed to the market crashes of 2008 and 1987 as evidence of this. “But the Fed doesn’t see it that way. It keeps pumping in another $5 billion per day,” he wrote, adding that “as long as the Fed keeps pumping, other bubbles will emerge.”

Neil Shearing, group chief economist at Capital Economics, isn’t as concerned, noting recent bubbles involving housing or bonds were macroeconomic in nature, whereas the GameStop and silver bubbles are more narrow. 

“When it comes to the macroeconomic fallout, not all asset price bubbles are equal,” Shearing wrote, adding that banks are much better capitalized now then compared with the 1990s or 2000s. “In other words, it seems fairly unlikely that the kind of targeted retail trading we have seen recently will have a serious domino effect on the broader financial system.”

It is unclear, however, whether regulators will be as sanguine as Wall Street about the recent glut of silver purchases.

Rostin Behnam, the acting chairman of the Commodity Futures Trading Commission, said in a statement late Monday that the agency is “closely monitoring recent activity in the silver markets” for “any potential threats to the integrity of the derivatives markets for silver, and remains vigilant in surveilling these markets for fraud and manipulation."

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Categories / Economy, Financial, Securities

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