From the Maven Letter: January 31st, 2021
Oh my silver. There is so much to say about everything going on with Reddit and Robinhood and volatility and market tops and and and…but I will save most of that for Wednesday and keep my comments to silver.
What’s going to happen? Silver price fireworks are a real possibility – but are not guaranteed.
Background: the Reddit crowd that pushed GameStop through the roof to (1) show hedge funds with publicly proclaimed shorts that retail has the power to stop their elitist and money-grubbing attacks on certain stocks or (2) make a pile of cash by getting oodles of retail to just pile into one stock or (3) some combination of the two have now shifted their focus to silver.
It started on Thursday and Friday last week. It made sense in that silver is a reasonably small market and one rife with shorters. In fact, the Reddit crowd turned to silver because its immense shorting market offers potential to create, as the thread declares, “the biggest short squeeze in the world $SLV Silver $25 to $1000.”
Moving the price of silver was actually a second thought. At first, the group looked at stocks. First Majestic Silver (TSX: FR, NYSE: AG) was an early focus, and fair enough as it attracts as much or more shorting as any silver stock out there.
Here’s what that did
But then they decided to go after the spot price. I commented on this briefly last week I said I didn’t think the Reddit crowd had the power really move the price of silver. I was wrong.
And they might just be getting started.
The weekend saw a buying binge that overwhelmed online silver vendors around the world. Many bullion dealers stopped taking orders because of unprecedented demand and incredible price uncertainty. BlackRock Inc’s iShares Silver Trust, the largest exchange-traded silver product, recorded an unprecedented $944 million new inflow on Friday.
What will happen from here? It’s pretty tough to know.
On the It Will Spike side:
- There are huge short positions in silver. In fact, it’s easy to make statements like “there is $11 billion bet short on silver at $30 per oz.” and they are true.
- The Reddit crowd and its followers have by some estimates bought as much as 35 million oz. silver over the last few days. That’s big! And one can make arguments that that’s enough to push the silver price above $30 per oz. (it’s already looking to open at $29) and that if it gets past $30 the barriers will fall away and it will just go
On the No It Won’t side:
- Money managers play both side of the silver market and many are net-long today. That means the principle doesn’t work very well. It also means there’s big money that will be happy to sell into gains, to compensate for losses on the short side if nothing else. Moderating forces
- The silver market is much bigger than GameStop. Before Reddit jumped all over it GameStop had a market cap of $1.4 billion. Silver sitting in vaults in London alone is worth $48 billion.
- Both of these points mean retail Reddit-ers will really have to stick to their silver guns to make this happen. We just don’t know yet whether that’s likely or not.
What to do…
Only participate if you can be glued to this story. It could run like mad, shooting silver up 5 fold. Or it could fizzle completely. Or it could spike and dive unpredictably.
The easiest exposure is simply First Majestic. It is the most heavily shorted silver stock out there and so will continue to get the most love from Reddit as long as their silver squeeze keeps working.
I don’t think silver juniors will get a lot of love out of this, almost no matter what happens. Even if the silver price goes to the moon, no one expects that it will stay there for any reasonable period of time. So this is first about understanding what the Reddit crowd will target and second about producer leverage. First Majestic is my answer to #1 and Global X Silver Miners ETF (NYSE: SIL) is my answer to #2. I have orders in for both for the open. They are not large orders; they are more about wanting to play a game than about taking any real bet on this craziness