Reddit users on the r/WallStreetBets forum tried to squeeze silver prices, but analysts say that isn’t what really happened. Nonetheless, one firm believes the push into silver could provide a temporary tailwind for silver stocks.
In a report this week, RBC Capital Markets analyst Josh Wolfson and his team said the silver squeeze narrative is a “mischaracterization of current market positioning.” They added that crowding probably wouldn’t result in soaring silver prices like what happened to GameStop and other heavily shorted stocks.
Sorting Out Fact from Fiction in the Silver Squeeze
The RBC team noted that inflows into the iShares Silver Trust (NYSEARCA:SLV), the largest physical silver exchange-traded fund, hit a record $943 million on Friday. On Monday, the ETF added almost 18.6 million ounces.
Over the past year, its daily flows have averaged $41 million. They also pointed out that searches for silver grew sharply over the last week, while the hashtag #silversqueeze trended on Twitter. Searches for “SLV” were also up sharply after falling in the second half of last year.
Wolfson and his team noted that comparisons between what happened in the silver market and the short squeezes in the stock market don’t make sense. Unlike the affected stocks, positioning on silver was not bearish. They noted that above-ground silver is valued at about $1.7 trillion, which is much larger than any of those equities.
Effects on the Silver Market
Even though the short squeeze comparison is not accurate, the RBC team noted that the increase in searches and social media trends for silver would likely have a near-term impact on silver prices and silver stocks. They point out that silver is a smaller and unique market prone to volatile price cycles.
The silver market is one-tenth the size of the gold market, and in the past, high speculative interest and the inelastic nature of supply resulted in sizable swings in the price.
The RBC team believes the short squeeze narrative is a mischaracterization of what happened, although it could still have a short-term impact on prices, which has occurred in the past. They also point out that unlike gold, silver demand is mostly industrial, and growth in solar, autos and other end markets have supported it.
Additionally, CME, the biggest derivatives market in the world, raised margins on silver as prices approached an eight-year high earlier this week.
Short-lived Effects
Based on previous swings in the silver price, the RBC team said price gains from the attempt at a silver squeeze would likely be short-lived. Indeed, it looks like the silver price is already starting to come down today.
The iShares Silver Trust is down more than 2%, and silver prices have fallen slightly to around $26 an ounce. Silver stocks that were impacted by the attempt at a short squeeze are also falling. For example, Endeavour Silver Corp (NYSE:EXK) is down by about 6%, while Fortuna Silver Mines Inc (NYSE:FSM) is down by about 5%.
The RBC team also noted that during previous silver price cycles in 2011 and 2020, silver prices outperformed silver stocks when prices climbed rapidly.
What About the Gold Market?
Another RBC team led by Christopher Louney considered what effect the attempted silver squeeze could have on the gold market. Based on market dynamics, they saw no signs that the gold market would be the next one affected by the r/WallStreetBets crowd. Indeed, other factors are moving gold prices even after the effects of the attempted silver squeeze have passed.
Weekly unemployment claims declined 33,000 last week, which sent gold prices into a tailspin. The yellow metal fell to below $1,800 an ounce, breaking through a key psychological and support level it has been holding for quite some time.
Additionally, the U.S. dollar has continued to climb, which is also usually bad for gold prices, although the two have moved in step during past times of economic disruption. The dollar index hit its highest level in two months overnight, while gold prices reached their lowest level in two weeks.
Many analysts are bullish on gold, but it’s hard to see what will send the price skyrocketing toward the record high it reached last year. The gold market may not be as much of a sure thing, as some bulls have been suggesting for months. If the economic recovery takes a hit, gold prices could rally, but the yellow metal could stay below $1,800 an ounce until some evidence of hardship appears.
Fallout from GameStop
Shares of GameStop Corp. (NYSE:GME) and other recently high-flying stocks have been plunging over the last few days, highlighting just how much greater the effect has been on the stock market than on silver. During regular trading hours today, GameStop shares are down more than 20% following steep declines on Tuesday and Wednesday. Meanwhile, silver’s fall is much smaller in scale.
The massive short squeezes that swept the market have drawn the attention of regulators. Treasury Secretary Janet Yellen called an ad-hoc meeting of the Securities and Exchange Commission, Federal Reserve and Commodity Futures Trading Commission. However, the agencies are currently without permanent chairs, as confirmation hearings for President Joe Biden’s appointed leaders have not been held yet.
The SEC has already said it’s investigating for signs of fraud related to the recent trades. Of particular interest is Keith Gill, one of the first endorsers of GameStop on his YouTube channel. He’s a registered securities broker who previously worked as a financial wellness education director at MassMutual. A Massachusetts regulator is investigating whether Gill or the insurance company broke any rules.
Theoretically, Gill could face accusations of market manipulation, as he benefited greatly from GameStop’s price increase. Apparently, he didn’t get out of the retailer’s stock before it plunged, as he posted on r/WallStreetBets that his GameStop position had declined from $50 million last week to $7.6 million this week.
On the date of publication, Michelle Jones did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
