There has been a global phenomenon over the past 4-5 days related to the silver markets. This follows on top of the successful short squeeze of GME, AMC and other highly shorted stocks. However, the commodity space is VERY different from the equity markets. Here are some key aspects in my opinion:
There are as many long positions as short positions in the futures market. When you buy a futures contract, someone sells it to you. You’re long. They’re short. Simple as that.
There is an unlimited supply of futures contracts.
Most of the trading in the silver and gold futures are paper trading. No one actually demands physical silver when the contract expires. Most brokers don’t even support taking delivery as best I can tell.
The futures markets represent a massively leveraged position for everyone involved as only 6-8% (last I checked) is required to put up against your contract (i.e. buy $100k of silver but only need $8k in your account). Leverage works both ways. And it usually ends up inflicting a lot of pain.
A lot of the big, politically connected, and TBTF banks will take a naked short position against longs. What do you think the odds of the big banks going belly up are? They have both the Federal Government and more importantly, The Fed, SEC, and CME to back them up.
Now….that doesn’t mean the price of silver can’t head a lot higher. I am not smart enough to know, and if I told you I was, you should stop reading this and go do something more valuable (like taking a nap).
The premise behind the current phenomenon to #squeezesilver, as is the hashtag on Twitter, is to get all these retail investors to buy the physically backed ETFs. It’s a decent strategy. But it likely won’t be nearly as effective as shorting zombie companies like GME. GME went from something like $4 to $350. I wouldn’t bet on silver going from ~ $25 to $100 let alone something even more dramatic like the GME performance. If I am wrong, I will be happy to publicly apologize for my inability to predict the future accurately. I do think silver and gold are headed much higher over 2021 but not because of this squeeze. It does have the potential for big players on the short side to rethink their short exposure.
Expect political instability to increase, not decrease. And the new Biden administration, like Trump, Obama, and Bush, will ever increase the amount of money they print to try and fix the economy. I suspect that this time, all that printed money will cause some serious inflation later in 2021. When it takes hold, the Fed will be useless at fighting it. That is when silver and gold will really take off, regardless of what we see during the next week or two from this phenomenon.
Saying that, here is what we have seen in the physical markets the past few days, and particularly in the past 36 hours:
- Physical demand has exploded. Up about 700% over the past 5 days.
- Big bullion distributors have shut down their trading platforms to retailers due to a lack of supply from producers / mints.
Here is how the spot price MIGHT continue higher. I will add that I have NOT read the prospectus of SLV so I am unsure of how they actually fulfill their physical requirements or if there are ways in which they can delay or outright not have to bring in the physical.
Millions of retail buyers buy shares in a physical backed silver ETF like #SLV. Those funds will acquire futures contracts and demand delivery to meet their obligation to have physical metal backing the funds.
Those selling futures contracts to the ETFs would need to deliver. If they can’t get it, they close out their futures contract to avoid the obligation. That will cause a massive increase in demand v supply of futures contracts.
Would I be surprised to see $35 silver by this Friday if this #squeezesilver movement continues. Absolutely not. And if everyone buys and holds their silver, then there are better days ahead for the price of silver.
Trade smart and trade well my friends.
Dan Barrett is an ex-Wall Street (9 years), turned entrepreneur in the bullion industry for over a decade. Part owner of a physical bullion dealer in the San Francisco Bay Area and an owner of a software company making point of sale systems for the bullion and coin industry. He is an avid reader of macro economic theory and favors Austrian economics. Always looking to learn something new or gain different perspectives. Feel free to reach out. firstname.lastname@example.org