This
past week’s silver-market action has been extraordinary, wildly
unprecedented. Incredible torrents of capital deluged into the
world’s dominant silver exchange-traded fund. That came right after
attempts to organize small traders to engineer a silver short
squeeze on Reddit’s famous wallstreetbets forum. While that group’s
apparent silver foray was fragmented and internally controversial,
their buying power can’t be denied.
I’ve
been a big Reddit fan for about a dozen years now, following and
moving between various topical subreddit forums as my interests
change. No matter what you’re passionate about, there’s probably an
active Reddit community maintaining intelligent forum chats on it.
I can’t count the number of times I’ve had some technical challenge
on something, Googled for solutions, and found them posted on
Reddit.
And
apparently virtually everyone likes Reddit, as Amazon’s Alexa
Internet ranks it as the 7th-most-visited website in the US!
The subreddits I follow mostly have to do with hobbies and
recreational interests, as my work immerses me in the financial
markets all day everyday. So unfortunately I wasn’t familiar with
that wallstreetbets subreddit until the traders on it executed that
utterly-brilliant GameStop short squeeze.
That
epic story soon went mainstream, a bunch of little guys uniting
together to take down apex-predator hedge funds radically
over-short-selling small stocks. In just ten trading days ending
last week, these small traders buying GME stock and call options
catapulted it a mind-boggling 17.4x higher! That forced an
elite hedge fund Melvin Capital that had over-shorted GameStop to
need an emergency $2.8b bailout!
Last
Wednesday January 27th the day GME stock skyrocketed 134.8% to its
record closing high, market professionals marveled at the power
Reddit’s WSB forum. Small traders banding together crowdsourced
unimaginable buying power, almost acting like a hive mind.
Harnessing and focusing that like a laser had the potential to
overwhelm and quickly move almost any price. The WSB guys were
looking for another target.
That
very evening, one of them suggested silver in a post titled
“THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$.”
That WSB user argued that “Silver Bullion Market is one of the most
manipulated on earth. Any short squeeze in silver paper shorts would
be EPIC. We know billion banks are manipulating gold and silver to
cover real inflation. ... Why not squeeze $SLV to real physical
price.”
Shortly later he edited it to include “ALL IN ON $AG. LETS GET THE
MINERS.” While that post was later removed by WSB moderators, that
seemed to be the spark that ignited massive inflows into
silver and its miners’ stocks. That attempt to rally the WSB horde
to pile into silver was always controversial in that community. It
was way outside of the normal wallstreetbets’ wheelhouse of finding
small overly-shorted stocks.
Silver is vastly larger than little meme stocks like GameStop, and
thus vastly harder to bully around. Just under $20 per share in
mid-January, all GME stock was worth less than $1.5b. This
video-games retailer is failing because most games are now purchased
online and directly downloaded to consoles and PCs. There’s no need
for any high-margin middlemen when software is mostly digitally
purchased and delivered.
The
silver market is global and opaque, impossible to directly measure.
The leading authority on silver fundamentals is the Silver
Institute, which publishes fantastic annual reports on global silver
supply and demand called World Silver Surveys. They are usually
released in late April, covering the prior calendar year. So the
latest comprehensive WSS data is still 2019’s, where global silver
demand ran 991.8m ounces.
That
was worth about $16.1b at that year’s average silver price of
$16.18, about an order of magnitude more than pre-skyrocketing GME.
That initial popular WSB post targeting silver mentioned SLV, the
iShares Silver Trust. It is the leading and dominant silver
exchange-traded fund, holding physical silver bullion in trust on
behalf of its shareholders. Silver-ETF capital flows are growing
ever-more important for silver.
On
January 27th before some of WSB’s gaze started turning towards
silver, SLV held 571.9m ounces of the white metal. That was worth
$14.4b at that day’s $25.20 silver close. At the end of 2019, the
Silver Institute’s analysts reported SLV’s silver-bullion holdings
accounted for half of all the silver held by all the world’s
silver ETFs! If that ratio continues to hold true, it implied a
silver-ETF “market cap” around $29b.
At
its closing peak, GME’s stock was worth around $24b. So engineering
a short squeeze on silver was a tall order compared to GameStop.
There were also suspicions in wallstreetbets that the calls for
buying silver were external, that hedge funds were infiltrating
normal posters’ ranks to try and harness the power of the so-called
Reddit Rebellion. I was skeptical that WSB users would even bother
to bite on silver at all.
But
on Thursday the 28th, silver blasted 5.5% higher to $26.59
despite a flat gold price! Normally silver just mirrors and
amplifies underlying moves in gold, which is its dominant primary
driver. There was all kinds of talk in precious-metals land about
the redditors coming in. That sure looked to be the case in major
silver-mining stocks. Their outsized gains that day were even
bigger than silver’s surge warranted.
Leading the way was First Majestic Silver, which had been mentioned
by its awesome AG symbol in that original WSB silver-short-squeeze
post. AG stock soared 21.4% higher that day! The much-larger Pan
American Silver surged 11.2%, Hecla Mining shot up 17.1%, and Coeur
Mining blasted 16.0% higher. Plenty of other silver miners saw
big-to-huge gains too, so something different certainly looked to be
afoot.
But
was that actually WSB users’ capital flowing in as new shareholders,
or existing silver-stock traders pouring in to front run the
expected WSB invasion? It certainly wasn’t clear. Adding to
the confusion, the holdings of that behemoth SLV silver ETF actually
fell 4.4m ounces or 0.8% that day. That meant there was either
differential selling in SLV shares or slower buying than the torrid
pace underway in silver futures.
Price-tracking ETFs holding underlying assets can only accomplish
their mission if they act as conduits for capital flows.
SLV’s price action needs to mirror silver’s own, as stock traders
want to own it for silver-price portfolio exposure. But the supply
and demand for SLV shares is totally independent from that in silver
futures providing silver’s reference price. Thus SLV prices quickly
disconnect from underlying silver’s.
The
SLV-share supply has to be actively managed in real-time to prevent
this failure. When SLV shares are being sold faster than silver
itself, SLV prices threaten to decouple from silver’s to the
downside. This forces SLV’s managers to buy back enough SLV
shares to absorb their excess supply relative to silver. They
raise the capital necessary to do this by selling some of SLV’s
silver bullion, equalizing selling pressure.
So
when SLV’s holdings are falling like the day after that initial WSB
post, that shows stock-market capital is flowing out of silver.
So the WSB redditors didn’t seem to be heeding that controversial
call to squeeze silver via SLV. That was disappointing, as a bunch
of traders moving into silver for their first times could really
shake up that market. But as WSB moderators argued, silver was very
different from meme stocks.
But
apparently support was building behind the scenes, and the Reddit
Raiders saw the huge gains in silver stocks that day. So the next
day which was last Friday the 29th, they apparently heeded the call
to flood into SLV shares. This chart looks at SLV’s silver-bullion
holdings superimposed over silver prices during the past couple
years or so. What started unfolding in SLV’s holdings a week ago
is astounding.
Silver didn’t look remarkable on the surface that day, merely
rallying another 1.3% to $26.94. But hours after the US close SLV’s
managers released its daily holdings, and they had rocketed a
truly-astonishing 34.4m ounces or 6.1% higher that day alone! That
blasted them to a dazzling new all-time-record high way up over
601.9m ounces. SLV had never witnessed a day like that since its
launch way back in April 2006.
When
SLV’s holdings rise, it reveals stock-market capital flowing into
physical silver bullion through this ETF. When SLV shares are being
bought faster than silver futures, SLV’s price threatens to
disconnect from silver’s to the upside. SLV’s managers have to
offset that excess demand in real-time by issuing enough new shares
to satisfy it. The proceeds from selling these shares are used to
buy silver bullion.
In
SLV’s entire 14.8-year trading history before last Friday, its
single-biggest daily build had only been 20.0m ounces in mid-January
2021. Before that it was 19.8m way back in December 2007. So 34.4m
a day after the WSB subreddit was rallied to take on silver short
sellers shattered the old record by over 1.7x! Again it wasn’t
clear if it was actual WSB users, hedge funds, or precious-metals
traders doing the buying.
Were
the redditors actually invading silver with huge crowdsourced
first-time buying, or were long-time silver traders rushing to get
deployed in anticipation of that WSB horde? Over the subsequent
weekend, silver-bullion dealers reported unprecedented and record
levels of orders for physical silver. I saw plenty of
reports of demand running at least an order of magnitude larger than
normal, leading to silver selling out!
Dealers that have been selling silver bullion for decades were
seeing such staggering demand that they restricted new buying for
their first times ever! Some wouldn’t even quote prices until after
silver futures resumed trading Sunday evening. Bullion-dealer CEOs
interviewed on financial media reported most of their massive orders
influx were small, in the few-thousand-dollar range indicating
individuals doing that buying.
That
made for the most-exciting silver weekend I’ve ever witnessed in my
decades studying and actively trading this metal and its miners’
stocks. Sunday evening silver-futures prices rocketed from $27.00
to over $29.00 in about a half-hour, before surging above $29.50 in
late Asian trading. Silver was set up for another big day this
Monday February 1st. And that indeed came to pass with the WSB
silver frenzy mounting.
Silver blasted another 5.5% higher to $28.42 by the US close. And
the flood of American stock traders’ capital into silver via that
dominant SLV trading vehicle was even stronger. SLV’s holdings shot
up by another 18.6m ounces or 3.1%, their fourth-largest daily build
ever. That implied $529m of differential SLV-share demand, after
the previous trading day’s record $927m! Huge capital was flooding
into silver.
And
the major silver miners’ stocks. AG, PAAS, HL, and CDE were
shooting parabolic on short-term charts with huge additional daily
gains of 22.1%, 12.1%, 28.3%, and 23.1%! In just three trading days
since that initial popular WSB silver-squeeze post, these silver
stocks had soared 59.3%, 29.4%, 52.1%, and 43.9% higher! Whether it
was really WSB buying or the anticipation of it, it greatly boosted
this small sector.
Silver itself had surged 12.8% in those three trading days, which is
nothing special for this volatile asset. But it was amazing to see
that move with gold merely climbing 1.0% in that same span. Usually
big silver moves leverage big gold ones by about 2x to 3x.
With crazy record premiums between physical silver and
silver-futures prices, soon after the close that day the CME Group
hiked margins on silver futures.
Futures are the Wild West of the financial markets, enabling extreme
leverage way beyond the 2.0x legal limit in stock markets. Each
silver-futures contract controls 5,000 troy ounces, which was worth
$142,100 at Monday’s close. With margin requirements at $14,000 per
contract that day, futures speculators could choose to run leverage
as high as 10.2x. The CME raised those margins 17.9% to $16,500 per
contract.
At
10x leverage, silver moving just 10% against a silver-futures
speculator’s bet would wipe out 100% of the capital they risked.
And after silver had just surged 12.8% in three trading days, the
CME wanted to rein in some of the default risks with that margin
hike. Those always lead to silver-futures selling, cooling
speculative fervor. That snowballed during the next trading day,
Tuesday the 2nd where silver plunged 7.2%.
Silver surrendered over 5/8ths of its WSB-spike gains that
day alone, hammering the silver miners’ stocks sharply lower. AG,
PAAS, HL, and CDE plummeted 24.2%, 13.4%, 18.9%, and 18.9% that day
alone. Would silver have suffered such a sharp down day without
that silver-futures margin hike after the prior close? Had Reddit’s
wallstreetbets horde already moved on? Had they even ever been
buying in force?
Though fascinating, I probably still wouldn’t have chosen this topic
for this week’s essay at that point. A 12.8% several-day surge
isn’t much by silver’s volatile standards. And the WSB moderators
seemed to be shutting down discussions on silver. One side said
they were trying to keep the focus on those small heavily-shorted
meme stocks, the other said they were killing all ideas that didn’t
benefit their own trading books.
You
just never know about motives on the Internet, as stripping all
nonverbal cues from communication can really mask intent. But
despite silver’s 7.2% plunge that day, SLV’s holdings exploded a
staggering all-time-record 56.8m ounces or 9.2% higher! When
I saw that I knew I had to write this essay. That was the
equivalent of a previously-unthinkable $1,497m of American
stock-market capital flowing into SLV shares!
That
super-spike to an epic all-time-record SLV
physical-silver-bullion-holdings high of 677.3m ounces is readily
apparent on this chart. Nothing remotely close to this level of
intense buying has ever happened before in SLV’s long history. In
just three trading days where silver round-tripped to a 0.8% slump,
SLV’s holdings skyrocketed 109.8m ounces or 19.4%! A week ago, that
would’ve seemed utterly impossible.
We’ll probably never know if silver’s Reddit surge resulted from WSB
users actually flooding in or if it was normal silver traders
deploying aggressively in anticipation. But the hype of WSB
potentially targeting a silver short squeeze unleashed
unprecedented American-stock-trader demand for silver either
way. That shows there’s lots of latent interest for silver
investment, which yields huge gains in silver’s periodic soarings.
I
suspect wallstreetbets’ users skew younger, maybe in their late 20s
to mid-30s. That’s a great age for speculators and investors to
learn about the essential portfolio diversification provided
by precious metals. In a world dominated by central banks
frantically expanding fiat-money supplies at reckless
inflation-stoking rates, all traders should protect their portfolios
with core positions in gold, silver, and their miners’ stocks.
So
even if the WSB crowd sticks to their knitting with small
heavily-shorted stocks they can bully around easily, I sure hope
this past week’s extraordinary silver-market action raises awareness
for them. While silver and silver miners’ stocks are volatile, they
are never going to crater by nearly 4/5ths in just over a week like
GME’s stock has. Despite selling off hard this week, silver and
silver stocks still look very bullish.
Again silver’s dominant primary driver is gold, which has been
forced down challenging its last correction low from late November.
That weakness has dragged down silver and its miners’ stocks with
gold’s. But as gold’s next upleg resumes, the whole precious-metals
complex is going to enjoy big gains. The
underlying
fundamentals for gold and silver miners have never been
stronger, these lows should be bought.
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The
bottom line is silver’s Reddit surge has been extraordinary. Silver
prices shot higher on mere rumors the wallstreetbets’ crowd would
target a silver short squeeze. That unleashed wildly-unprecedented
violent buying of silver-ETF shares, with American stock traders
catapulting SLV’s holdings vertical to dazzling new record highs.
Traders rushed to buy major silver miners’ stocks too, blasting them
parabolic.
Whether the WSB redditors were responsible or not, this extreme
silver-market episode sure highlights the massive latent interest in
silver. Legions of speculators and investors out there are watching
silver, ready to pour in on the right catalyst. And with silver now
on way more traders’ radars, it and its miners’ stocks have the
potential to attract much more capital as gold’s upleg powers higher
driving outsized gains. |