about 3 years ago • 2 mins
This article is the second in a series we’ll be running all week examining trade ideas posted on the WallStreetBets Reddit forum.
What’s going on?
The price of silver sank 8% from an eight-year high on Tuesday, with both hedge funds and members of the WallStreetBets Reddit forum denying their involvement in the failed short squeeze.
We’re unlikely to ever know who was behind this attempted coup, but silver was never the right candidate for a short squeeze. In fact, it only meets one of the three main criteria necessary for a serious squeeze higher to develop: high short float and low volume, existence of a bull thesis, and strong retail participation.
Why could it happen?
Of the three factors, the existence of a bull thesis is definitely the strongest. There are two good fundamental reasons for holding silver right now: first, it’s a store of value and hence a potentially good hedge against the devaluation of fiat currencies and inflation that could be caused by central bank and government stimulus. Second, it’s used as an input to make electric vehicles and solar panels, which could benefit strongly from the growing “green economy”.
Investment banks from Goldman Sachs to Saxo have pushed silver as a theme to watch in 2021.
Where could it go wrong?
Silver is however missing the two other ingredients: investors are long rather than short the metal – betting on gains rather than losses – and retail participation is declining rather than increasing.
Let’s start with positioning: how can a short squeeze happen if speculators are long rather than short? CFTC positioning data show that speculators (including hedge funds) are net long silver futures. And when it comes to trading volume, the picture is even bleaker: silver volume is more than 200x larger than GameStop’s and the fact that it mainly trades on the futures market – where it’s much harder to get caught on the wrong side of a short trade than in cash equity markets – means that engineering a short-squeeze is operationally more difficult.
The second missing ingredient is increased retail participation. In fact, browsing through the WallStreetBets forums, it becomes clear that the majority of Redditors are actually warning against buying silver – or even seeing any discussion of trades other than GameStop as a traitorous distraction. Partly because they know that Wall Street’s elite are on the long side of the trade and partly because they are smart enough to know a squeeze would have a low chance of success. This vibe is in sharp contrast to posts on GameStop, which are strongly supported by a unified community.
To sum up, the silver market is unlikely to suffer a serious squeeze higher in the short term. But that doesn’t mean that you shouldn’t consider investing in silver for the longer term on its own merits: the precious metal could go up as there are valid arguments behind the bulls’ thesis.
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