The battle over US stock GameStop represents an extraordinary fight between rich instos and the disgruntled retail class.

It’s a powerful narrative and, so far, retail appears to be winning.

Melvin Capital, the hedge fund at the centre of the GameStop drama, lost 53 per cent of its value in January.

Short sellers like Melvin borrow a stock (for a fee) and then sell it, expecting it to fall in value. They buy back the stock at some point and return it to the original owner.

If the stock falls, they pocket the difference. If it increases, they take a loss.

Depending on how much it increases, these losses can be catastrophic.

Retail traders, spearheaded by punters on r/Wallstreetbets, recognised that some hedge funds – like Melvin — were very short GameStock and caused a ‘short squeeze’.

This happens when the price of a stock or other asset increases quickly, forcing the short sellers to buy it at a higher price to prevent even bigger losses.

This buying momentum forces prices even higher.

Late last week it appeared that these retail heroes had turned their attention to the silver market. We saw Twitter posts like this:

The idea behind the #silversqueeze theory is this: big banks and hedge funds have massive, short positions in the silver market to suppress the price of the precious metal.

According to this theory, if enough small investors buy silver these big players will be forced to cover or buy back their short positions, which would send the price soaring. Retail wins again.

If it sounds like nonsense, it probably is. Even Wallstreetbets is calling bullshit.

CITADEL IS THE 5TH LARGEST OWNER OF SLV, IT’S IMPERATIVE WE DO NOT “SQUEEZE” IT. THESE ARE HEDGE FUNDS BOTS SPAMMING AWARDS from r/wallstreetbets

The Silver Squeeze is a hedge-fund coordinated attack so they can keep fighting the $GME fight from wallstreetbets

But the narrative caught fire: on Monday, silver stocks on the ASX went through the proverbial roof.

Are retail traders getting sucked in? Here’s why #silversqueeze could be phoney.

 

Shorting a commodity isn’t like shorting a stock

The silver market is enormous – it would be very hard to attempt a short squeeze in such a large and liquid market, Minelife analyst Gavin Wendt says.

But the reason speculators target silver more than other  metals is because silver is inherently volatile.

Here’s the silver price since about 1978:

 

There are two examples in recent history of speculators with huge financial firepower that have tried to influence the silver market.

Both successfully manipulated the price in the near term, but ultimately it proved disastrous for the wider market.

“Back in 1979 and 1980 the Hunt Brothers bought billions of dollars in silver in an attempt to corner the market,” Wendt says.

The price soared before plummeting again.

“They failed and were bankrupted in the process,” Wendt says.

Then in ~1998 [famous investor] Warren Buffett acquired a large position in silver.

“He drove the silver price up by about 90 per cent to 10 year highs.”

Silver speculation made Buffett $US97m profit … and then the price dropped again. Again.

Silver — it attracts speculators because it is extremely volatile, Wendt says.

#silversqueeze is less about killing another hedge fund, and more about manipulating the short term price.

“I don’t think there is any short squeeze in the market,” Wendt says.

“At best, what we are looking at is buying momentum that could generate waves in the market and push the price of silver further north for a short period.

“These new investors obviously believe that because of silver’s natural volatility they can create waves. Those waves may grow and generate momentum in the silver price.

“But the difficulty with commodities is that the markets are so vast, that it is very difficult to sustain any market movement.

“Ultimately, a lot of speculators are going to get burnt.”

 

Silver’s fundamentals are solid …

Right now, the fundamentals of silver — the best performing metal of 2020 — are very positive.

“There will always be short and long positions in a market, but I don’t think there would be any fund out there which would be short in silver,” Wendt says.

Metals Focus says silver prices could be about to rocket higher relative to gold (which also has very good fundamentals).

“As investors become increasingly accustomed to a gold:silver ratio in the low 70s, there is plenty of room for a further contraction toward the low 60s, as we progress into 2021,” Metals Focus writes.

The ‘gold-silver ratio’ is simply the amount of silver it takes to purchase one ounce of gold.

And unlike gold, silver is currently trading well below its all-time high in 2011 of over $50, Metals Focus says.

“Once the expected rally in the precious metals complex resumes, this may well encourage aggressive tactical buying from those who believe silver remains undervalued relative to gold.”

Silver was the best performing metal last year. That same sentiment has carried over into 2021, Wendt says.

“The broad consensus is that the outlook for silver in 2021 is that it is at the very least solid,” he says.

“If the fundamentals for gold look good – with the amount of debt out there, low interest rates, and low dollar – then that has to be agreeable for silver.

“So why would banks hold such a large, dangerous short position a commodity with such a positive outlook?”

 

…which is why big players probably aren’t short silver

It’s inaccurate that banks are constantly running short positions in the metal, Wendt says.

“I think from a price position they are neutral,” he says. “They have longs and shorts that tend to cancel each other out.”

It would not make sense for a bank to be tremendously short on a commodity for any significant period of time, Wendt says.

“Around about the time of COVID there were a lot of short positions in copper, for instance, but in the second half of the year that fund positioning changed,” he says.

“The shorts reduced significantly, and the long positioning started to grow.”

The fundamentals are there for silver to perform, Wendt says. It would be a brave fund that took a large short position.

But this is also new era of trading, Wendt says.

“You also get a lot of crazy people out there — conspiracy theories with respect to metals, central banks, governments that are suppressing the price of silver,” he says.

“If you put some of those wacko theories together with the ‘us vs them’ [GameStop thematic], silver’s natural volatility, and the fact that opinions and rumours can be spread very easily by social media – you can create waves in almost any commodity, or any stock.”