Brokerage curbs push Reddit-driven traders to chase silver lining elsewhere

Singapore

SILVER shuddered on a blistering rally and retail sites for the white metal's coins and bars were overwhelmed by demand as the army of traders on Reddit made the commodity their next stop after the frenzy they sparked earlier on equities paused owing to brokerages' curbs.

The mania for the precious metal - like what set off GameStop Corp stock's wild rally - was fuelled by a call on Reddit's r/wallstreetbets or r/wsb forum, rallying traders to pile into the market for a "short squeeze", driving silver prices to a seven-month high on Asia's open on Monday.

By late afternoon, the bullion had shot up 10 per cent to US$29.64 an ounce - a whisker away from some analysts' base projection that silver could peak at US$30/oz in 2021 and closer to the most bullish forecasts of US$40/ounce on the back of a recovery in global industrial activity and a weaker greenback.

Silver's ascent dwarfed the showing of its "richer cousin" in the precious metal complex - gold - which gained less than one per cent on Monday.

The move didn't come as a "pure surprise" given last week's rush to iShares Silver Trust - the world's largest silver exchange traded fund (ETF) - and considering silver has lagged gold's record gains in 2020, said Swissquote Bank's senior analyst Ipek Ozkardeskaya. The ETF has seen massive inflows since last Thursday, when the online rampage kicked off while silver futures rose the most since at least 2013.

"The rise in silver doesn't seem far-stretched just yet. So far, it is not exactly the GameStop anomaly, but it is a hint that the retail traders who just discovered the strength of their unity are out there, looking for new targets - and apparently bigger ones," she added.

Following a weekend buying binge, Money Metals, an online exchange for precious coins and bullion, posted an "EXTREME DEMAND ALERT" banner across its homepage, and limited orders at US$10,000.

Another online retailer SD Bullion said it was experiencing shipping delays due to "unprecedented demand".

Based on chatter on Reddit's r/wsb message boards, the traders zeroed in on silver as they deemed the metal oversold. One post declared the white metal "THE BIGGEST SHORT IN THE WORLD". The subreddit group is the fastest-growing forum, according to FrontpageMetrics, and has garnered 7.8 million users on Monday from 4.4 million last Thursday. The #silversqueeze hashtag was also trending on Twitter.

Analysts deemed silver's spike "artificial" and "not lasting" but warned against underestimating the impact of Redditors' rebellion on the metal's prices as silver is more volatile given its lower trading liquidity and hence, its price swings tend to be exaggerated when sentiments turn.

Indeed, silver is a rather complex market with spot, forward, futures and options trading in various locations all over the world, also involving physical logistics. Because the silver market is relatively small compared to, for example, gold or other commodity markets, it does not take much money to move the metal.

Axi's Stephen Innes contends: "The silver market is not huge and very illiquid, setting up the perfect storm. This is a month-end signal as the Reddit wrecking crew were trying to push paper higher to squeeze out shorts, which pressures the exchange for physical positions".

Bank Julius Baer's head of next generation research Carsten Menke said: "While we disagree with the notion that silver is heavily shorted, another investor-driven spike is entirely possible, considering the market's small size and its susceptibility to sentiment swings... which is why the potential impact of the Reddit investors should not be underestimated".

Others reckon it would be harder for Reddit traders to pull off a similar squeeze on silver as they did with the GameStop stock, which market value soared more than 16-fold after they decided to give giant Wall Street hedge funds their comeuppance and rocked the financial word.

For one, silver is not heavily shorted by hedge funds. Therefore, the short-squeeze strategy that worked on small, single stocks may not be replicable, reckoned Daily FX strategist Margaret Yang. She pointed out that according to data released by Commodity Futures Trading Commission (CFTC), net-long silver position as a share of aggregate open interest stands at 24.8 per cent as of Jan 19, suggesting that there is no significant hedge-fund short positions.

Still, the speculative rush could turn out to be a dangerous game. One analyst brought up the cautionary tale of Texan oil baron Nelson Bunker Hunt. "The Reddit wolf pack should tread more carefully here. Nelson Bunker Hunt and his brothers deployed the same strategy. While bearing fruit at first as silver hit US$50 an ounce, their attempts to corner the silver market came to a gruesome end in 1980. Silver plunged, as did the brothers' fortune," warned Oanda's Jeffrey Halley.

Mr Menke recalled the 2010/2011 record run, driven entirely by speculative buying which had pushed silver prices to US$50/ounce. The rally had destroyed demand from industrial users as they had started to look for cheaper and less volatile alternatives. This was most evident in the solar industry.

He added: "Between 2010 and 2020, the silver content per solar cell fell from around 85 grams to around 25 grams. While another investor-driven spike in silver is entirely possible and could lead to very rewarding returns, it would not be based on fundamentals and would not reflect a healthy market".

The siren of caution rang loud and clear on Monday as the Reddit-motivated trading mania spread to the commodities market and analysts warned investors not to chase the speculation-driven rally.

Swissquote Bank's Ms Ozkardeskaya remarked: "One important thing to remember in this game is - if you lose full support, and momentum, it's over. This is why the speculative rush is a prosperous, but a dangerous game".