Silver’s Reddit Surge

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.

image-20210205175630-1

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.

So we’ve been aggressively adding new trades in fundamentally-superior gold and silver miners in our newsletters since late November.  The current count is now up to 16 in our weekly and 8 in our monthly, with full trading books targeted at 20 and 10.  So our young-gold-stock-upleg redeployment is continuing.  We recently updated our newsletter formats as well, increasing their focus on individual-stock analysis.

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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.

Adam Hamilton, CPA

February 5, 2021

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