January 29, 2021 by Michael Maharrey 0 1
If you’re following the markets at all, you know that the price of GameStop stock skyrocketed this week. As the story goes, it was primarily driven up by retail investors on platforms such as Robinhood, and pushed by social media posts, particularly on Reddit. Now, these so-called Reddit-Raiders have set their eyes on silver.
The GameStop phenomenon not only caught a lot of people’s attention because the price skyrocketed over 400% in a matter of days. It also raised eyebrows because it cost some of the hedgefund big boys a lot of money. Melvin Capital in particular took huge losses when it had to close out its short positions on Tuesday. CNBC could not confirm exactly how much the fund lost, but reported that short-sellers overall have accumulated losses of more than $5 billion year-to-date in GameStop stock, including a loss of $917 million on Monday and $1.6 billion on Friday.
The Short Squeeze
As CNBC described it, the run-up on GameStop stock was encouraged by “an army of retail investors who marshaled forces against short sellers in online chat rooms.” The rapid rise in price created a short squeeze.
In a nutshell, investors can borrow stock and then sell it, anticipating a drop in price. If the price does in fact fall, the investor can buy the stock back at a lower price, return it to its owner, and pocket the profit. But if the price rises, the investor still has to buy back the stock and return it to the original owner. In that case, the investor will take a loss.
If a stock goes up sharply, it can cause a short squeeze. Traders who were short have to quickly buy the stock back in order to cut their losses. That puts even more upward pressure on the price of a stock.
That’s what apparently happened with GameStop. Social media and message boards incentivized a big push to buy and that forced the hands of the shorts. This explains why some of the big boys are throwing a fit because a bunch of millennials on Robinhood drove the price of GameStop up for no good reason and cost them money. Big boys don’t like it when the little guy wins.
This is further evidence of just how unhinged markets have become. We know the stock market, in general, is a big, fat, ugly, bubble thanks to the Fed. And we’ve seen how the markets have decoupled from economic and political reality. Now we have a phenomenon where an individual stock soars – again with no connection to reality.
A short position on GameStock made sense in a sane market. There is no good reason fundamentally to buy GameStop stock. It’s a brick and mortar store selling game cartridges. Nobody does video games like this anymore. It’s a dead business model, and the company is scrambling to move to an online business model. Think Blockbuster about 10 years ago.
So, the pumped-up stock price has no connection to reality. It was purely fueled by social media speculative mania. And at some point, the stock price will most likely reflect that. A lot of these investors will be left holding the bag when this social-media induced bubble pops.
On Thursday, the Reddit Raiders turned their attention to silver. A post by aalaja30 declared “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV silver 25$ to 1,000$”
It’s probably wise to be wary of Reddit-induced speculative bubbles, but as Peter Schiff noted in a tweet, there is a difference between GameStop and silver. There are actually fundamental reasons to be bullish on the white metal.
It looks like the #reddit raiders have turned their attention to #silver stocks. They’re getting smarter. Silver stocks are actually cheap, and represent good investment value. The fact that some investors were foolish enough to short these stocks makes their trade even better.
— Peter Schiff (@PeterSchiff) January 28, 2021
Silver responded, rising over 8.5% Thursday.
Interestingly, the advice on Reddit wasn’t just to buy silver mining stocks or silver ETFs. Some were calling on investors to buy physical silver to move the spot price higher. One post declared:
HOW TO EXECUTE ON SILVER?????????????
Buy SLV CALLS. Gamestop was all about Call Option gamma squeeze. SLV call options squeeze the gamma and move the futures market which impact the physical. HUGE impact.
Buy the physical yourself. Use reputable, certified, professional dealers.
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As I’ve mentioned, apart from the attention from Reddit Raiders, the fundamentals for silver look extremely good and the metal has been undervalued for months.
First off, at its core, silver is a monetary metal. You should be bullish on silver for the same reason you should be bullish on gold. The money printing and the borrowing and the spending will continue. In order to turn bearish on gold and silver, you have to believe the Federal Reserve is actually going to tighten monetary policy and the dollar is going to remain strong. But given the massive dose of monetary heroin the central bank has injected into the economy, the Fed really has no way out. There is no exit strategy from this extreme monetary policy. That bodes well for both silver and gold in the long-term.
Furthermore, silver has been undervalued compared to gold for quite a while. The run-up the last 48 hours dropped the silver-gold ratio below 70 for the first time in a while, but that’s still historically high – meaning silver still has some room to run higher just to catch up with gold.
The silver-gold ratio is the number of ounces of silver it takes to buy one ounce of gold. It has been historically high for months. It climbed to well over 100-1 back in March. We saw the ratio shrink as silver followed its historical trajectory and outperformed gold as the yellow metal climbed above $2,000 an ounce. With the ratio currently over 68-1, it remains historically high. The modern average over the last century has been between 40 and 60-1.
The supply-demand dynamics are also positive for silver.
Silver investment demand hit a 5-year high in 2020. It won’t likely slow in 2021. And while industrial demand took a big hit due to the coronavirus pandemic, it is expected to rebound as the global economy begins to recover.
Silver demand will also likely get a boost from the push toward solar power and other green energy initiatives in the coming years. Solar power generation is expected to nearly double by 2025 according to a report released last summer by the Silver Institute. Even if the global economy recovers more slowly than expected in the wake of the pandemic, green energy demand for silver will likely remain robust. Analysts expect many government stimulus plans will include funding for green initiatives.
On the supply side, mine output fell sharply in 2020. Production was projected to fall by 6.3% to about 780.1 million ounces. The big drop in silver output is largely a function of mine shutdowns due to coronavirus, but mine output was already trending down before the pandemic. Global mine production fell by 1.3% in 2019.
In a nutshell, the GameStop runup is a bit of a head-scratcher, but the Reddit Raiders might be onto something with silver.
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