When writing about the GameStop squeeze last week, we compared it to Fight Club on Wall Street, referencing the 1999 movie with Brad Pitt and Ed Norton.
On Friday, Jan. 29, the Fight Club aspect of the game spilled over into the real world, as a Redditor purchased space on a digital billboard in New York’s Times Square. The advertisement said “$GME GO BRR” and showed a stock price candlestick pattern going vertical.
In the movie, Brad Pitt’s character gives a speech to a group of Fight Clubbers that feels almost perfectly suited to the ethos of the moment. The GameStop squeeze is part prank, part strategy, part global protest, and ultimately deadly serious:
“We’re the middle children of history, man. No purpose or place. We have no Great War. No Great Depression. Our Great War’s a spiritual war… our Great Depression is our lives. We’ve all been raised on television to believe that one day we’d all be millionaires, and movie gods, and rock stars. But we won’t. And we’re slowly learning that fact. And we’re very, very pissed off.”
A new research report from Goldman Sachs notes that “if the short squeeze continues, the entire market could crash.”
Goldman and others are worried about the ripple effects of a successful squeeze. If the price of GME is driven so high that hedge funds are forced to cover their short positions at $1,000 per share, or even $2,000 to $3,000 per share or something worse, the ripple effect created by tens of billions in losses could destabilize the entire market.
A meltdown would probably be just fine with the GameStoppers (how’s that for cosmic humor?). The attitude seems to be: “Dear Wall Street, you caused the crash of 2008, and wrecked the economy, and then got bailed out; this is the little guy paying you back.”
Meanwhile, even as the GameStop squeeze heads toward a crescendo — an endgame where the GME share price either soars beyond $1,000 or plummets into double digits — the Reddit army is turning its attention to the silver market.
The goal of the “Reddit silver squeeze” (that is what we’ll call it) is to drive the price of silver to $50 per ounce or more, while creating turmoil for the money center banks (and J.P. Morgan in particular).
As of Monday morning, as this is being written, the Reddit silver squeeze is working, with spot month silver futures and SLV, the bellwether silver ETF, both seeing one-day price moves of 10% or more. Various silver miners are also up 10% or more in concert with the silver price hitting multi-year highs.
For multiple reasons, we doubt the Reddit silver squeeze will work. It can certainly move the needle in the short-term, as we are already seeing with the silver spot price.
But ultimately, squeezing a global commodity is a whole other level of difficulty in comparison to squeezing a stock with a roughly 50 million share float sold more than 100% short.
Some of the problems the silver squeeze will face are as follows:
- There is a lot of silver stockpiled above ground relative to modest industrial supply needs, and the squeezers are likely to run into a wall of it.
- Unlike the GameStop squeeze, there is no targeted party who can be forced to cover their shorts due to margin calls; when it comes to silver, in fact, hedge funds are overall net long.
- There is a rumor that J.P. Morgan, the giant money center bank, has a vast short position that is the equivalent of a hidden naked short — but this rumor has no real basis and is literally decades old. If JP Morgan actually had such a short, it should have blown up with the silver run of 2011.
- If the silver price runs beyond its fundamental justification too far, too fast, silver miners — who are inherently long silver that is still in the ground — will be happy to hedge forward production years out by selling futures contracts.
- If the silver miners see their share prices ramped up, they will happily issue new shares to pay for more exploration and production efforts.
- The silver market has ties to the far-larger copper market on the industrial side, and to the gold market on the far-larger precious metals side: Both of those will exert gravitational pull if the spread between copper and silver or copper and gold gets too out of whack.
- WallStreetBets, the Reddit message board promoting the squeeze, is internally conflicted over whether pursuing silver is even a good idea: Some see it as a trap, because it is a means of siphoning attention and energy from GME before the GameStop battle is won.
The biggest problem with the Reddit silver squeeze — in terms of gauging the likelihood of failure or success beyond a short-term pop — is that the structural mechanics don’t really work.
The structural mechanics of the GameStop squeeze are actually brilliant.
At the start GameStop was a relatively small company, with a relatively small share float (just over 50 million shares), and a group of arrogant hedge funds shorting well over 100% of the share float.
Then, as the squeeze pressure built on GME, the hedge funds were foolish enough to stand their ground, or even double down on their shorts in some cases, rather than get out.
The GameStop squeeze has global publicity, a defined end-goal — forcing the hedge funds to buy back their shares at astronomical prices — and a rational means of getting there, by way of putting so much buying pressure on the stock that margin calls are triggered.
The silver squeeze is missing all of these factors. Rather than structural mechanics, it has rumors and misplaced analogies to the past, as juxtaposed against a group of silver market participants who are mostly long rather than short (which means they can’t be squeezed at all).
In 1979 and early 1980, the Hunt brothers — Nelson Bunker Hunt, William Herbert Hunt, and Lamar Hunt — tried to corner the silver market using Texas oil money.
The Hunt brothers came close to succeeding in their silver corner, or appeared to, before the Chicago Mercantile Exchange (CME) shut them down by changing the margin requirements for futures contracts.
But the Hunt brothers also had a much bigger counterparty to squeeze.
Bloomberg columnist David Fickling reports that, in 1979, industrial use for silver accounted for 84% of demand, across areas like photographic emulsion (think Kodak pictures), soldering, and electronics.
The stockpile of available silver supply was also minimal in 1979. Those two factors — high industrial usage and low available supply — meant that end-users like Kodak would have to pay up for silver or lose their ability to do business.
But fast forward to 2021, David Fickling reports, and there is a mountainous silver stockpile, about 2.46 billion ounces worth, coupled with a far more modest base of industrial demand relative to annual production.
What that means overall is that a whole lot of silver sits in warehouses and bank vaults that is used to satisfy investment demand and jewelry demand, rather than industrial demand.
And so, if the silver price gets crazy, much of that 2.46-billion-ounce silver pile can flood the market as investment-oriented silver holders cash out. On the jewelry side something similar can happen: If the silver price becomes wildly expensive, jewelry demand will fall even as large amounts of silver jewelry and other forms of scrap silver will be pulled into the market to get melted down and sold.
As part of their bull case, the silver squeezers are floating a rumor that J.P. Morgan has been manipulating the silver market for years, which would further imply that J.P. Morgan has a gargantuan “naked short” position because the hypothetical silver in its vaults is not actually there.
The problem with the J.P. Morgan rumor is that the story is literally decades old. Your TradeSmith Daily editor heard it in his first year on the job working for a commodity broker straight out of college; that was all the way back in 1998.
While J.P. Morgan and other investment banks have done questionable things in terms of making a market in silver, it is highly doubtful they are actually suppressing the price or faking the existence of stockpiles. Such moves would not only be criminal, but they would be extremely dangerous, and would have likely created a blow-up long before now — like when silver climbed to nearly $43 per ounce in April 2011.
Other flaws in the thesis include the fact that hedge funds are net long silver futures — as evidenced by Commitment of Traders (COT) data — and have been so for 17 months.
This not only leaves the question unanswered as to who will get squeezed as the silver price runs higher, it creates an opportunity for hedge funds that are net long silver to sell into any meaningful spike.
The silver miners could also be a problem to the extent they are inherently net long silver, in terms of their unhedged silver production still in the ground.
Not only should silver miners be happy to sell far-dated futures contracts into the market if the silver price gets ahead of itself — thus locking in a high price for future production — they should also be willing to issue new shares and do capital raises in the event of a share price run-up, as a miner will almost always have ready-made justification for new exploration, or new production investment, or both.
Then, too, if the silver price gets too far out of whack with copper, or gold, or both, opportunity will exist for professional traders to short overpriced silver while buying either copper or gold, mitigating their risk to an increasing rise in the silver price.
And last but not least, even the WallStreetBets message board is divided on this whole endeavor, which is never a great sign: While some Redditors appear all in on the silver squeeze, others think it might be a trap, or a means of diverting attention from the GME squeeze (which needs all the firepower it can get).
This is not to say we are long-term bearish on silver. Nor is it to say that the silver price can’t rise in 2021.
Instead, it is mainly to point out that, whether or not the GameStop squeeze is successful, the structural mechanics for a silver squeeze are far less favorable — and thus far less likely to deliver a real victory.