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LAWRIE WILLIAMS: Could Social Media Drive Silver to New Heights à la GameStop

Few investors will be unaware of the strange investment phenomenon on Wall Street which has seen apparent ‘no-hope’ stocks like GameStop soar in value as a new breed of investor has used it to target short selling hedge funds.  Short selling is at best a controversial activity, so for a perhaps more altruistic type of investor the very act of directly tackling the short selling hedge funds, and at the same time using the funds’ woes to make sometimes substantial profits, is a very positive means to what they would probably see as a justifiable end.

What has happened with GameStop, and a number of other short-sold stocks, is that a flood of investment from social media-inspired stay-at-home day traders has driven up the stock prices, thus causing the short sellers to buy the stocks as a stop-loss necessity.  This has been a self-perpetuating phenomenon with resultant stock shortages driving prices ever higher making those which still hold short positions vulnerable to ever greater potential losses.   Indeed there are reports that some funds might be forced out of business as a result.

This saga has been exacerbated by the low interest rate environment, making money cheap to borrow, plus the rise in free, or low cost, internet trading platforms like robinhood.com.  This has allbrought a plethora of new non-traditional equities investors into play who are far more open to new investment ideas than the much more long-established investment community.  This new breed of investor is much more attuned to investment advice promulgated by social media, however misleading some of this advice might seem to be to the traditionalist investor and day trader.

It’s taken a little time, and some burnt fingers, for the professional investment community to start to fight back – at least as far as the equity markets are concerned.  But it now begs the question of whether this kind of activity be transferred to a completely different market – like precious metals for example – and if so,  particularly to silver given its relatively low price and the huge short positions held by traders and bankers.  Should the kind of buying activity seen in the GameStop trades find its way into the market for silver we could see exactly the kinds of price surges seen in the GameStop equity price coming into play.  Indeed it may already have begun to happen. 

In such a case, there could even be a two-pronged approach with the day traders piling into easily tradable counters like the SLV silver-based ETF, while the true silver metal bulls might simultaneously invest heavily into silver bullion.  Both would tie up silver metal in an already tight supply/demand balance.   Thus the kind of impetus this could give to the relatively thinly-traded silver market could be large indeed.  The same could also apply to gold where there are also big short positions held, although it could also be a case of the silver tail wagging the gold dog generating some increased impetus in investment interest in what is generally seen as the primary precious metal!

But be warned.  We still think there will be a quite severe crash in equities – perhaps brought on in part by the obvious bubble in many over-hyped equities of which GameStop and similar stocks driven up by the phenomenon noted above could provide the inflection point.  There are a whole batch of stocks – led by some of the more popular tech equities – where profits and prospective growth cannot anywhere near justify their current high prices.  They are where they are seemingly driven there by hype alone.  Eventually reason will win out and they will come crashing down. 

Silver and gold may, or may not, benefit in the short term in any such crash.  They do provide a degree of safety but, as in the 2008 stock meltdown some big holders will have to sell good assets along with bad to preserve liquidity.  But if this happens gold, in particular, will likely bounce back much more quickly than equities and perhaps rise to new highs as it did in 2009 and the following three years.  So, along with cash, gold and silver in particular may well provide easily the best wealth protection. 

But, as noted above there could also be some spectacular prior gains for both metals if some of the current money going into shorted stocks transfers into the precious metals sector – particularly if the investment establishment manages to bring some of the recently-seen stock market mayhem under control.  The establishment may well win the current battle in the equities markets but it could well be silver and gold which win the overall investment war.

29 Jan 2021 | Categories: Gold, Silver

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