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LAWRIE WILLIAMS: Silver – the ‘devil’s metal’ - confounds again

Silver has certainly lived up to its reputation as the ‘devil’s metal’ over the past few days.  Over the weekend and on Monday the story went out that those investors who had been targeting the GoldStop short sellers had switched their focus to silver, and the silver price soared accordingly.  There were big deposits into the big silver-based ETF, SLV, and reports of silver sellers demanding high premiums amid shortages in the silver bullion market. 

Perhaps there were signs that the consequent surge in the silver price, which had taken it above $29 at one time, was going to be shortlived, given that prices were flat to lower towards the market close on Monday and after hours.  And overnight in Asia and in European trade prices were marked down on Tuesday morning.  There was no respite in the U.S. market either with silver having given up nearly all of its Monday gains as the day progressed.  Wednesday morning saw choppy trade too. Was this manipulation by the big silver shorts or a correction in the price of a metal that had risen too far too fast?  Take your choice.  Many had been predicting a huge silver price bubble as the short sellers were forced to cover, but this particular bubble wasn’t given the time, or opportunity to even partially inflate leaving those who had been sucked in to the prevalent story to lick their wounds and count their losses.

Indeed the apparent silver squeeze may have just been a fiction designed by the investment professionals to teach the amateur market army a salutary, and costly, lesson.  We suspect the Wall Street insiders may have won this particular battle, but will they win the investment war?  We are not so sure. 

Silver, in particular, does remain vulnerable, although the amateur investment army may well regroup, have another tilt at GameStop-type vulnerable shorted stocks in the equities markets  to rebuild their confidence, and then make a better-prepared attack on the heavily shorted precious metals.  After all many of these investors are representative of a generation weaned on video games and they may look on GameStop et al as just another game with serious concrete rewards if they win out.

What has happened is that this new breed of investors, for whom the markets have been made easier to access by the likes of no-cost online brokerages like robinhood.com, and partly fuelled by easy money from the government and the Fed, have effectively thrown away the old ‘rulebook’.  This has taken the investment ‘establishment’ by surprise and things may now never be the same in the investment world. 

There have long been signs, mostly ignored up until recently, that what might have been considered standard investment practice is beginning to break down.  Last year, for example, saw investment pouring in to companies stock market professionals thought to be virtually worthless, like Hertz for example.  Popular ‘tech’ stocks like Tesla have been pushed up to way beyond their true value because the product appeals to this new investment force and an enormous social media following.  With a charismatic rule-breaker like Elon Musk calling the tune, and lax control by the regulators who have tended to sit back and let things happen, the only way seems to be up, no matter that some of the social-media-promoted stocks may be effectively valueless as far as the real world is concerned.

You win some, you lose some, but eventually there will be successful raids on the establishment as we saw last week.  GameStop may now have crashed in value but it’s still way above where it was trading before the Reddit recommendation saw massive money pouring in to it.  True the latecomers will have got burnt – they always do – but those who invested at the beginning will still be well in profit, even if they didn’t sell before the stock peaked, while the short sellers – probably seen as ‘immoral’ by the new investor breed - continue to have a major liquidity problem on their hands.

So what does all this mean for precious metals?  The silver price has dived to around where it was before all this furore started, and it appears to have brought gold and platinum down with it.  But precious metals remain still, in our view, safer investments than equities as the latter have to remain vulnerable to a major crash.  The equity indexes have made a decent recovery clawing back most of the heavy losses seen last week when the effects of the GameStop trades caused the hedge funds that were short to offload stocks in order to stay afloat.  This could all happen again.  One suspects that those who triggered the attacks on the hedge funds will, at some stage, do that again but perhaps with even more success, having learnt lessons from the recent attacks – or perhaps their lateral thinking will find other ways to stick it to the investment establishment ‘fat cats’.

Similarly the heavily shorted precious metals also came into the investors’ sights this time around, although without the success of the equity move, but may well be targeted again after a decent interval.  A massive attack on these positions may then be more successful and the fact that it came so close this time around may lead to the short sellers unwinding their positions rather more quickly than they have in the past.  Inaction is probably no longer an option.

03 Feb 2021 | Categories: Silver

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