Be patient, silver investors: it’s only a matter of time

A wild week of trading across asset markets has left investors wondering what represents real value – and whether it even matters anymore.

Stratospheric GameStop shares came crashing back to earth after their gravity-defying run up.  The stock had clearly been pumped to ridiculously overvalued levels based on all conventional metrics. But that didn’t deter buyers who believed they could push it to $1,000 per share before cashing out.

After dropping over 85% its nominal price peak, perhaps the GameStop craze has ended just as abruptly as it began. 

Meanwhile, some online speculators have jumped aboard other bizarre market frenzies. For example, the crypto token Dogecoin – which launched a few years ago as a joke – spiked this week to a market capitalization of over $6 billion.  

A single tweet by Tesla CEO Elon Musk sent Dogecoin soaring by over 50% on Thursday. Musk, who is now the world’s richest man, stated “Dogecoin is the people’s crypto.”

It’s not clear whether he was serious or joking. But plenty of people took him seriously enough to put their hard-earned money into Dogecoin. 

Regardless of whether Elon Musk intended to move Dogecoin prices, either for his own amusement or for the benefit of holders, the incident proves that anything that can be traded can be pumped – and then dumped.

That’s the kind of market environment we’re in, for better or worse. Asset prices are being manipulated wildly on social media sites and internet discussion forums. 

Of course, as those of us in the precious metals community know all too well, certain large institutions are well practiced in manipulating gold and silver markets. Big banks including JP Morgan Chase and Deutschebank have paid millions of dollars in fines in recent years over price rigging schemes. 

Other types of interventions aimed at suppressing precious metals prices are carried out openly and without any legal consequence. 

For example, after Monday’s big pop in silver prices, the COMEX futures exchange announced it would raise margins on silver trading by 18% and then JP Morgan followed by downgrading the silver sector in a thinly veiled effort to reverse the bullish sentiment.

Those moves had the predictable effect of causing long traders to pare back their positions, allowing short sellers to pounce. As prices began to fall precipitously, some sold in a panic. 

Silver prices plunged from a high of over $30 an ounce intraday Monday to as low as $26 during Thursday’s trading. 

Although the price action of the past few days leaves many precious metals investors disappointed, silver and other metals will have opportunities to shine in the future. 

The past week’s bullion buying surge cleared out dealer inventories. If physical bullion buying continues to remain strong in the weeks ahead, then it’s only a matter of time until supply and demand fundamentals drive spot prices higher.

In an interview with FoxBusiness earlier this week, Zacatecas Silver CEO Bryan Slusarchuk talked about the potential pressures the physical silver market could impose on paper prices.

Bryan Slusarchuk: The paper silver market is hundreds of times the size of the actual market for physical silver. And what you continue to see are these open contracts get kicked further and further down the road with most participants in the silver market, having no real ability nor inclination to ever deliver physical. Now, physical is in short supply. If anybody tried to buy physical silver this past weekend, they'll know that. If there's no ability on people that have entered into these contracts to ever deliver the physical silver they're contractually obligated to deliver, where does that lead to us? And that leads us, I think, to the potential for the mother of all short squeezes.

Unlike the recent crowd-sourced short squeezes on certain stocks that have poor fundamentals, a silver squeeze based on actual physical demand and real supply scarcity could last a lot longer than a week. It could play out for months or even years as public interest in silver and gold grows while miners struggle to ramp up production.

Physical precious metals aren’t for everyone. For some, the fact that their value is grounded in reality rather than being completely arbitrary is a disadvantage.

In the long run, though, chasing after absurdly priced assets tends to produce absurdly bad outcomes.  It may be for the better that precious metals haven’t been rendered a joke by internet stock pumpers. 

It’s certainly fortunate for those looking to accumulate more ounces that they can currently do so at reasonable prices, for now.