Silver volume hits all-time high as investor rebellion grows

The big story wasn’t the Federal Reserve’s policy announcement or any other actions by central planners. Instead, all eyes were on a loosely connected group of traders who gather on internet discussion boards to plot purchases of depressed stocks such as GameStop.

Hedge funds had taken out large short positions on GameStop, AMC, Koss, and other beaten-down stocks – betting that their share prices would continue to fall in value. They typically offset their short positions by going long other stocks. That theoretically mitigates risk and gives them something close to neutral overall market exposure.

The problem is that in extreme circumstances the losses on a short position can be orders of magnitude greater than the gains on a corresponding long position. 

In fact, short sellers have unlimited risk since a stock or commodity or other asset has no defined maximum upside. 

GameStop shares traded under $15 at the beginning of the year and spiked to as high as $483 on Thursday. The unexpected surge in buying from individual online traders created an epic short squeeze – forcing panicked shorts to cut their losses by buying to cover at higher and higher prices, adding even more fuel to the rally.

So, what does this have to do with silver?  

For years, many silver bugs have envisioned a time when the concentrated short positioned held by banks and other large institutions in the futures market got squeezed, blowing the lid off silver prices. 

Up until now, the big players have always managed to get their way whenever they have piled on massive naked short positions – selling into the market more ounces of silver than they could ever possibly deliver and counting on being able to trade out of their contracts for cash.

The effect of the concentrated short position has been to cap rallies, trigger outsized selloffs, and depress sentiment toward silver.

The GameStop reckoning may prove to be a literal game changer for silver futures trading. Neither banks nor hedge funds will be able approach short selling with the cavalier attitude as before.  

They have been used to gaming the system. Now the system is being gamed against them.

Short sellers collectively have lost a staggering $54 billion so far this year. Anyone who is short anything right now risks being wiped out by the next target of the “WallStreetBets” online forum.  In fact, there is some indication that the short-busting mob is turning their attention to the silver market – with more and more chatter out there encouraging small investors to buy physical silver. 

Silver mining equities as well as silver itself got a big pop yesterday and is seeing follow up today.  Hefty silver-related short positions are ripe targets for a squeeze, and it may not take all that much new buying to make it happen.

The total market capitalization added to GameStop during its incredible run over the past week would be enough to purchase the entire annual global production of silver – assuming it could actually be obtained at the current spot price.

Of course, a sudden surge in investment demand for the precious metal would send the spot price soaring along with premiums on available bullion products.  

At Money Metals Exchange, we are seeing signs of exactly that. Buy orders for silver coming in at higher volumes than at any time in our operating history.  Premiums are suddenly rising as the market grapples with scarcity and supply chain bottlenecks. 

But now isn’t the time to get out over our skis and declare the long-awaited super spike in silver is happening.  The market has yet to break above major resistance levels, at least to this point. 

Yesterday’s rally didn’t change the technical picture in terms of the ongoing consolidation phase – although it did register some impressive volumes in both the exchange-traded and retail bullion markets.

Metals markets didn’t get much of a boost from the Federal Reserve, despite the central bank recommitting to dovish monetary policy and higher inflation. Chairman Jerome Powell expressed total confidence in the Fed’s ability to keep pumping inflationary stimulus into the economy without creating any sort of problem their policy tools won’t be able to solve.

Jerome Powell: Frankly, we'd welcome slightly higher inflation, somewhat higher inflation. The kind of troubling inflation that people like me grew up with seems far away and unlikely in both the domestic and global contexts that we've been in for some time. So, we think it's very unlikely that anything we see now would result in troubling inflation. Of course, if we did get sustained inflation at a level that was uncomfortable, we have tools for that. It's far harder to deal with too low inflation. We know what to do with higher inflation, which is, should the need arise, we would have those tools. And we don't expect to see that at all.

Powell denied that monetary policy was at all to blame for artificially inflated asset values or wild spikes in stocks like GameStop.

But with M2 money supply expanding at an unprecedented rate – it rose by $369 billion in the previous week alone – it’s not difficult to see a direct connection to rampant speculation. 

The money has to go somewhere. And most conventional “safe” assets aren’t so safe in an environment where they are set to lose real purchasing power to inflation.

Regardless of recent market volatility and the potential for silver prices to make some very big moves in the near term, we continue to encourage clients and those who are interested in precious metals investing to maintain core long-term positions – and continue to accumulate over time as funds allow.

Artificially inflated stock booms can go bust at any time and revert to their much lower intrinsic value. Meanwhile, the intrinsic value of precious metals may ultimately be reflected through much higher prices in dollar terms.