For those who have been paying attention to the market in early 2021, the last two weeks have indeed been interesting. The Reddit army worked together to create a short squeeze of the popular game retailer Gamestop, sending the price from $17/share in early January to $347/share at close on Wednesday, Jan. 27th. It dropped about 40% the next day, to rebound to $325 the day after that. Through this week, it has gradually come back down to earth; the stock is currently trading at $63.77/share. The main question is: Is it a good time to sell silver jewelry in 2021?
Why was the Reddit army able to make this happen? Communication, solidarity, and a clear plan. It helped that no one was really paying much attention to the stock, and that the float was relatively small, given the number and size of the short positions that several prominent players were holding. It was truly a terrible situation to be on the wrong side of.
Now we come to February, and the Redditors are at it again this time in commodities? Really? Did they really think they could squeeze the silver market? Why silver?
Initially, this seemed like a good idea. The Reddit army had some intelligence suggesting a number of short positions. Over the last weekend, retailers who sell silver bars large and small as well as silver coins were overwhelmed with demand. This led to a few minor delays in processing orders.
Were they successful? Not exactly at least with respect to creating a short squeeze. There is a lot of silver available in markets all over the world. Over the weekend before the Redditors started, the price of silver was $26.99/ounce. It reached a high of $29.52 on Monday, before coming back down to $26.95 after close on Friday Feb. 5th. So what went wrong?
This time the Redditors were not prepared. Unlike the stock market, the commodities market is not as easy to summarize with a few statistics. The Commodity Futures Trading Commission (CFTC) doesn’t exactly provide the best data for clarifying the positions of individuals, let alone banks. And many banks offset their silver holdings with futures. Over the course of the week, it became clear that those holding long positions in silver were safe, and those who were short could likewise remain patient.
What is the True Direction of Silver?
For the five years prior to May 2020, silver has traded mostly between $15 and 18/ounce. Then in August, a new trend developed, and that trend still shows silver on the rise. Silver has more than doubled since early April, and a new floor has emerged at around $24/share. This trend has been growing long before the Reddit army got involved. So what’s driving the price?
“Despite reports to the contrary, the recent surge in the price of silver has little to do with the Reddit group that sparked a monster-sized rally in the price of beleaguered retailer GameStop.
Instead, the rally in the price of the white metal is being driven largely by inner turmoil in the Republican Party and worries that the COVID-19 vaccine plan is failing, according to commodities consulting firm CPM Group.”
Constable goes on to describe a common uncertainty among investors regarding the vaccine delivery system. He points to this and our current political landscape as reasons why many investors are running to silver. Of key interest here is that both the Reddit-inspired buyers as well as those following political trends are favoring physical silver; this demand has served to underscore the value of owning physical metal as a safe investment.
2020 was a difficult year. If market uncertainty continues in 2021, it is reasonable to expect a continued ascent in the price of silver. But this climb would likely not take the form of a short squeeze; rather conditions favor a slow, stable price increase in the coming years. Barring any other unprecedented political upheaval, one estimate places silver on a trend line of 8-9% growth moving forward.
Uncertainty tends to arise in response to discrete events in the news cycle. And we can’t predict the future. For now, there seems to be a continuing stream of noteworthy news items since the election to put concern in people’s minds. There is good reason to believe that models predicting a gradual increase are accurate.
Other Factors Driving Silver
And not everyone believes that there is an abundance of junk silver lying around for investors to lay their hands on. Silver is not procured simply to make 100-ounce bars. It’s used to manufacture a wide array of products in several markets. So there is some concern that a run-up can occur in some form. Here are a few areas where the demand for silver looms large:
Silver is the best metal for conducting electricity and heat. It is favored therefore in all kinds of electronic devices, in automobile manufacturing, in conductive adhesives, and in electrical equipment such as conductors, fuses, and switches. One example of an increase in demand is in the manufacture of solar panels, where the demand for silver has grown by 6% over the last year to just under 100 million ounces.
Most silver coming from mines is turned into some form of jewelry. Although gold has more value, many jewelry manufacturers favor silver because of its durability, malleability, and reflective quality. Silver jewelry continues to enjoy high demand, increasing by 1% over the previous year, with just over 200 million ounces used.
Demand for silver in the silverware market did take a dip last year. India saw an 11% decline in demand due to an economic downturn. That pretty much accounts for the 9% drop seen here. But the demand is still fairly high, at 60 million ounces.
Should I sell my Silver?
There continues to be fallout from the 2020 election, and the COVID-19 health crisis isn’t going away anytime soon. Demand for silver in manufacturing continues to rise. And you can’t make a solar panel using a silver future. You need the real thing.
There is good reason to keep an eye on the silver market these days. If for no other reason, one should be wary of the Reddit army and their shenanigans. For now though, it does seem wise to stay long.
If you do happen to be short however, there is reason for concern. The new floor at $24/ounce does seem to suggest real resistance. And it could rise. A short is looking for a bad week or even a bad day to get out of a position. For those holding their position with confidence, I ask: “When were you thinking of covering? Now, or six months from now?”
For those of you laughing at the Reddit army for failing to squeeze silver, are you really sure they failed? Suppose a consequence of the Redditors’ attempt is that more people are taking a look at silver, and thus more people are noticing its value. Is that good news if you’re short?