This article will examine the events surrounding silver squeeze and the challenges of shorting silver markets.
OPPORTUNITY LIES IN WAIT
A finance-focused community called WallStreetBets was established on Reddit in January 2021. It caused quite a stir when news broke that they were planning to raise the prices of several targeted meme stocks to get a quick squeeze.
Initially, the coordinated activity resulted in a dramatic rise in share prices. However, this exponential rise was cut short by retail brokerages like Robinhood that restricted the purchase of meme stocks due to increased clearing charges.
The WallStreetBets group decided to focus their attention on the silver market to try to increase the price in a market long suspected of deliberately suppressing prices.
THE FIRST SILVER SQUEEZE (01 FEB 2021)
According to reports, the first and second silver squeezes were conducted by the world's largest silver Exchange Traded Funds (ETFs), iShares Silver Trust. It has a market capital of $15.97 billion at the time. The plan was to invest in the ETF, which would make it more difficult for the fund to purchase new shares. An abrupt surge in interest would cause a sharp increase in demand for silver, which will likely lead to a significant increase in its price.
A staggering $1 billion was transferred into iShares Silver Trust on Friday prior to the planned silver squeeze. This forced it to purchase 34 million ounces more physical silver to bring the stockpile to just over 600 million ounces.
Below is a candlestick chart that highlights the gap in fund prices. Prices quickly recovered and returned to their pre-inflow levels. The red circle indicates the surge in volume, while the average true range indicator (ATR), which shows an average daily price movement, is also highlighted.
The orange line superimposed on the graph shows the price of the continuous futures silver contract. There was a spike in prices but no significant increase, as was expected. Between Friday, January 29th and Monday, February 1st, silver prices rose by less than $4 The prices dropped below the spike high, but they remained above pre-squeeze levels for the rest of February.
SILVER SQUEEZE 2.0 (1 MAI 2021)
The second silver squeeze, or "silver squeeze 2.0", took place on May 1st. Although this occurred on a Saturday, most of the price action was captured on the 3rd. The chart below shows that this attempt initially had a less dramatic effect. Prices jumped less and there was significantly lower volume.
It seems that the second silver squeeze has maintained a somewhat choppy increase in silver prices, as opposed to a sharp parabolic movement which is often associated with a squeeze. The depreciation in the US dollars may have contributed to some recent silver price increases (see overlay below).
WALLSTREETBETS DENY INVOLVEMENT IN THE ATTEMPTED SSILVER SQUEEZE
Many subreddit members posted scathing comments about the possible silver squeeze shortly after it was announced. Although there was a consistent motivation to the previous short squeezes, namely a protest against short selling hedge funds, there are many issues with shorting the silver markets.
This has led to some to speculate that it may have been a diversionary ploy by actual Wall Street to disrupt the momentum and cohesiveness in the online trading community.
The REASONS A FORCED SQUEEZE OF SILVER IS UNLIKELY
- Hedged Short Positions- Large amounts of short positions in silver can be used to hedge long positions on the London OTC Market. These shorts do not look like naked shorts, as seen on meme stocks, where hedge funds made one-sided bets on the price falling. A price rise is unlikely to cause these short sellers to sell their hedged positions.
- Sentiment is long - Many hedge funds and money managers are bullish on silver, believing that the coronavirus epidemic would drive up silver prices. It is unlikely that large-scale forced buys will occur to close shorts.
- Surplus Silver Supply – A prolonged supply shortage is unlikely, as silver has been in surplus over the past 10 years, with approximately 1 billion ounces being produced each year. Although temporary supply restrictions may occur, the overall silver market is still reasonably well supplied.