Why Silver Isn’t a Stonk
The meme investor mob came after a physical commodity, and it didn’t go well
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Over the past week or so, the meme-crazed, Reddit-fueled “stonk market” phenomenon careened in a new direction. Instead of aiming to drive up the share price of yet another business with a dubious financial future, the mob went after silver. This hasn’t worked out — largely because of the nature of silver itself as a physical commodity whose value can be difficult to untether from its materiality.
The run on silver seems to have been sparked by users of Reddit’s now-infamous WallStreetBets group, calling for a short squeeze — running up the price on silver and forcing short interests to cash in their silver futures positions at a punishing loss. This “ignited a buying frenzy that roiled precious-metals markets and squeezed physical supplies,” says one report, causing the U.S. Mint to ration sales of silver coins. “We have seen unprecedented demand for physical silver,” one dealer commented. Shares of mining companies went up, and futures prices did spike, reaching an eight-year high on Monday.
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But that wasn’t a huge run-up — about 11.5% — and it didn’t last. Partly the market action was tamped down by CME Group, a financial exchange firm that facilitates commodity trades, increasing the margin requirements on silver futures. But more significantly, the fizzle reflected the way a precious metal differs from company shares.
Back in the late 1970s, in one of the most famous attempts to corner a market, the Hunt brothers, sons of a Texas oil billionaire, bought up about half of the world’s tradable silver supply.
For starters, the way we use silver has changed. According to Bloomberg, about 52% of the current silver market involves the sale and use of the metal for industrial purposes — in semiconductors, solar panels, photographic emulsion, and the like. That figure used to be much higher — over 84% in 1979. Today, about 25% is used for jewelry, silverware, and so forth. And more than 22% exists as bars, coins, and ingots that function solely as investment vehicles. Such bullion—a term derived from the French word for “boiling,” in reference to the process of converting the raw material into a standardized object—used to account for less than 3% of the market.
Back in the late 1970s, in one of the most famous attempts to corner a market, the Hunt brothers, sons of a Texas oil billionaire, bought up about half of the world’s tradable silver supply before regulators figured out a way to restrict their scheme. Their idea — to control so much of the world’s physical silver that they could effectively dictate its price — depended on a market dominated by industrial buyers who had to have the stuff. When they failed, the price of silver collapsed, and the Hunt brothers lost at least $1 billion. Some of the restrictions devised to deal with others like the Hunts, such as limiting how much silver any single entity can own, remain a factor in the current market.
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With that industrial chunk of the demand side now much smaller, cornering the market would be even tougher. Indeed, the Wall Street Journal and others reported on a Goldman Sachs assessment, arguing that it is essentially impossible to create a silver short squeeze without acquiring “a significant portion of the physical metal” in existence, an expensive and difficult proposition. Investors who buy or sell bullion can operate at their own pace and discretion. Instead of participating in the Reddit run-up, a significant number of such silver owners simply chose to hold.
Then there’s the “logistical hurdle of commodities trading,” as the New York Times put it: To sustain their campaign, at some point “retail investors hoping to drive up the price of silver would have to take delivery of the metal, instead of buying up shares in online accounts or purchasing options contracts.”
Finally, silver is simply an enormous market — pegged at around $200 billion by one estimate — and a highly liquid one. That makes it far harder to influence than a stock like GameStop, which was worth about $1 billion at the start of 2021 and so heavily shorted by funds betting on its collapse that there was a potential to force demand through a short squeeze. That doesn’t seem to have been remotely the case in the silver market, where much of the shorting going on was a function of standard hedging strategies by industrial silver producers. These entities don’t have to go buy silver, as short-sellers must eventually acquire shares they’ve promised to deliver, potentially squeezing demand; they already have it. “When commodity short positions are broadly backed by real physical stock,” the Goldman analysts said, “there will be no subsequent buying and no short squeeze.”
Silver is simply an enormous market — pegged at around $200 billion by one estimate — and a highly liquid one. That makes it far harder to influence than a stock like GameStop.
In retrospect, the silver squeeze was doomed from the start. In any case, the price of silver was actually trending up before the Reddit mob stampeded through, and when the run-up flagged the chatter on the WallStreetBets board, it promptly devolved into conspiracy theorizing that the whole silver gambit was a trap engineered by hedge funds.
Perhaps. Or perhaps it was just an ill-considered scheme that failed to account for the fact that silver is a material object and to control or influence its price requires owning it in physical form. That makes it a strikingly tangible counterpoint to the highly virtual and digital stonk phenomenon, which has often seemed so divorced from the real world. “To corner the market and create a short squeeze, we estimate would require each one of the Wall Street Bet individuals to accumulate positions of around 4,200 ounces,” one analyst said, which is about 262 pounds of the stuff. “That is a lot of silver, and where are you going to put it?”