Never, in the history of financial markets, has there been a commodity with as much potential as silver. Every time you look at the investment case for the “metal of the moon”, you quickly become convinced it is on its way there. Lamborghinis and other spoils start to fill your dreams.
And yet, never has a commodity disappointed its investors so consistently. It’s trading at the same price today as it was 40 years ago. It's the metal that always lets you down. As a new group of traders might be about to find out.
Silver is the next target in the revolt against Wall Street
Last week, the financial news was dominated by the story of the extraordinarily successful raid on Wall Street by a gang of Reddit users. Thanks to some superlative research by a user who goes by the name u/deepfuckingvalue – his French, not mine, but please excuse it all the same – it was discovered that there was an excessively large short position in video games retailer, Gamestop (NYSE: GME) that amounted to 140% of the float (the percentage of a company’s shares that are available for trading). Given that only about 25% of the float actually trades, the effective short position was much greater than that.
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Here was DFValue’s plan: they were going to short the short sellers. Translated into plain English: buy the stock, and not sell for love nor money. With such an excessive short position, short sellers would not be able to cover and the price would be driven much higher.
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DFValue’s investment of under $50,000 many moons ago built into a pot worth more than $30m. Seeing the ongoing success of the trade, an online mob gradually built up. “Wall Street did us in 2008. Now we are going to do them!” was their mantra.
The mob bought as much stock as they could, and then levered up with call options. The mother of all short squeezes was the result and the stock went from under $5 to over $400.
We all love to sock it to The Man, and The Man was well and truly socked by an online peasants’ revolt wielding little more than their stimulus cheques (or so the story goes – it’s more nuanced than that, but who cares about nuance in a mania?). Buoyed up by their success, the mob buying moved into other companies, most notably cinema chain AMC Theatres (NYSE: AMC). There’s now talk of bringing down Wall Street.
Perhaps some have got a little ahead of themselves. This was just some little-known retail stock and a group of specialist short traders. But, hey, nuance in a mania.
Their next target is silver. Why silver? Because it’s the most shorted metal on the planet – or so we are told. The explanation for its perennially disappointing price performance is: “manipulation”!
The story is that a large investment bank is suppressing the supply on the COMEX (commodities exchange). This bank can’t deliver on all the silver it has sold short; the silver sold short is greater than annual production. If enough people buy silver and demand delivery, the ensuing short squeeze would bring said bank down.
This story has been around for as long as I have. But in the last couple of days it has caught hold once again – more on Twitter than on the infamous Reddit channel r/wallstreetbets – but even so a mob, armed with memes, has formed nonetheless, and in weekend trading, silver has gapped up dramatically. It closed last week at $27, now it is touching $30.
The fundamental case for silver
Let’s quickly summarise the investment case for silver, beyond “it’s next for the Wall Street Bets treatment”. Like gold, silver is a monetary metal. The words “silver” and “money” are even interchangeable in umpteen different languages – for example, “argent” in French, “plata” in Spanish. A pound was once a pound of sterling silver; one US dollar was once an ounce of silver – and, perhaps as a result, the metal has a tendency to arouse a certain patriotic sentiment in some quarters of the US.
And so one investment case for silver is the same as the case for gold – it is an inflation hedge in an era of monetary debasement, it is nobody else’s liability and so on.
Here’s your fun silver fact of the day: the 30 pieces of silver that Judas was paid to betray Jesus amounts to about 15 ounces. That’s $450 in today’s money. $450 is pretty cheap for a Messiah, I’d say. It’s another example of how “undervalued” silver is today – or what a rotten inflation hedge it has been, depending on your point of view (today they would have to pay him in bitcoin).
Meanwhile, silver has a plethora of exciting industrial uses, especially in multiple new technologies, from medical to electrical. Every smartphone has silver in it; every computer; every jet engine; every solar panel (demand for silver on photovoltaic cells has gone from one million ounces in 2000, to around 50 million ounces last year – about 5% of silver's annual supply). It finds widespread use in battery technology and in 3D printing. The question is not so much which modern technologies contain silver, as which don’t.
New discoveries are being made all the time about its ability to combat infection, fungi, bacteria and even bad smells. As a result, demand is increasing from medicine, biotechnology and clothing. The metal is used in everything from treatment of warts and bad breath to purifying water. It is also an ingredient in hospital paint. Heck, they’ll probably soon find out it cures Covid – it certainly fights off vampires.
The arguments to say that silver should be well over $100 an ounce
Then of course, there is jewellery and investor buying, which together with silverware, make up about 50% of annual demand.
Often the metal is in deficit, but currently silver supply roughly matches demand – just below a billion ounces per annum. A little bit of increased investor demand, however, quickly throws things out of balance and, yes, does have the potential to send the price quickly higher.
About 80% of silver's billion-ounce annual demand comes from mining, the rest from scrap. Most silver is produced as a by-product of lead and zinc mining, which has suffered dramatic underinvestment over the last decade, leading to a paucity of major new discoveries.
There are some pure silver mining plays, but, with two or three exceptions, most have struggled to make money in recent years, either through inept management or a flawed business model. The result is perennially disappointing share price performance with most trapped in a perpetual cycle of disappointment.
Currently silver trades around $27 an ounce. (edit: it’s gapped up overnight to $30). What’s a fair price? Well, silver is about 15 times more abundant in the earth’s crust than gold, so one valuation methodology says silver should be 1/15th the gold price. This was the rough ratio between the two historically – 15 silver coins got you a gold coin of equal weight.
Gold today is $1,850. So 1/15th of that is $127. Wait a minute! That’s nearly five times higher than where we are today. That’s always the logic that gets the silver bugs salivating. Silver “should” be over $100.
In 1980 you could buy the average UK house (currently over £300,000) for about 1,000 ounces of silver (currently £20,000). Silver would have to rise 15-fold to something over $200/oz for that particular ratio to be achieved again.
In short, what's not to like? Silver seems to have so much going for it. And yet, silver’s all-time high was $50 in 1980. It re-tested that level again in 2011 and failed. And here we are today at $30.
Silver: hang around for a good time, but not a long time
The silver story has been about for as long as I can remember. It just never seems to deliver on its potential; not for any extended period anyway. For years it doesn't move; or, worse, it sinks. But when it runs, it really runs. And now this “it’s the next GME” narrative is out, it looks like another run has got started.
I own silver, I’m long silver, I want it to go up. I’m all for bringing down large investment banks if it means quality memes. But I also know that if you actually want to make money from silver, you should hang around for a good time – but not a long time.
Gamestop was a $1bn market cap company. Silver is a $25bn market. So the short squeeze is not such a given. Many short sellers (often mining companies, locking in a price for next year’s production, rather than trying to speculate on the silver price) will stand aside in the short term and let the mob have its day. But they will come back and try to hammer the price. They always do.
If silver can clear $30, there is a good chance it will run to $50. There is a massive “greater fool theory” situation in play here. Perhaps this time – third time lucky – silver will get through $50.
But, remember, it’s silver. As you have heard me say on these pages many times, silver always lets you down. It’s the metal that always disappoints. Every silver lining has a cloud.
The ancient Greeks should have had a myth for the frustrations born out of investing in silver. This compelling, alluring, irresistible and beautiful investment that lures you with its vast potential. Yet, once trapped, you are doomed to disappointment by its never-ending failure to deliver.
As I said, stay around for a good time, but not a long time.
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