Retail traders have targeted the silver market following their successful attack against short-sellers of games retailer GameStop.
The world’s largest silver-backed exchange-traded fund, the iShares Silver Trust, recorded almost $1bn in inflows on Friday, according to data from BlackRock, the fund’s sponsor. The jolt of investments came after a user in Reddit’s r/WallStreetBets forum urged people to buy shares and options to put a squeeze on banks.
Prices for silver rose 6 per cent to $28.61/troy ounce in early Asia trading on Monday. That followed a 6 per cent jump last week and a rally in shares in miners of the precious metal, with New York-listed First Majestic rising 29 per cent. “It's a fools' errand, it's financial anarchy; somebody is going to get hurt,” said Ross Norman, a veteran precious metals trader.
Last week the user TheHappyHawaiian said buying shares in the ETF would “force physical delivery of silver” into the fund’s vaults, thereby causing a “short squeeze” on the market, pushing up the silver price.
The user wrote on the forum that it would be “incredible” to make large banks active in the futures market “pay dearly” for what he alleged were bets that the silver price will fall. The rallying call echoed that of other r/WallStreetBets users who last week cheered their success in triggering large losses at Melvin Capital and other hedge funds.
The 37.05m increase in the number of shares of the iShares Silver Trust on Friday was the biggest one-day increase since the ETF started trading in April 2006, data from BlackRock show. The ETF is backed by physical silver held in vaults, meaning it needs to purchase the precious metal when it receives new investments.
The attempted “short squeeze” was reminiscent of a similar effort by oil barons William Herbert Hunt and Nelson Bunker Hunt, known as the Hunt brothers, who in 1979-80 bought billions of dollars worth of silver in an attempt to corner the market. They were later sanctioned for market manipulation and went bankrupt after the silver price collapsed in an event dubbed “Silver Thursday.”
In 1998, Warren Buffett’s Berkshire Hathaway drove silver prices up 90 per cent to a 10-year high after he quietly accumulated a huge position in the silver market.
Analysts said it would be more difficult for retail investors to influence the silver price as opposed to that of a single equity, given the large off-exchange market for the precious metal, where banks trade on behalf of clients.
“We are confident that the influence of retail investors on silver will not last all that long,” analysts at Commerzbank said.
Around $6bn worth of silver traded hands in the silver market in November, according to the latest statistics from the London Bullion Market Association. London’s vaults hold around 33,475 tonnes of silver, valued at $23.8bn, they said in January.
Mr Norman said the Reddit forum’s targeting of large banks was misplaced since the lenders used futures contracts to hedge their physical holdings of silver, meaning they were not speculating on the price falling.
“There is a misnomer here that banks are constantly running short positions, but from a price perspective they are neutral, they have a long and a short that cancels each other out,” he said.
Additional reporting by Chris Flood in London.