Why the Silver Trade Shouldn’t Be Lumped In With GameStop Stock and AMC

Silver soared, then dropped. Whatever happens now, the metal’s price movements will look nothing like what happened with the stocks that faced a spectacular short squeeze and are now falling.

Monday, the price of actual silver rose as much as 9% to $29.52 per ounce. “Retail traders who drove the short squeezes in stocks like GME last week were banding together to try and trigger a squeeze in silver,” wrote Tom Essaye, founder of Seven’s Report Research, in a note.

It all revolves around the practice of short selling, where people borrow a stock and sell it, hoping the price will fall, making it possible to buy shares at a lower price and return them. A short squeeze happens when the price of the stock rises, rather than falls, forcing short sellers to buy. If a lot of the stock available for trading has been sold short, there can be a scramble to buy that triggers spectacular price gains.

That is what happened with GameStop (ticker: GME) last month. Other stocks that had been aggressively sold short surged as well.

But the iShares Silver Trust (SLV), after rising 11% to $27.76 a share Monday, is now down 11% from that level. There are key differences between companies like GameStop and AMC Entertainment (AMC) and silver.

First off, GameStop rose as much as 1,800% in a few weeks in January. AMC rose as much as 890% in roughly the same period. The iShares Silver exchange-traded fund, which buys futures contracts linked to the direction of the metal’s price, rose to roughly its all-time high of $27, set in August, and failed to break past it.

With the price down Tuesday, fundamentals, rather than the possibility of a short squeeze, are returning to the fore. While silver is an asset that can take part in a “reflation rally,” or one that occurs when economic stimulus jolts an economy out of recession and spurs inflation, that possibility doesn’t seem to have been enough to send the silver ETF to a new high.

Importantly, options trading was an important factor in the gains for GameStop and AMC. Retail traders were buying calls, or the right to buy shares at a specified strike price on a later date. The hope is that an option’s strike price will be lower than the stock’s price when that day comes, making it possible to buy at the strike price and make a profit by immediately selling on the open market.

That possibility forces the brokers who wrote the options contracts to hedge by buying the shares. It adds to demand for a stock and can contribute to a short squeeze, as appears to have happened with GameStop and AMC. Retail traders posting on Reddit were able to move the stock without much capital because they could buy call options at a far lower price per underlying share than the cost of the actual stock.

For silver, the overarching theme is that retail traders can’t summon up the large pool of capital needed to create huge demand for silver.

Traders aren’t buying calls on silver right now, Andrew Smith, chief investment strategist at Delos Capital Advisors, told Barron’s, citing the activity he saw Tuesday. That’s partly because buying calls on commodity ETFs, which reflect a blended forward expected price—based on the prices forecast for several different dates—is a complex process.

Buying silver outright, which is what retail traders did, requires much more money. There are no call options and no need for brokers to hedge against them.

“Squeezing the market isn’t likely” from here, wrote Jeff Currie, global head of commodities research at Goldman Sachs, in a note. In order for the WallStreetBets crowd to send silver prices up the 700% they rose in 1980, when the wealthy Hunt brothers gobbled up almost one-third of the global supply, they would have to own 4,600 tons of silver each.

Silver could certainly charge ahead, just not so fast so soon.

Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)

The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.

It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.

Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.

Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.

Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.

With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.

Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.

New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.

“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.

He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.

If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.

Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.

Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.

Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.

There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.

Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.

It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.

Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.

Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.

Why the Silver Trade Shouldn’t Be Lumped In With GameStop Stock and AMC

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