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

By JACOB SONENSHINE
Wed, Feb 3, 2021 4:24amGrey Clock 3 min

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.



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The IMF’s biannual World Economic Outlook report says the world has so far avoided stagflation and recession, with large pandemic savings enabling households to cope with higher rates and inflation, and strong immigration in advanced economies creating unusually tight labour markets.

IMF economic counsellor Pierre-Olivier Gourinchas said most indicators point to a soft landing for the global economy and the IMG now expects “less economic scarring from the pandemic. He noted that markets had reacted exuberantly in recent weeks to the prospect of central banks lowering interest rates soon.

However, the IMF says global growth will moderate over the next five years to its lowest level in decades. It projects 3.2 percent global growth in 2024 and 2025, the same pace as 2023, with still-high borrowing costs, the withdrawal of fiscal support and weak productivity growth weighing economic activity down.

Australia is expected to underperform other advanced economies, especially the United States, this year but will surge beyond them from 2025. The IMF predicts annual gross domestic product (GDP) growth of 1.5 percent in Australia in 2024, which is well below our long-term pre-pandemic average of 2.5 percent. The US is expected to book above-average growth of 2.7 percent in 2024 and the world’s advanced economies are tipped to average 1.7 percent growth.

Australian economic growth will then move above other advanced economies and maintain upward momentum through til 2029. The IMF predicts 2 percent GDP growth for Australia in 2025 and 2.3 percent in 2029. For the US, the IMF expects 1.9 percent growth in 2025 and 2.1 percent in 2029. For the advanced economies in aggregate, the IMF forecasts 1.8 percent growth in 2025 and 1.7 percent in 2029.

The IMF said higher interest rates had had less effect on the US economy compared to Australia because most US mortgages are on long-term fixed rates and household debt has been lower since the global financial crisis. In Australia, most loans are on variable rates and therefore immediately impacted by every rate rise, household debt is high, and housing supply is restricted.  

The exceptional recent performance of the United States is certainly impressive and a major driver of global growth, but it reflects strong demand factors as well, including a fiscal stance that is out of line with long-term fiscal sustainability,” said Mr Gourinchas.

An example of unusual fiscal policy is the Inflation Reduction Act, which includes US$369 billion in new spending to encourage green energy investment. This raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy since it risks pushing up global funding costs, he said.

While things are going well now, Mr Gourinchas said risks to global economic progress remain.

On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices. A divergence in disinflation speeds among major economies could also cause currency movements that put financial sectors under pressure.

Mr Gourinchas said growth in China could falter, hurting trading partners, without a comprehensive response to its property sector downturn. “Domestic demand will remain lacklustre for some time unless strong measures and reforms address the root cause. Public debt dynamics are also of concern, especially if the property crisis morphs into a local public finance crisis.

He also noted that weak productivity growth remains a challenge for the whole world and “much hope rests on artificial intelligence delivering strong productivity gains in the medium term”.

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