Silver’s surge to an eight-year high lost momentum after a key exchange hiked margins and warnings about the rally mounted, casting doubt over the lasting influence of an investor army that’s thought to have contributed to the jump.
The metal emerged as the latest focus for investors on Reddit’s WallStreetBets forum who train their fire on supposedly shorted assets, and a buying stampede swiftly followed. Traders are now trying to determine whether the phenomenon will prove ephemeral or have a sustained impact. Tuesday’s retreat comes after Comex margins increased -- which may push out smaller players -- and as some analysts warn the dizzying rally won’t last.
It remains unclear who authored the posts that ignited the huge run-up in silver, or who exactly was behind the trading. Reddit posters themselves now seem conflicted about the trade and market watchers have cautioned chasing up a commodity would be a tougher proposition than squeezing single stocks.
Silver’s retracement “isn’t surprising, as any longer-term price upside due to social media-driven collaboration and conspiracy theories was always going to be unsustainable,” said Gavin Wendt, a senior resource analyst at MineLife Pty. “There is a big difference however between trying to manipulate trading in an equity compared to a major exchange-traded commodity.”
The speculative activity hatched online has captivated global markets after triggering huge gyrations in stocks such as GameStop Corp., though fears that the frenzy could derail the equity bull market have begun to recede. U.S. regulators have said that they are closely tracking developments.
Most-active silver futures declined as much as 3.7% on the Comex after the CME Group said margins will rise to $16,500 per contract from $14,000, effective Feb. 2. The decision was based on “the normal review of market volatility to ensure adequate collateral coverage,” it said.
“Fundamentally I don’t believe that there are any significant short positions in the silver market, as the outlook for silver is robust this year, coming off a strong performance in 2020,” said Wendt.
As the frenzy built, BlackRock Inc.’s iShares Silver Trust recorded an unprecedented $944 million net inflow on Friday, after a -- now-removed -- post appeared on the WallStreetBets forum that encouraged traders to pile into the exchange-traded product. That move now appears to be fizzling out, with some on Reddit urging their fellow investors to back away from silver.
“We suspect that prices will remain volatile,” James Steel, chief precious metals analyst at HSBC Securities (USA) Inc., said in a note before the margin increase was announced. “Beyond this week, and possibly sooner, we believe the new entrants into the market may tire and begin to liquidate silver holdings, with a commensurate price impact. Buyer beware!”
Silver futures traded 3% lower at $28.54 an ounce at 12:06 p.m. in Singapore. On Monday, they surged as much as 13% to the highest since 2013. Last year, prices advanced almost 50% as investors sought haven assets amid the pandemic and the dollar declined.
Silver differs in important ways from stocks like GameStop. For one, the scope for a short squeeze is far less obvious: money managers have had a net-long position on the metal since mid-2019, futures and options data from the Commodity Futures Trading Commission show. Net-bullish bets by money managers rose to a three-week high in the week to Jan. 26, according to CFTC data compiled by Bloomberg.
“Silver continues to fall from yesterday’s highs, with the attempted squeeze on the market appearing to run out of a steam, while the raising of margins for Comex silver futures would have only added to the downward pressure,” said Warren Patterson, head of commodities strategy at ING Bank NV. “From a fundamental perspective it is difficult to justify the recent strength that we have seen, and so would expect prices to trend lower, although volatility may remain for some time.”
— With assistance by Jake Lloyd-Smith, Ranjeetha Pakiam, and Sunil Jagtiani