Three reasons behind #silversqueeze in the global market and its impact on India

Silver

Silver’s glitter began to wear off on February 2, 2021, after having surged to an eight-year-high of over $30 an ounce the previous day.

Prices on the futures market zoomed by 13 percent before the shine gave way to reason, though silver ended with 6.3 percent gain at USD 28.70. However, the hammering continued on February 2 with prices declining further by 5.5 percent to USD 27.80.

In India, silver futures on MCX for delivery in March, which closed at Rs 73,666, opened lower at Rs 72,600 before falling further to Rs 70,733 per kg.

In spot trading, silver was quoted at Rs 71,000 a kg against the previous close of Rs 73,000.

Unprecedented investor interest was witnessed in silver, especially during the weekend, that impacted the physical market as dealers across the global were unable to meet the huge demand.

Social media sites such as Reddit were behind the #silversqueeze with Reddit’s Wall Street Bets mobilizing investors with discussion on “The biggest short squeeze in the world”. This paved way for traders to target big banks for “being responsible in artificially suppressing silver’s price”.

It all began with Blackrock iShares Silver Trust recording $944 million inflow on January 29. The #silversqueeze followed a run on stocks such as Gamestop, Blackberry and AMC Entertainment on Robinhood app, dragging them down sharply.

Dutch multi-banking and financial services ING said that retail demand had increased significantly, with large inflows into silver exchange-traded funds (ETFs) on January 29.

Total known silver ETF holdings increased by almost 35 million ounces to total nearly 940 million ounces on February 1, 2021. The inflow in iShares Silver Trust was equivalent to purchase of 1,150 tonnes of silver. It would make up 25 percent of all registered inventories backing silver futures contracts on COMEX.

The other reason for the higher inflow in ETFs on January 29 was hopes of a huge opening on January 31 evening. Many dealers stopped processing online orders because of the unprecedented demand, in the face of price uncertainty.

Trade analysts said whatever happened on Robinhood app was a proof that it would not be wise to suspect the retail investors purchasing power. The rise in silver prices had proved it again.

But retail investors could find it a little more difficult to squeeze the silver market given its size and liquidity, though they currently held the momentum.

The investment in silver is surprising since data from the US Commodity Futures Trading Commission showed that money managers had bet on a rise in silver prices.

A Twitter handle Gold Venture claimed that it launched the short squeeze with the objective of taking silver to $50 an ounce and thereafter to USD 1,000.

Peter Spina, Goldseek.com President, said there was a 10 percent sale in silver futures on February 2 morning in view of the record physical demand.

Gold Venture said the current rate of buying all the physical silver that will be mined in 2021 would be sold in 10 days. The Twitter handle called for stacking silver coins.

ING said a number of retail dealers were unable to process orders due to the extraordinary demand for bars and coins. Demand was six times more than normal on February 1 and dealers expected premiums to increase further.

It also said that American Eagle silver coin sales jumped 24 percent in January 2021 compared with the same period a year ago. The sales of 4.8 million ounces was the largest in the last four years.

Chris Marcus of Arcadia Economics said the Reddit forum had an impact on the market as dealers had run out of silver in the market.

He tweeted that there was a smoking gun in the form of prices falling “from the cliff” even as there was a massive spike in volume without any news on development.

Trade analysts said that though silver looked a good bet in the long-term, investors needed to exercise caution. Some even question how physical silver can be found for the investments made in paper format (taking position in the futures market and buying iShares).

ING wondered how much more could the silver market be squeezed with “the biggest hurdle being the sheer size of the market”.

The silver market had already seen a significant rally and there was not much to squeeze further given the positioning data on COMEX.

Analysts said that though the move was huge in silver, it had not surpassed any major milestone. The market would have to wait and watch how much momentum the metal had.

In the Indian context, silver has always been looked at as a volatile market, said CA Surendra Mehta, Indian Bullion and Jewellers Association National Secretary.

“Silver prices can rise 20 percent within a short span of time and come down similarly. Prices in the global market will have to close above $30 an ounce for the metal to be ready for the next upward move,” Mehta said.

Attributing the sudden spike in the precious metal to “Reddit and Robinhood effect”, he said hedging could be the best safeguard for such a trend.

However, silver caused another problem as there was a “big difference between physical and exchange (futures) price. The difference is sometimes as high as 10 percent, which makes it difficult to protect the inventory.

Recently, when prices on the futures market went up, physical prices ruled 10 percent lower, he said.

Spot silver prices on February 2 were quoted 3.73 percent lower at USD 27.61 an ounce.