Get Minerva Analysis’ take on the latest moves in silver and where the retail trading pack could move to next
Global stock markets are recovering on Monday after last week’s torrid performance, which saw the largest declines since October. European markets are higher across the board and US futures are also pointing to approx. 1% gain for US indices at the start of the week. The better tone to the markets comes in spite of another retail trading frenzy, this time in the silver market. The silver price is up nearly 10% on Monday, as the retail traders have jumped on a new band wagon, the precious metals market. This has seeped into the mining and resources sector in the FTSE 100, companies such as Fresnillo, Mining, Minerals and Metals PLC and Phoenix Global Resources are all up by a staggering 15% so far this. Silver, the new target in the Reddit-fuelled retail trading frenzy, suggests a change in direction for the retail trading army that is dominating financial markets. Last week, the retail traders were targeting short sellers, who had sold GameStop shares or the cinema chain AMC. Silver is not particularly popular with short selling hedge funds, so what is going on?
Two reasons spring to mind why silver has become the latest target for retail traders. Firstly, there could be some confusion/ misinformation about the silver market. Many banks are involved in trading physical precious metals, however, many of these banks do not short the physical metal. Instead, they hedge the long positions that they hold, either for themselves or for clients, in the futures market. Thus, if the latest move in silver is designed to punish large banks who have huge silver holdings, such as JP Morgan, then it’s unlikely to have the desired effect. Some banks will only have short positions in silver futures contracts to hedge their long physical exposure, thus, the recent push higher in the silver price is essentially neutral for banks and other large, long-term investors in silver. Secondly, precious metals tend to be mentioned in conspiracy theories around financial markets and financial systems. Thus, it is no surprise to some that silver is the latest target in the retail trading frenzy. These are fairly spurious/ outright incorrect theories on which to base the massive push into silver. In comparison to the massive rush into GameStop last week, which was heavily shorted by some hedge funds, the push into silver seems devoid of logic. There was an argument to be made that GameStop would be of interest to deep-value investors that hang out on the social news platform Reddit. However, there is a surplus of silver in the global market and it is not heavily shorted, thus there is a far less compelling case for the retail community to pile into silver to this extent. From where we are standing, silver could be a red-herring. It could be manufactured to either 1, lead the retail community astray, or 2, to highlight the power of the retail community in financial markets and is a warning to the financial establishment that there is a hard core wave of traders who will invest even if there is no fundamental reason to do so and it defies economic logic. If the latter reason is what is fuelling this rally, that is worrying, as it makes unexpected bursts of volatility more likely, which could ultimately destabilise financial markets in the long term.
Stability elsewhere as silver reigns supreme
For now, the broader market has been able to ignore the latest move by the reddit-fuelled retail pack. We envisage that the short squeeze in silver could fade out in the next few days, as the dynamics of the silver market support a large sell-off after the recent surge in the silver price. Market levers could also be used to halt the rally in silver. Retail and institutional trading houses and platforms can ban trading in an extremely volatile product at short notice, like what we saw with GameStop last week. We expect the same to happen to silver in the next day or so, if the rally continues. While the financial establishment are playing a game of cat and mouse with the retail community, they ultimately can halt these rallies since they have control of the platforms that the retail community need to trade these products en masse.
Where could the retail pack go next?
Equities have calmed down after last week’s sharp sell-off, the FX space is also relatively calm, the dollar is up a touch, while the euro is slightly weaker. The surge in the silver price has not triggered a rush into safe havens, and the 10-year US Treasury yield has risen slightly at the start of this week. Other parts of the commodity market have seen some price rises at the start of this week. For example, WTI and Brent crude oil are up by 0.5% and 1% respectively, gold is up by nearly 1%. At the end of last week, gold was being sold, potentially as some people moved into silver on the back of the price rise. However, that has stabilised at the start of this week. The rush into silver has seeped into other parts of the commodity market, including platinum and palladium, which have seen a 5% and 1.7% increase in their prices respectively on Monday. These price moves are interesting, and we could see a broader push into the commodity space later this week, especially if the silver price continues to rise. Thus, while we would urge people to stop and think before jumping into the silver rally, there could be further upside for platinum and palladium as long as the silver rally has legs.
Stocks to watch
In the current environment where retail traders, who are usually a diverse group targeting diverse securities, are instead working together and targeting certain products in unison, it is worth pointing out some of the most active stocks in the broad FTSE index. Iconic labs is down 55% and is virtually worthless after a spat with the European High Growth Opportunities Securitization Fund. WorldSec, the investment company that is active in unlisted companies in Asia, is up 71% at the start of this week. This obscure company could be worth watching over the coming days, along with Fragrant Prosperity holdings and Parity Group, which have also seen a surge in their prices at the start of this week.
How to track the retail pack
WallStreetBets, the reddit thread that has triggered the retail trading rush that we have seen in the last week, continues to focus on GameStop, while some on the threat are telling users to stay away from silver saying that it is a trap. There is also a lot of support for Elon Musk, so Tesla is likely to stay a favourite of the extreme end of the retail trading community. Overall, analysts will be watching Reddit closely from now on, along with ClubHouse, an invite-only social media platform that allows users to drop-in and listen to audio chats, basically eavesdropping, that is packed with celebrities including Musk. Retail traders continue to dominate the financial headlines, but we reiterate that the broader market is stable, and last week’s sell off could trigger a decent recovery rally this week.
In other news, PMI data for Europe was roughly in line with expectations, however, China data for January ticked lower after some localised quarantines were enforced in recent weeks due to fresh outbreaks of coronavirus. The European data may have slowed down in January, relative to December, but bulls will be happy that the declines were not worse considering parts of Europe have enforced tighter lockdowns since the start of this year. Economic data to look out for this week includes Eurozone Q4 GDP, which is released on Tuesday, and US labour market data that is scheduled for release on Friday.