Silver Squeeze: How to join the Reddit bandwagon, but should you invest?

·6 min read
Silver bars are displayed in the Austrian Gold and Silver Separating Plant Oegussa in Vienna (Reuters)
The price of silver hit an 8-year high this week. (Reuters)

Silver investors aren’t on the same wild ride of shareholders in Reddit favourites, such as GameStop (GME), AMC (AMC), BlackBerry (BB.TO), but they likely won’t enjoy the same huge returns on their investment either.

Following a massive short squeeze, GameStop shares rocketed as much as 1,600 per cent over a two week span at the end of January that burned short-selling hedge funds for billions of dollars. It and a number of other so-called ‘meme stocks’ have cratered in the last few days following trading restrictions on platforms like Robinhood.

Redditors set their sights on silver over the weekend through a subreddit called The Silver Squeeze, citing shortages of the precious metal, currency debasement, and a way to stick it to Wall Street, accused of suppressing the price. Silver hasn’t faced trading restrictions, has lower short interest, and is a much larger market than those smaller capped stocks, so it’s been more stable during the turmoil. That also means silver is far more difficult for the Reddit herd to influence.

“It has been long known that the physical silver market is in tight supply, and that many banks are short the metal. It has been a hot conspiracy topic for decades. However, it is far different trying to squeeze a global commodity than it is a small company's stock,” Peter Hodson, founder and head of research at at 5i Research told Yahoo Finance Canada.

Hodson was previously chairman at global precious metals leader Sprott Asset Management. He says short sellers can easily withstand a 10 per cent gain on silver, versus the huge moves in GameStop. He thinks the retail crowd will eventually get bored with the lack of response with silver and move on.

Hodson says a small weighting to silver is okay, not too much. His favourite silver company is Mag Silver (MAG.TO).

Should you follow the Reddit Herd?

It should be noted that Reddit posters do not have to identify themselves. A number of WallStreetBets members say large funds, and not retail investors, are trying to pump silver while reminding users about the Hunt Brothers who tried something similar more than 20 years ago.

Herbert and Nelson Hunt tried to corner the market by pouring billions of dollars inherited from their father’s oil business. After early success, their story ended in tears when the government stepped in to limit buying with borrowed money. They ended up bankrupt after missing a margin payment as silver prices plummeted.

Benj Gallander, president of Contra The Heard Investment Letter, says he sees some similarities.

“This made me think of when the Hunt Brothers went to corner the silver market back in 1980. But back in the day it was just them so to speak. This Reddit/WSB stuff is a whole different animal,” he told Yahoo Finance Canada.

Gallander says investors should think twice before blindly following the herd in or out of silver.

“They appeared to have some success with silver already. It did reach an eight year high before falling back. The key is to maintain individual thought and not just follow the crowd,” he told Yahoo Finance Canada.

“One has to attempt to stay ahead of the crowd or at least be early. And then people must be nimble. It is not a time to fall in love with the commodity,” he said.

For investors who fundamentally believe in silver’s prospects, Gallander says it’s probably best to wait.

“But, understanding this ‘new’ way of working the system should be included in the toolbox,” he said.

Gallander doesn’t have a favourite pure play silver miner, but he bought Gold Resource Corporation (GORO) last week, which has silver operations as well as gold and others.

Silver’s recent run-up might tempt investors to jump in head first. Stephen Rogers, investment strategist at IG Wealth Management, says they should avoid succumbing to FOMO (fear of missing out) and avoid putting too many eggs in one basket.

“Whether it’s silver or any other investment opportunity, it’s important to remember that any strategy that focuses heavily on one stock, geographic area or sector can be risky,” he told Yahoo Finance Canada.

“Developing a long-term plan and working with a financial advisor can help investors tune out the noise from trends and stay focused on achieving their goals. Historically speaking, what’s served investors well is having a diversified portfolio and staying invested in the markets.”

How to buy silver

The buzz has helped exacerbate supply shortages of physical silver. Dealers report demand they’ve never seen and banks, like TD, some types of silver bars are sold out. Ads are popping up on places like Facebook marketplace as sellers try to capitalize on the supply-demand imbalance.

But investors can easily buy silver on paper through a number of ETFs that track the price of commodity. Daniel Straus, head of ETF research and strategy at National Bank Financial, says investors could consider iShares Silver Trust (SLV), Aberdeen Standard Physical Silver Shares ETF (SIVR), and Invesco DB Silver Fund (DBS) on U.S. exchanges.

Canadian options are less liquid, but offer currency hedging options. Straus says you can look at iShares Silver Bullion ETF Currency-hedged (SVR), and currency-non-hedged (SVR.C), Purpose Silver Bullion Funds (SBT, SBT.B, SBT.U currency-hedged, non-hedged, and USD units respectively).

There’s also Horizons Silver ETF Currency-hedged (HUZ).

“This is a swap-based and tracks a futures index—investors who want “physical replication” would use one of the other products,” Straus told Yahoo Finance Canada.

ETFs that track a basket of silver miners is more difficult, because most companies aren’t pure play silver miners. Instead silver is usually a byproduct of gold, or other precious metal extraction.

With that said, Straus says possible options include Global X Silver Miners ETF (SIL) ,ETFMG Prime Junior Silver Miners ETF (SILJ), and iShares MSCI Global Silver and Metals Miners ETF (SLVP).

Straus says a small allocation to precious metals can make sense for some investors in the form of diversification from stocks and bonds. But he cautions that silver doesn’t behave the way gold does.

Silver is down over a 10-year period compared to a 17 per cent gain for gold. (Yahoo Finance Canada)
Silver is down over a 10-year period compared to a 17 per cent gain for gold. (Yahoo Finance Canada)

“Silver itself tends to be quite a bit more volatile than gold, though the two metals can be correlated at times,” he said.

“This means that when precious metals do well, silver offers more upside participation, but it can slide to deeper lows when demand falls. Over the past 10 years, gold is up 25 per cent, but silver is still down -17 per cent even with the recent run-up in prices.”

Correction: An earlier version of this article attributed conversations about silver investing to the reddit forum r/WallStreetBets. The reddit forum containing discussion of the silver market since the weekend of January 30 is r/SilverSqueeze.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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