Precious Metal: Silver rally unsustainable

This article first appeared in Wealth, The Edge Malaysia Weekly, on February 22, 2021 - February 28, 2021.

"The move into silver by some Redditors merely highlights their complete ignorance of risk, liquidity and the market in which the product operates. They unwittingly make rich companies richer.” - Halley

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It started with gaming merchandise retailer GameStop Corp. Then, it was silver. Retail investors, who were also Redditors, had fervently poured their money in shares and silver to hurt short-sellers and earn profits. The share price of GameStop rallied by more than 1,900% in January to hit US$347, before plunging to US$50 on Feb 9.

Silver, on the other hand, hit its eight-year high of US$28.68 per ounce on Feb 1, and fell to US$27.34 ten days later.

A question that lingers in the mind of retail investors is: Will the price of silver experience the same parabolic rise as that of GamesStop? Two industry players say there is little to no chance that it will be anywhere close to that of GameStop. Retail investors should be cautious if they want to ride on the silver market momentum.

Jeffrey Halley, senior market analyst for Asia-Pacific at US-based foreign exchange company OANDA, says there is “zero chance” that the silver price will imitate exactly that of GameStop. First, the liquidity of silver futures is much larger than that of GameStop, making it very hard for retail investors to push up the silver price.

“The COMEX (the world’s largest futures and options trading for metal) futures market for silver had a turnaround of about US$11 billion per day in 2020. It is less than gold by a large margin but still very liquid in comparison to GameStop, with only a free float of 67 million shares,” he says.

The silver market involves a large group of silver miners globally that use the futures market to hedge the prices of their products. They are not speculators, hedge fund managers, or short-sellers who are affected by huge fluctuations in the silver price. And the buying trend among retail investors could fizzle out soon, he adds.

“Instead, miners can use the futures market to hedge future production by selling futures. The higher the Reddit vigilantes push up the silver price, the happier the mining companies are as they sell [futures] into the rally at an even better price.

“Effectively, the speculators (or Redditors) are locking in huge profits for silver producers. It seems to be the antithesis of what this group of retailers is trying to achieve,” says Halley.

CGS-CIMB Securities Sdn Bhd head of retail research Kong Seh Siang, who covers the Malaysian market, concurs with Halley’s view. “According to the Commodity Futures Trading Commission, many short-sellers of futures in the silver market are commercial entities that use silver as raw materials for their production. For those who take a short position, they are doing it for hedging. There is no major concern for them to cut short their positions.

“As for the speculators, most of them are holding a net long position on silver. They are the beneficiaries of the rising silver price, and there is nothing much for some of the Redditors to squeeze,” he says.

The silver market, Halley adds, is entirely different from a single, peripheral public-listed equity. “The move into silver by some Redditors merely highlights their complete ignorance of risk, liquidity and the market in which the product operates. They unwittingly make rich companies richer. And for those who still long silver, they will inevitably lose their shirts when the music stops.”


Meanwhile, Halley says investors should not switch their entire gold holdings to silver based on the thinking that silver is undervalued, and its price as a safe haven should be equivalent to that of gold.

“I am of the view that all the talk about silver being undervalued versus gold is nonsense. It is cheaper than gold, per ounce, merely because there is a lot more of it in the world than gold. Silver will never be as pure a safe haven as gold, simply because it is relatively more common than gold and used in industrial processes.

“However, investors can buy some silver and group it with gold. Precious metals are a hedge against inflation and the US dollar debasement. They also have been a portable store of wealth for thousands of years. Investors should always hold some precious metal in their long-term portfolios and treat them as a non-correlated asset,” he says.

As at Feb 4, the gold-silver ratio — an indicator for investors to gauge silver price movements — was at around 67, close to its long-term average ratio, he adds.

At the beginning of February, CGS-CIMB’s Kong said he was adopting a wait-and-see attitude on silver. “If you look at the gold-silver ratio, you can see that the price of silver is rising, but [the price of] gold is not. Usually, gold is the big brother, and the silver price tends to track that of gold. In this case, I think the silver price will come off in time if the gold price does not increase. The upside of silver may be capped for the time being. Already, the silver price has plunged quite a bit on Feb 2.

“Personally, I won’t touch silver for now. I would only buy it when the gold price gains momentum, but it is still not in some long-term consolidation,” he says.

Silver was one of the top performers among metals in 2020, hitting a seven-year high of US$28.32. For the whole year, its price has risen 30%.