Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Soybeans
- Chinese Yuan
- Maize
- Euro-Pound Cross
- Lean Hogs
Last week’s reversing trends:
- Taiwanese Equities
- Japanese Equities
- Australian Equities
- Russel 1000 Value Index
- Mexican Peso
What we are taking note of:
All eyes in the commodity market are on silver. Having pumped the Gamestop stock to the moon, the army of subscribers of the WallStreetBets subreddit turned their attention to this precious metal. What is going on?
The short squeeze in Gamestop succeeded because a number of factors played in the buyers’ favor. Gamestop’s business was improving, its balance sheet was strong, activist investors got involved in the company, and the short position was too large. A few WallStreetBets members noticed this opportunity and rallied together to drive the stock price up, forcing the short sellers to cover or trim their positions, thus driving the price even higher.
Is there a similar dynamic going on in the silver market? Not quite to the same extent.
Unlike gold, silver is not predominantly a monetary metal. Seventy percent of silver production goes to industrial use: solar panels, electronics, medical equipment. Only 30% serves investment demand. The slowdown in global economies in 2020 reduced industrial demand for silver by about 10%, similar to the general decline in industrial production.
Production of silver also declined in 2020. There are few dedicated silver mines. Most silver is produced in copper mines because copper deposits are frequently accompanied by smaller amounts of gold and silver. Silver serves as a byproduct: miners sell silver in order to reduce the production costs of copper, their primary source of revenue. Copper production was disrupted in 2020 by months-long Covid-related lockdowns in Peru, Chile, and Mexico, as well as a strike at the largest copper producer in the world, Antofagasta.
With the declines in industrial demand and mine production of silver balancing itself out, the main driver of silver price in 2020 was growing investment demand. Continuous monetary expansion around the world led investors to search for inflation protection, and some of the newly created money found its way to the silver market: enough to lead its price higher but not enough to drive it to unprecedented levels.
Overall, silver fundamentals looked mildly positive at the beginning of 2021. And then the WSB phenomenon happened.
Some WSB members believe that there are large short positions in the silver market that make it vulnerable. It is hard to understand why they think that. Commitment of Traders reports (COT) indicates that traders have long positions in silver while the short positions are held by producers. That is how the market should work in an equilibrium: miners hedge their production, and traders take on the risk of price fluctuation. There is no obvious vulnerability in the disclosed positions.
In the wilder corners of the WSB subreddit, one can find all sorts of conspiracy theories about cabals of global banks manipulating Silver prices and pushing them down using esoteric arrangements. If those banks are doing that, I salute them. In 15 years of investing in mining companies and commodities, I have never come across any evidence of their nefarious plans. They must be doing an excellent job of covering their tracks.
To a certain extent, it doesn’t matter whether the Redditors are right. If enough people get mobilized and start buying silver, they will push its price up. Even if there is no short squeeze, the price action will feed on itself and entice more people to join in the fun. Silver was once a monetary metal and a store of value, but it lost that role; it would be ironic if Internet meme boards brought it back. In the zany world of today, it’s not entirely out of the question.
Silver July 2020 – February 2021
