While there’s always some gossip and euphoria about gold across markets, it seems like silver is closing the race by being the talk of every town. Yes, we’re talking about the crazy silver rally that has brought a surprise for investors who were solely pro bullion.
To give context, the prices of silver are on a rise, categorically silver futures. The prices jumped by 9% on 1st February and have been poised to rally even further. While it is not as popular as gold is, it is definitely a decent and smart investment given its prestigious attributes.
So far, it has proven to be significantly undervalued, as the sky-high gold-to-silver ratio would suggest. But now, the question is what suddenly made silver a very promising investment for the year 2021.
Do we owe the price rise to a strong realization amongst investors regarding the stellar investment that silver is or is there something happening behind the curtains that we are unaware about?
Before delving deep into the details, let’s try to understand silver futures. These are nothing but legally bound agreements that cover the delivery of a certain quantity of silver at an agreed-upon price in the future. This contract is standardized by the futures exchange as to the time, quality, quantity, and place of delivery, but the price remains variable in accordance with the market norms of demand and supply.
Right now, the prices are soaring so high that if you hold a silver contract, the value of your contract will shoot up in the coming days since there has been a massive buying spree by investors. But exactly which people are buying?
The wallstreetbets’ people. Rings any bell?
Yes, the same online investors on Reddit who stimulated a trading frenzy in the shares of GameStop Corp. and AMC Entertainment Holdings Inc. have now shifted their focus towards the global silver market, powering the precious metal to its biggest one-day advance in more than a decade.
After being restricted from trading some popular stocks by brokerages given the nexus of wall street elites and the brokerages, the members of the Reddit forum have therefore plunged right into the silver commodity market as their next potential short-squeeze.
Basically, a short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, that is the traders who short-sold the asset, to buy it in order to forestall even greater losses. Unfortunately, their scramble to buy adds to the upward pressure on the stock's price.
In this particular scenario, speculations are that the wall street elites shorted the metal while the retail investors on Reddit are trying to short squeeze them similar to what happened in the case of GameStop shares.
However, the people at wallstreetbets completely deny this claim and have asserted that they have nothing to do with the surge.
They believe that this is a trap being set up by the hedge funds who are losing out on a lot of money ever since the rise of Gamestop and therefore, are trying to compensate for their losses by the means of convincing the gullible retail investors about the potential lucrativity of silver.
Also, the fact that the silver market is a very different and huge market from that of the beleaguered companies that caught the Reddit investors’ attention, points us in the direction of the hedge funds because silver is a difficult market to be influenced by the relatively small group of traders who previously spurred the stock prices of certain company’s shares like that of Gamestop.
However irrespective of who is fiddling with the prices in the market, the fact that remains is that whatever is happening with it is actually beyond ordinary investment prudence and thus, the exchange was left with no other option but to intervene in the market.
They’ve asked the people dabbling with it to put up more collateral that is more money in this case. Therefore, even if the market crashes sometime later and some investors fail to honour their end of the contract, the collateral will help.
Also, once the collateral rises, people will automatically become wary of investing in a high-risk market such as silver at this moment.
How sustainable the surge is or whether or not the rise in the price of silver futures will manifest into the rise of the commodity is quite unpredictable at present given the uncertainty of the market.
Meanwhile, all we can do is keep tracking the market and try to predict the future of silver (futures).