If you’ve been keeping an eye on the news, you’ve likely heard about Wallstreetbets and the eye-watering stock price changes of video game retailer, Gamestop. The David vs. Goliath battle saw everyday stock traders on Reddit take on the hedge fund giants of Wall Street. Now, in a similar fashion, there’s a new short squeeze happening with one of the world’s favourite precious metals. The silver short squeeze
What is a short squeeze?
Let’s take a step back to first understand the mechanics of a short squeeze. As a one liner, the principle of shorting a stock is simply “sell high, buy low.” It’s the exact opposite of the investing principle “buy low, sell high.” We’ll get to the squeeze in a moment.
At a high level, a seller will “short” a stock if they believe that the stock is overvalued and will fall in price. Shorting means that the seller will borrow the stock at the “overvalued” price and then, once the price has dropped, they’ll cover their position by buying back the shares, allowing them to make money by cashing in on the difference. For example, if someone borrows and sells a share at $20, then the share price falls to $5 and they buy back, they profit $15.
The danger to shorting a stock is that there is infinite risk, since there is no limit to how high a stock price could go. This is an important point in understanding what happens in a short squeeze. When a stock sharply jumps in price, it forces short-sellers to sell at a loss to prevent further losses; they’re effectively “squeezed” out of their positions.
How does this relate to Reddit and Gamestop?
The short squeeze scenario described above happened recently in spectacular fashion with Gamestop, the world’s largest retail gaming company. The movement was fuelled by a Reddit forum called WallStreetBets, which now has over 9 million subscribers.
This happened because some private investors in the forum group realized that not only had several hedge funds shorted millions of dollars of Gamestop shares, but also that there was strong potential for Gamestop to see further growth. So, the Redditors came together to squeeze the hedge funds out of their positions and lose a lot of money. Collectively, they drove up the stock price by 1,700% in the space of a month. In the process, hedge funds saw huge losses – Melvin Capital, for example, was reported to have lost $4.5 billion in assets value in January.
Following the Gamestop saga, various spin off groups from WallStreetBets have appeared on Reddit, targeting different stocks. One such group is WallStreetSilver, created at the end of January and already attracting almost 40,000 members, called “Silverbacks.”
Like their counterparts on WallStreetBets, these Redditors believe that silver prices are being artificially suppressed by major banks and will see immense gains in the future. With these small-time investors banding together and putting their money into silver, the price of silver touched eight-year highs in early February. Retail sites struggled to keep up with the demand, as Redditors flocked online to showcase their collection of coins and bars. BlackRock iShares Silver Trust, the largest ETF tracking silver, recorded unprecedented inflows.
What’s the significance of a silver short squeeze?
As momentum built from the WallStreetSilver group, the hashtag #silversqueeze started trending on Twitter and some big names Tweeted their support, including the Bitcoin billionaires, the Winklevoss twins, with Tyler Winklevoss writing that the “#silversqueeze is a rage against the machine” and Cameron Winklevoss stating, “ramifications of a #silversqueeze cannot be underestimated.”
Following a similar pattern to Gamestop shares, if the private investors succeed in driving up the price of silver, the potential price boom could be massive, with one Reddit poster sharing “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$.” If this scenario were to play out, silver could be a very good hedge in the future. With Reddit mobilizing the collective power of everyday traders and global market seeing significant shifts, it appears silver is certainly one commodity to keep your eye on.