The Silver Squeeze is Working - Part I
“I won a silver medal. But really, I ended up running the fastest race of my life to become part of something that transcended the Games.” – Peter Norman
By way of introduction and disclosure, I’m a long-time investor in precious metals. (A doomer with precious metals? Shocking!) I own physical gold and silver. I often own various forms of paper gold and silver and trade around those positions. Unlike with cryptocurrencies where I’m merely a market observer, when I write about gold or silver you should assume I’m biased and I would like the price of precious metals to go up. Also, nothing I write is trading advice. I’m a paranoid chicken on Substack. If you are taking trading advice from a paranoid chicken on Substack, you’ve got serious problems. You probably also hate money.
In late January of this year, at the peak of the WallStreetBets (WSB) Reddit GameStop mania, there began a fledgling movement to squeeze the price of silver. One truly never knows what a crowd is thinking and commenting on the strategy of any movement is necessarily an exercise in generalization, but, from what I’ve gathered, the WSB crew believed the price of silver is manipulated lower by “the big banks,” there isn’t enough physical silver in “the vaults” to support all the claims against that silver (especially at COMEX), and if everybody bought and held physical silver the price would explode higher as greedy bankers were forced to cover their short positions. Market panic would ensue as the vaults emptied, creating an upward spiral in the price of silver.
This was all very exciting.
I spoke with the best precious metals trader I know, a guy who once traded the gold book at Goldman Sachs. He’s the real deal. I won’t reveal his name, but let’s just say it rhymes with Pony Sneer. As I struggled with uncorking the first of many bottles of champagne I intended to consume while celebrating my imminent step-change in wealth, Pony cracked his knuckles, smirked, and doused out the flames of my excitement with ruthless efficiency.
“It’s going to flop,” he said.
“They’re going to shoot their wad buying SLV and coins on eBay. The big players with access to the real game – the futures market – are going to see this coming from a mile away and take all their money. Silver isn’t a washed-up video game retailer. J.P. Morgan isn’t Melvin Capital. Put that champagne away, dipshit.”
I couldn’t get the bottle open anyway, so there! Showed him.
Sure enough, the silver squeeze news cycle ran its course, and not much happened to the price of silver. It chopped around in the mid-to-upper $20s (per ounce), and the movement seemed to fizzle out like so many of my wealth fantasies of yesteryear.
Now that I’m a world famous paranoid chicken on Substack, I thought I’d have another look at the silver squeeze situation. I started by pulling up SLV on my Bloomberg terminal and made a chart of its fund flows. As far as ETF flow charts go, this one is pretty spectacular. Just as Pony Sneer predicted, the WSB crowd plowed right into SLV in huge numbers. During three trading days as January turned into February, SLV experienced inflows of over $3 billion, roughly the same amount it pulled in during all of 2020. And also, just as he predicted, the wave washed right back out, with $2B flowing out over the next month. SLV round-tripped in price from $23.5 to a high near $27 back down to $23.5 again. A GameStop this was not.
The big boys crushed the reddit army. “Just as Pony predicted,” I thought to myself. Surely, that was the end of that. Not so fast, chicken! I made my way over to subredditstats.com and discovered, much to my surprise, not only is r/Wallstreetsilver not dead, it is thriving. Subscribers are up 400% since early February, topping 80,000. With rallying cries of Empty the Vault! and Silver Raid! and countless pictures of redditors showing off their personal physical Silver Stacks, this has the feeling of a community with some serious momentum.
And they’ve gotten smarter about it. They’ve learned from their fruitless effort with SLV and turned their attention to a new target: PSLV.
Let me explain. With SLV, it’s effectively impossible for a retail investor to stand for delivery. Sure, you are technically laying claim to a certain amount of silver when you buy SLV, but not really. Ultimately, your dollars get hedged away into oblivion by the much larger silver futures market, where sophisticated investors of all stripes use substantial leverage to speculate on (and control?) the price of silver.
PSLV is run by Sprott Asset Management and is a different beast altogether. From their website:
“Investment Objective: The Sprott Physical Silver Trust (PSLV) is a closed-end trust that invests in unencumbered and fully-allocated London Good Delivery (LGD) silver bars.”
“Goal:Provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical silver.”
“Sprott’s unique exchange listed physical bullion trusts give investors a more flexible way to own physical precious metals: fully allocated and unencumbered precious metals held at the Royal Canadian Mint that are redeemable for physical metals yet liquid and traded on the NYSE Arca and TSX exchanges.”
The reddit army figured out that they could have Sprott stand for delivery in their place! Sprott is the real deal. When I invest in paper precious metals, I prefer PSLV to SLV and PHYS (Sprott’s gold trust) to GLD, unless I’m using options. I trust Sprott. They have the metal they say they have. If they experience inflows, they buy more metal. Aside from owning physical metal outright, I view Sprott as the next safest alternative.
Since PSLV is a trust and not an ETF, there’s no fund flow data for it on Bloomberg. However, it is a simple task to plot the ratio of PSLV’s total assets under management (AUM) by its share price to produce a proxy for fund flows (i.e. share count). The results are shocking, at least to me. Quietly, under the radar, the silver squeeze army has increased PSLV’s share count by nearly 60% in only four months. The assets under management have increased from ~$2.3 billion in late January to ~$4.1B today, an increase of nearly 80% (the price of silver is up during this period, which accounts for the delta between the two percentages).
No matter how you slice it, $1.8 billion of de facto physical silver is a lot of cheese. They are having an impact. What about Empty the Vault!? I’ll end Part 1 of this series by charting the inventory of silver at COMEX. From the highs of late January, inventories are down 12%. It’s not a worrying squeeze yet, but it’s a start.
I called Pony Sneer and shared all this data. His response?
“Okay. THAT’S interesting…”
To be continued.