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Silver Sinks as Investor Frenzy Cools and Reddit Backlash Grows

Commodities Feb 02, 2021 13:00
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(Bloomberg) -- The buying frenzy that sent silver to an eight-year high is showing signs of stalling.

Silver in London and New York dropped more than 5% after CME Group (NASDAQ:CME) hiked margin requirements for futures, while a backlash against the precious metal gained momentum among posters on the now-famous Reddit board that kicked off turmoil in the market last week.

Backwardation -- a sign of tightness -- is easing in the futures market, and at least one European coin dealer said demand was getting back to normal after a buying surge that overwhelmed retail websites across the globe over the weekend. Analysts from HSBC to Commerzbank had warned the rally would be hard to sustain.

Read more: Reddit Trades Crumble as GameStop, AMC and Silver Plunge

“The rush in silver was the perfect moment to take profit,” said Georgette Boele, an analyst at ABN Amro Bank NV. Investors will liquidate their positions when “they realize that prices can’t be pushed higher.”

The silver market was roiled in the past week after a series of posts on the WallStreetBets forum calling for a “short squeeze.” BlackRock’s iShares Silver Trust (NYSE:SLV) had a combined net inflow of $1.5 billion on Friday and Monday, silver options trading surged and prices swung dramatically before spiking to the highest since 2013. Silver miners were caught up too, with Canada’s First Majestic Silver Corp.  (NYSE:AG) rising as much as 43% yesterday.

As prices pull back, it remains unclear who authored the posts that ignited the huge run-up, or who exactly was behind the trading. Money managers have had a net-long position on the metal since mid-2019, making it unlikely that retail investors could accomplish the kind of result they’ve produced so dramatically in stocks like GameStop Corp (NYSE:GME).

“In the current environment, a coordinated surge in investment by retail traders into the silver market would simply raise volatility and generate small regional dislocations in supply-demand dynamics,” Goldman Sachs Group. analysts including Jeffrey Currie wrote in a note. “While the silver market will likely survive this intense focus, what this event does represent is that populism is still a growing political force, now with the power to move markets.”

On the WallStreetBets board, sentiment has turned decidedly against silver. Users are speculating supporting posts may be part of a pump-and-dump scheme -- or that hedge funds may have infiltrated the board.

In the physical-silver trade, dealers presented a mixed picture. In Singapore, orders remain high and U.S. Mint American Silver Eagle 1-ounce coins are commanding a premium of 46%, more than double a week ago, said Ronan Manly, a precious metals analyst at Singapore dealer BullionStar.

But in Switzerland, “it looks like interest is getting back to normal,” said Alessandro Soldati, chief executive officer of dealer Gold Avenue, although he said premiums remain high. “Yesterday was a really hectic day.”

Spot silver dropped 5% to $27.5980 an ounce at 11:39 a.m. in London. Gold and platinum also fell, while palladium rose. The Bloomberg Dollar Spot Index was little changed.

“Silver is ripe for a correction as the retail frenzied buying begins to fade,” said Ole Hansen, head of commodities research at Saxo Bank A/S. “Infighting on Reddit also highlights the fact that the biggest winners from the recent surge are hedge funds many of which have been long for month.”

©2021 Bloomberg L.P.

 

Silver Sinks as Investor Frenzy Cools and Reddit Backlash Grows
 

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