There’s More to the Silver Squeeze Than a Silver Squeeze
Today, we’ll discuss gold and silver. But before we do, let’s discuss l’affaire GameStop.
No doubt, you’ve followed the saga. GameStop is big news — and getting bigger.
Retail investors (the RobinHood crowd) crafted a multibillion-dollar squeeze on a cabal of big shot New York hedge fund guys who short-sold stock in a company named GameStop.
The rich guys, their lapdog media and pet politicians don’t like it at all, because this is more than just a headline or one-off story. Retail has organized and is now in rebellion.
This new force can destabilize markets. Call it asymmetrical financial warfare. To borrow a phrase used at the Naval War College, this GameStop squeeze has “delivered effects.”
Over time, the squeeze may or may not succeed. But figuratively, it caused the first big crack in the dam of American finance, such that water is just beginning to leak, preceding the entire edifice failing.
Whoops. Inspector inspecting crack in a dam.1
Now, the target of the retail rebels has shifted to chronically manipulated, oft-shorted metal markets — namely silver; with gold feeling the wave as well.
Let’s discuss how to play this and make some money…
When my son was younger, he often asked me to drive him to the local mall to visit the GameStop store. It was a pleasure, and I have nice memories of those trips.
My son and I perused racks of video games. We’d talk with other kids about the latest ideas. The staff were friendly and helpful. My son traded in old games and bought new ones.
Meanwhile, I was working for Agora Financial. I wrote about the energy and mining business. My role was to find investment opportunities in publicly traded companies.
Yet despite my focus on the business side of oil and mining, I never really thought about GameStop as a larger entity, namely an investment play.
To me, GameStop did video games. It didn’t concern drill rigs, or mineral exploration and processing, so it wasn’t in my wheelhouse.
But obviously, GameStop was (and is) a real business. It has management, employees, real estate, products, inventory, logistics, cash flow… The whole thing.
Fast-forward to now. Malls suffered in 2020 due to COVID, with much of the country in either restriction or lockdown. Most foot traffic to GameStop stores dried up as a result.
Late in 2020, the short sellers pounced. They sold off 140% of the company’s shares. The idea was to drive GameStop into the dirt and make a killing.
I’ve met some hedge fund guys. They tend to be smart, and they’re unsentimental to the point of ruthless. Often, they do things that drive companies out of business. To them, it’s just another day at the office.
Of course, most reasonable people might look at what happened with GameStop and say something like, “Huh?” As in, “Wait a minute! Can you really sell the same shares twice?”
Okay. Look at it another way. Can you sell your car twice? Your house?
Well, yes. You can sell something twice. Usually, it’s called perpetrating a fraud.
But we’re dealing with the modern U.S. financial system. Fraud is not a bug but a feature.
And when it comes to extracting what are called “rents” from markets, it’s routine for short sellers to dive in.
Academic economists call this creative destruction. Then again, nobody ever short sold a college or university into bankruptcy, so it’s only creative when someone else loses their job or business.
There are plenty of examples of more things being sold than there are things. (See silver, below.)
But this time, along came the Robin Hoodies. They organized online to buy GameStop shares and drove up the price. This squeezed the shorts out of 5 billion dollars and more.
It’s an epic tale. It’s also a sign of the times, because cultural and class warfare are on clear display.
In online chats, Robin Hoodies discuss how much they enjoy taking down greedy, wealthy, nasty, oppressive, obsessive moneybags who own gaudy houses in the Hamptons and Aspen.
On the other side of the trades, via television and in print media (let alone during cocktail hour on their garish yachts), hedge funders refer to retail traders with utter disdain.
Hedge fund suits accuse riff-raff punters of taking Trump-era, government stimulus checks and playing big-boy in stock market trades where they simply don’t belong.
It reminds me of the stratified class structure on the perpetual train ride in Snowpiercer, a dystopian movie, now television series.2 First class are up front living well. Deplorables dwell in the tail eating protein gel made out of bugs.
Beyond the evident sociology, there’s another angle to this. It’s bigger than even the billions of GameStop dollars in play, let alone the revealing level of name-calling.
L’affaire GameStop has torn up a rigged rule book. It’s introduced a new method of market destabilization. The retail rebellion adds new levels of risk to the cozy, oft-crooked way in which things function in American finance.
And it’s about freakin’ time.
Before I returned to the Whiskey bar and when I ran portfolio-themed newsletters, my job was to find great ideas in the energy and mining space.
I recommended stock ideas. But first and foremost, I always advised readers to buy and hold precious metal, certainly gold and silver.
Looking back, I’ve pounded the table for gold since the mid-2000s when an ounce would set you back all of $350. And silver back then was in the $6 range.
If you bought physical metal over the years, you may have tripled or quadrupled your money in nominal dollar terms. And you still have the gold or silver (I should hope)!
With physical metal, there’s no counterparty to the trade; possession is the end game. It’s wealth preservation with the upside of holding through the inevitable inflation that’s part of U.S. monetary governance.
All along, with gold and silver you preserved the value of your dollars over many years. In this sense alone, physical metal serves a noble purpose in a world dominated by government fiat currency.
At the same time, mining shares can be a ticket to even bigger gains. Such as these examples…
- In 2011 I recommended Reservoir Minerals, a copper-gold play in Serbia. Our entry price was $0.37, and readers had a year or so to buy in under $0.50. In 2016, Reservoir was taken over by Nevsun Minerals for $7.20. We call that a 19-bagger.
- More recently, in 2016 I recommended Victoria Gold, a gold (and some silver) play in the Yukon. Entry price was about $0.45. Currently, Victoria shares trade for $9.20. That’s a 20-bagger.
- In 2017 I recommended K92 Mining, a copper-gold play in Papua New Guinea. Entry price was about $0.40. Currently, K92 shares trade at about $6.70. It’s a 16-bagger, with more to come I suspect.
There are more examples of mining plays that moved up strongly. Plus some that moved just a bit. And some that went sideways, if not down. Because nobody can win ‘em all.
But overall, the winners in mining made up for losers. All of this while metal prices moved over time and because strong mining assets are highly leveraged to the price of metal.
For example, consider how over 10 years, a double or triple in the price of gold or silver can translate into massive moves for evolving mining plays.
Look at Victoria Gold again. With gold at, say, $900 per ounce, Victoria Gold was a tough sell. With gold at $1,800, Victoria is a cash-generating machine.
Exploration, development and mine-building take time and investment, to be sure. But all along, the fate and fortunes of mining shares also rise and fall with the tide of underlying metal prices; the price of gold, silver, etc.
And I assure you… Those metal prices are manipulated.
How are prices manipulated? Well, consider the spot price of gold or silver generated across the globe 24/7 in markets from New York and London to Singapore and Shanghai.
You can easily look up the price of gold or silver on any of many sites, such as Kitco.3
But that price is deceptive. It’s the price of a “paper” contract (to be clear, they’re nearly all electronic).
In other words, you’re looking at the price point of a purely financial deal in which Party A agrees to buy or sell metal to Party B. And in almost all cases, there’s never final delivery of the real thing. There’s just a contract that settles out and in which cash passes between players.
No real gold or silver change hands. So is that a real market? Or is it fake?
The current, global precious metal markets are a trading system that evolved over the past half century, after President Nixon closed the U.S. Treasury “gold window” in August 1971. (The 50th anniversary of that is this year.)
In recent years with gold, at any given moment there are well over 100 so-called “contracts” for each real ounce available to trade. With silver, it’s more like 250 contracts for each ounce. These numbers rise or fall with the rest of the market, as well as economy.
But if you want real metal? Good luck… You pay a premium over the “spot” price.
Recently, the spot price of gold has been in the $1,800 range. But to buy a one-ounce gold bullion coin from the U.S. Mint or a coin dealer, the list price is $1,975 or so (depends on the dealer). There’s a $175 premium to obtain real metal; call it a markup of 10% or so.
With silver, the markup is higher in percent terms. This week, spot silver was in the $29-30 range. But the list prices for silver one-ounce U.S. Eagles was in the $44 range. That’s a 50% markup.
Which brings us to the current silver short squeeze.
The retail rebellion is training its guns on the oft-shorted silver market. The idea is to buy physical metal — squeeze actual supply.
Once more, a cozy trading club is about to feel the impact of a massive flow of retail funds into the highly evolved, extremely rigged system.
We’re early in the process. The first round included a run-up in the silver spot price, which was quickly quashed by the paper dealers, as well as exchanges hiking margin requirements.
Professional traders are confident, if not smug. They will smite those rookie metal chasers. Indeed, it’s like watching the first-class passengers on the Snowpiercer train. There’s no way those untutored Robin Hood rubes can un-rig this happy state of affairs. Right?
Meanwhile, we see strong buying in many silver mining names: First Majestic, Pan American, Hecla, Coeur, Fresnillo, Wheaton and more. And again, the shorts simply keep shorting into it.
It’s mostly market ripples here and there — no big breakthroughs.
But if you listen closely, you can hear the sound of concrete cracking deep inside the dam.
In particular, look at the supply for physical silver. It has dried up. Bullion dealers across the world have mostly sold out, even large ones.
For example, American Precious Metals Exchange (APMEX) — sometimes called the Walmart of precious metals — stopped taking orders this past weekend. And sales opened Monday with sky-high markups over so-called spot, and a lot of “unavailable” tags on products.
The trade (and even mainstream) press is filled with anecdotes of dealers scrambling to obtain new supply, while miners and refiners are sold out well ahead into 2021 and 2022.4
This battle between organized retail and the insider pros is far from over. It will play out over the months to come. And we’ll see what kind of blowback hits when the reality of physical supply (or lack of it) runs up against near-bottomless paper trades.
Which brings me to something that I’ve discussed before, the Hard Assets Alliance.
I’ll say up front that Agora Financial has a financial relationship with this group. But that’s because we’ve checked it out and are impressed with the way they conduct business. It’s straight-up…
Hard Assets Alliance offers a way to buy gold and silver and to take delivery with relatively low costs. Or with a single click, you can buy and store your metal in your choice of five audited vaults worldwide.
This is among the easiest ways to get started with gold and silver, even after the recent run-up in prices. That’s because there’s likely much more to come.
Just complete the short application process to open a FREE account, and right away you’ll be able to shop for the type of gold or silver you want.
You’ll have access to the inventory list and be able to make an informed decision. If you’ve been sitting on the sidelines, unsure of what to do… Okay, we get that.
But don’t wait for the overall situation to get worse. And don’t expect that “the government” is there to protect you. Or that Wall Street will protect your money when things tighten up.
If you have gold and silver, great! If you don’t have any… Get Some!
We’ll have more on metals in Whiskeys to come.
And on that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
P.S. – Feel free to forward Whiskey & Gunpowder to friends, family and colleagues. If you received this article from someone and would like to subscribe, click here. Thank you.
4 Silver Dealers Scramble to Find Supplies for Retail Buyers, Reuters