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Silver benefits from Redditt's WallStreetBets forum, but there is more to the story

Commentaries & Views

Last week traders and market participants witnessed a transformation in how individual or retail investors can effectively use the power of collective capital to trade the financial markets. And do so with the same big stick that the hedge funds and large institutional players have been wielding for years.

This movement, which began on Reddit's WallStreetBets, has proven to be a very effective method of influencing market pricing. It has created an army of retail investors with enough collective capital behind them to take on hedge funds and win. However, there is a huge caveat to the participants' stock selection and timing on  Reddit’s WallStreetBets. That caveat is whether the fundamentals support the current price movement in any given stock or commodity.

As we spoke about last week, the plays that this forum has been recommending were on stocks that have, in my opinion, had very weak fundamental undertones, which made the recent price gains unsustainable. For example, GameStop lost $100 per share today, a net decline of over 30%, and is currently fixed at $225 per share. I believe that GameStop is still incredibly overvalued at the current valuation and will move to lower pricing.

In any given market, a short squeeze play can be useful for a short period if it is based upon an overweighted number of hedge funds being short a particular market. However, the price at some point very soon will reflect and move to a more realistic price point based upon the fundamentals.

WallStreetBets forum targets SLV.

This is why their recent recommendation to go long SLV makes sense and could continue to be an extremely profitable play. In other words, the fundamentals back the recent price increases we have seen in this ETF. However, according to reports on CNBC this morning, it is unclear whether or not the SLV thread came from genuine longtime Reddit's WallStreetBets traders or large professional traders posting on this forum to bid the price of silver higher. The market cap and open interest in silver futures are much greater than the smaller equities, such as GameStop making a short squeeze in silver a challenging maneuver to pull off effectively.

My take is that silver pricing fundamentally deserves to move higher.  Although recent gains have reflected and exaggerated the price moves, SLV upside moves are warranted and, in fact, should continue.

Today gold had a respectable gain, with the most active April 2021 Comex contract gaining approximately $14 (+0.76%) and is fixed at $1864.30. Today, silver's gains were tremendous, with the most active March 2021 Comex contract gaining $2.23 (+8.46%) and is currently fixed at $29.15.

This gain in the precious metals occurred concurrently with dollar strength, indicating a solid demand for both precious metals. Spot pricing also reflects the exaggerated move in silver. According to the KGX (Kitco Gold Index), gold gained $12.20 and is currently fixed at $1860.30. On closer inspection traders bid the precious metal up by $22.55, and dollar strength took $10.35 of those gains. Spot silver is currently fixed at $28.44 with a gain of $1.61 directly attributable to traders bidding silver pricing higher and $0.15 taken back from dollar strength resulting in a gain of $1.46.

The take away from all of this action is that you can see exaggerated moves in any given stock or commodity. Still, eventually, prices will reflect the actual fundamental reasons that they are moving higher or lower. A sustained move in any market must contain a correct assumption about where that share price or commodity price deserves to be. In the case of SLV, I believe these gains are sustainable and warranted.

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Wishing you as always, good trading and good health,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.