Blockchain, Reign and the Paper Parade
Gold, ETFS and how blockchain will change the way gold is bought, sold and held in the future.
When life gives you lemons, make lemonade.
Never has the old faithful proverbial saying been so applicable to financial markets. This was particularly true in both equities and the precious metals scene earlier this year, where a few minor substitutions by way of replacing the lemons with allegedly nefarious short sellers and lemonade for lots of wholesome dollars, managed to tickle the taste buds of even the most acclaimed connoisseurs while simultaneously satiating thousands of stubborn, vigilante retail traders the world over.
I guess it really should have come as no surprise when the millions of retail investors and speculators across the globe eventually reached peak capacity to stomach the blatant, decades-long manipulation of silver and financial markets as a whole.
Silver in its purest form is scarce. Accurate readings for the global total of below ground reserves are hard to come by, however in January 2020, the US Geological Survey estimated that there were around 560 000 metric tonnes or approximately 17 billion ounces . Silver reserves in general are an interesting topic (I’ll discuss this further in another article). Above ground ounces are already facing supply constraints, thanks largely to the collective, conscious decisions made by certain miners to withhold production in favour of sacrificing immediate monetary gratification in order to preserve future reserves while simultaneously inflating future profits .
One of the most widely debated aspects of the US $500 Billion dollar derivatives market, is the notion that gold and silver are subject to enormous amounts of "paper shorts" (selling silver derivatives such as CFD's or ETF's etc). Proponents of this observation argue that the physical silver spot price is intentionally manipulated by institutions and large corporations that desire to keep prices low, by shorting the paper market in order to offset their large scale physical purchases destined for industrial or commercial use.
If this is the case, then the concerns echoed amongst producing miners would seem completely justified, and their attempts to raise their own raw commodity prices from the inside out become somewhat admirable.
Regardless of the lack of admission of guilt or permissible proof, we've unsurprisingly seen significant support for the heavily suppressed silver sector over the past year.
Of course, I wouldn’t dare to mention the highly dubious ‘silver squeeze’ without first introducing the Saga that revived the once rapidly deteriorating American bricks and mortar video game store – GameStop.
Almost religious in nature, the Short Squeeze community managed to single-handedly cripple hedge funds of the likes of Melvin Capital Management, Point72 Asset Management and D1 Capital Partners through their arduous attempts to undermine and outbid the heavily leveraged, largely exposed institutional sellers that had plagued the company for years .
For those unfamiliar with a short squeeze, you must first understand the concept of a "short" position. A "short" is essentially the term given to an investment technique where investors or speculators can choose to borrow stock or securities in order to sell them, with the intent of buying them back at a lower price and then pocketing the difference as 'profit', upon returning said stock to the rightful owner. Often times these "shorts" are highly leveraged which in some cases leave their owners dangerously exposed.
In the case of the 2021 short squeeze, responsible for enormous growth in the share price of GameStop (GME), Blackberry and several other heavily ‘shorted’ companies, the over-leveraged institutional ‘short’ investors were caught in a rather vulnerable position, knees against the cistern with their pants down. Sadly for them, thousands of fed up, stimulus backed robin hoods decided they weren't going to let such greedy folks get away with another free lunch undisturbed, so they strategically or at least eagerly went about accumulating as much stock, or in the case of silver, as many physical paper ounces that they could possibly afford. The consequences were visible, even tangible to some, as the villainous "shorts" were forced to liquidate their positions (jump ship without a life jacket) once enough of the buyers had successfully clambered onboard, kidnapped the corrupted captain and taken control of the helm, all while refusing to ever back down.
However, not everyone approved of the ‘Squeezers' guerrilla tactics and it wasn't long before the mirror-less, hypocritical victims in the form of overzealous investment bankers and spineless securities regulators began to cry foul. They swiftly condemned all manipulation of markets and then immediately moved to restrict margin trading, leverage and accessibility for a large number of amateur investing platforms .
Of course, the majority of their efforts were to no avail, as the avid members of the short squeeze resistance persisted to pump the prices while doing everything they could to avoid the blasphemy of profit taking on their most prized possessions.
To this day, the GME share price is holding steady above $170 USD. This is absolutely phenomenal considering it bottomed out at lows of $2.57 in April 2020 before peaking at an insane $483 nine months later in January 2021. Just a small squeeze to the tune of 18,800%.
Following the initial GameStop blow-off period and subsequent declaration of victory, the focus and consequent hype soon transitioned to the precious metals market, and in particular Silver.
Between late January and February 2021, the silver price experienced several notable periods of volatility which ultimately resulted in temporary gains of 25% over the two weeks between the 18th of January and 2nd of February. As much as I’m sure certain members of the original short squeeze movement had aspirations of pulling off a similar job on the silver price, I feel it’s fair to say there was an undeniable sense of caution surrounding the obvious undercurrent of questionable tactics that appeared to have infiltrated the squeeze. Perhaps that was the motive behind the hype all along. In the end, the silver price slumped back to its pre-squeeze levels and it’s been hovering back and forth in a $21-$28/oz holding pattern ever since.
It’s extremely crucial to note that it is entirely probable that several members of the financial elite also profited handsomely from the hype and euphoria that played out in those few short weeks between January and February this year. One could even argue that it was all an ingenious ploy by unknown parties to make a quick buck off the ethically and emotionally sensitive, cashed up members of the freshly caged public at the time. It remains to be seen, whether we'll be gifted an encore to the short squeeze saga, however what does ring true is the all but certain reality that a people-powered precedent has been set, and big fish may well end up in the net.
Fishing analogies aside, I truly believe the silver spot price is prone to substantial upside growth during turbulent, ethically and emotionally charged times such as these and therefore an allocation of capital to an asset with as many far-reaching applications as silver would hardly be unwise.
In the words of many diligent leaders - "Failing to prepare is preparing to fail".
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