National Post (National Edition)
WHY SILVER IS THE LATEST DARLING OF REDDIT.
Metal price surges 11%, most in a decade
For years, gold bugs and silver truthers have railed that deep-pocketed, powerful forces have been manipulating both metal markets, using `futures' to drive the prices up or down according to their will.
Their jeremiad gained legitimacy last September, when JP Morgan Chase & Co. agreed to pay US$920 million and admitted wrongdoing to settle a probe launched by multiple U.S. federal agencies into the manipulation of the futures market for precious metals.
Concerns about market manipulation re-emerged Monday as silver prices surged 11 per cent, the most in more than a decade. The reason was not a Wall Street firm, but attention from investors on the social media site Reddit, some of whom hope to use their collective financial power to punish silver naysayers.
Last month, investors on Reddit's WallStreetBets group roiled financial markets when they poured money into a few moribund stocks, most notably GameStop Corp., a Texasbased videogame retailer whose share price rocketed up 1,600 per cent in the past few weeks. The unexpected surge caused big losses for hedge funds that had been `shorting' or betting that GameStop's share price would decline.
Now, some investors are trying to bring the same approach, known as a short squeeze, to the silver market. But even as the price of silver surged — and one company in particular, Vancouver-based First Majestic Silver Corp., rose as much as 31 per cent — analysts cast doubt that the Redditors could repeat the success they found with GameStop in the silver market.
“All things being equal there's a lot of different dynamics,” said Don DeMarco, an analyst with National Bank Financial who covers First Majestic. “I just don't think you're going to get the same returns (as they did) with GameStop.”
Although DeMarco had recommended investing in First Majestic, it was far from the top of his picks. For one thing, it's always been expensive compared to peers, based on the ratio of its share price to the net value of its assets, by his analysis about 2.47, he said to the Financial Post.
In addition, tax authorities in Mexico, where the company operates three silver mines, are seeking to criminally prosecute First Majestic's local entity for tax fraud. On Monday, it raised the amount it is seeking to US$534 million from US$267.8 million, according to a Reuters report that cited a source who had seen audits of the company dating back to 2010.
“When you have an elevated valuation with a tax liability ... the combination contributes to a short interest,” said DeMarco.
Reddit investors may be focused on First Majestic because among silver miners, it has the highest `short' interest at 23 per cent — meaning 23 per cent of its outstanding shares are held by investors who believe the stock price will decline.
That makes it similar to GameStop, in which, at one point, 139 per cent of its outstanding shares were sold short. (Some shares were sold short multiple times, hence the percentage is above 100.)
One of those short sellers, the New York-based hedge fund Melvin Capital, is reported to have lost billions of dollars and more than 50 per cent of its value after Reddit investors flocked to the company and helped raise the share price from around US$17 to US$269 as of Monday morning.
But as the chatter on Reddits' WallStreetBets turned to silver, investor attention spread far and wide: Other Canadian silver stocks Fortuna Silver Mines Inc., Silvercorp Metals Inc. and Pan American Silver Corp. also all jumped. Meanwhile, some Toronto retail sites that sell physical bars and coins said they were overwhelmed with new demand, and there were indeed posts on Reddit strategizing about how to create a physical shortage for the metal.
Bloomberg also reported that on Sunday Apmex Inc., considered the Walmart Inc. of precious metals products, said it was unable to process silver orders until Asian markets opened due to record demand.
Last Friday more than US$944 million flowed into SLV, BlackRock Inc.'s iShares Silver Trust, the largest exchange-traded fund tracking the metal. The ETF was up nearly eight per cent on Monday.
In one post on Reddit's wallstreetbets group that generated more than 5,000 comments, a user with the handle `TheHappyHawaiian' urged investors to buy SLV and “force the physical delivery of silver.”
There's not enough physical silver to cover every open position, TheHappyHawaiian explained. If all investors insisted on settling their trades with physical delivery of the metal, rather than cash, the price of silver would surge, and deliver a blow to anyone `shorting' silver.
“It's not Melvin Capital on the other side of this trade, it's JP Morgan,” TheHappyHawaiian wrote. “Time to get some payback for the bailouts and manipulation they've done for decades.”
The user recommended against buying miners, such as First Majestic, because that would not “create the squeeze in the actual silver market.”
Still, that post was buried among many others in the wallstreetbets group, some of which contemplated the price of silver to gold, relative to the presence of each in the Earth's crust, as well as speculation on supply and demand.
DeMarco, the silver equities analyst, said that the silver market is far larger than GameStop, which even after its surge had a US$18.2-billion market cap.
“This may provide an opportunity for silver producers to capitalize on the higher prices, maybe by way of an equity raise,” he said.
More broadly, economists were debating what the overall impact of the Reddit users' newfound influence on financial markets means.
Pauline Shum Nolan, a professor
THIS IS MARKET MANIPULATION WHICH IS A VERY BAD THING.
of finance at York University and chief executive of Wealthscope, an investment analytics firm focused on small investors, described it as a “fascinating” new phenomenon that shows how crowds are using the internet to affect new investment outcomes.
David Goldreich, a professor of finance at University of Toronto's Rotman School of Management, said he was skeptical of the “David vs Goliath narrative,” and that it's not a good thing when a company's share price is no longer reflective of its actual value.
“This is market manipulation which is a very bad thing,” he said. “Markets are really important and it's a good thing when the market price represents the value of a security.”