Silver is a good story for the populist mania that is engulfing retail investments. But creating a so-called short squeeze in the precious metal is impossible, according to Goldman Sachs commodity analysts.
A short squeeze occurs when rising prices force investors to buy back an asset that they had sold short at a higher price, causing them financial losses.
But this doesn’t work in the commodities markets, said Jeffrey Currie, commodities analyst at Goldman Sachs. That’s because most commodity short positions are contracts used by manufacturing companies to protect themselves against future price movements.
In the stock markets, the shares already exist and the hedge fund that borrows them has to return them at some point. On the silver markets, short sellers promise to deliver a new batch of silver that producers are digging up from the ground.
In stocks, “the guarantee of a future purchase is the driving force behind a short squeeze,” Mr. Currie wrote in a note on Tuesday. “If commodity short positions are broadly backed by real physical stocks, there will be no subsequent purchases and no short squeeze. To go short in a commodity market, you would need to own a substantial portion of the actual underlying physical market. “
In addition, there are rules that limit the size of positions that individual investors may take. These were introduced after “Silver Thursday” in 1980, when the Hunt brothers, two wealthy Americans, cornered the market by buying up nearly a third of the world’s supply, pushing the price up 713% in three weeks.
Nonetheless, Mr. Currie said that maintaining a general populist theme in US politics is positive for commodity prices in general. The Covid-19 pandemic has led to a shift in the goals of governments and central banks away from stability in economics and prices to social needs, most likely accompanied by inflationary spending.
“More spending on social needs not only increases consumption, but it also drives more resource-intensive consumption as lower-income households consume more resources per dollar spent,” he wrote.