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What Makes Silver a Tricky Trade in the Reddit-Driven Rally?

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Silver Coins (Photo: Chris Ratcliffe/Bloomberg) Silver coins (Photo: Chris Ratcliffe/Bloomberg)

The latest wave of the retail trading revolt has migrated to silver futures and options from GameStop and other stocks. It’s evident not only in price, in which silver futures jumped to $30 an ounce from $25 a week ago, but in the level of activity.

From Jan. 19 through Jan. 26, the volume of 5,000 ounce silver futures contract averaged about 80,000 contracts a day. Options volume averaged about 7,500 a day.

But the Bastille was stormed on Thursday, when 205,000 silver futures contracts traded, and a whopping 45,000 silver options contracts traded as well.

On Monday, trading volume in the silver futures contract was roughly 300,000.

This scenario evokes memories of the Nelson Bunker Hunt silver corner of 1979, in which silver futures jumped to roughly $49 per ounce from $8, as the Texas oil baron and others tried to corner the silver market. But futures markets are not stocks, and 1979 isn’t today.

What’s the Same

One similarity is how the market players have reacted to the frenzy: Robinhood changed its rules and limited stock purchases; in 1979, so did the Commodity Exchange, which trades silver futures.

The uproar caused by the Hunts is like that being generated by today’s retail traders — led by the Reddit chat group Wall Street Bets.

But as Henry Jarecki, then chairman of Comex said about the Hunt corner at a later time, “an exchange is going to protect itself.”

What’s Different?

But how are futures and options markets different from stock markets when confronted with these trading frenzies? First, shorting futures is a fact of life in both the commodities and options markets — as is volatility.

The exchanges, especially the Chicago Mercantile Exchange, which owns Comex, is agile in raising margins to cool off hot tempered traders. Also, margin is marked-to-market, which means it’s collected before trading opens the next morning.

Also, the price of one silver futures contract today is roughly $145,000. The CME’s Initial margin, the deposit on a contract, is $15,400, and the maintenance margin, the amount that varies according to market volatility, is $16,500 per contract (was $14,000 on Monday but was raised by the exchange to be effective Feb. 2 at the close of business).

Prior to Monday’s increase, the exchange hasn’t altered silver margins since early December 2020. Clearing brokers adjust their own margin requirements on client positions.

Furthermore, the size of the silver market overshadows GameStop market capitalization, even today. On Monday, as GameStop’s price  was $242.50, it had a valuation of $17 billion.

However, the size of the silver futures and options market is roughly $40 billion, while it trades an average of $10 billion in futures and options a day, according the precious metals website BullionVault.

Will Silver Continue Rise?

Phil Steibel of Blue Line Futures in Chicago said last week that he thinks the price of silver futures could climb to $50 or higher. He also pointed out that the retail trading frenzy has engulfed silver mining stocks as well as silver ETFs.

He sees the current jump in silver prices as “a blessing,” as silver was woefully underpriced in his view. He does not see traders moving over to gold, though, as that commodity is not used in industry like silver and copper.

Another difference between today and 1979 is that there’s plenty of silver in storage — some 2.46 billion ounces — almost all tied to investment-linked product such as ETFs, according to Bloomberg.

While there are more investors trading in the silver market now vs. in 1979 when commercial interests, such as mining companies, controlled most the market, “These days, global silver stocks could supply industrial use until 2026,”  according to Bloomberg.

The silver futures market seems to be just the latest asset to get attention from the Reddit crowd. In fact, one retail trader urged others to buy silver to force a hosing of the bears.

However, according to the Commodity Futures Trading Commission’s Commitment of Traders report of last week, they are too late. Hedge funds went long prior to the Reddit craze.

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