The recent run-up in stocks like AMC (AMC), Blackberry (BB), and Bed Bath & Beyond (BBBY) is an indication that traders on Reddit and social media will continue to be a major influence during this bull market. In fact, this is now the second short squeeze that they have organized and engineered. At the beginning of the year, we experienced the first meme stock rally which caused GameStop (GME) to go from $17 to $483 in 13 trading sessions.
These moves are a testament to the power of social media, the infectious memes about punishing short-sellers on Wall Street, and the human desire to be part of a collective that is focused on a mission. Therefore while many investors may be dismissive of this new trend, I find it fascinating from a human interest perspective and believe that it can lead to profitable trades if we can anticipate the crowd’s next moves.
Something on my radar is a new Reddit message board – WallStreetSilver – which is attempting to engineer a short squeeze in the silver market. This follows an earlier failed attempt in February which caused silver’s price to spike from $23 to $28 in a few trading sessions, however, these gains were quickly reversed. Their mistake was in buying SLV, an ETF that buys futures contracts. However, this group now has a much more promising approach which I believe is more likely to be successful, if they can attract more people to their cause. Therefore, investors should consider buying silver ETFs like the Sprott Physical Silver Trust ETF (PSLV), Global X Silver Miners ETF (SIL), and the ETFMG Prime Junior Silver Miners ETF (SILJ).
The first inkling that this squeeze could be successful is that they are targeting the right instrument – PSLV. PSLV uses inflows to buy physical silver, whereas SLV uses inflows to buy futures contracts of silver.
A variety of metrics show that this subReddit’s efforts are starting to gain traction. For one, WallStreetSilver has been showing extraordinary growth in terms of new users joining. In February, the subReddit had just over 20,000 followers and now has over 100,000. Further, there is significant cross-pollination between WallStreetBets and WallStreetSilver in terms of posts and users.
There has also been a sustained increase in PSLV’s inflows which is evident from the growth in its assets under management (AUM). Over the last 4 months, PSLV’s AUM has climbed from $1.6 billion to over $4 billion. And, this is having an effect in terms of leading to a drop in COMEX inventories. Notably, there was no impact on COMEX inventories during the initial attempt to squeeze silver.
While this could certainly be a catalyst for a move higher, it’s important to note that the fundamentals for silver also remain constructive as inflationary pressures continue to build, while monetary policy and fiscal policy remain supportive.
Last year, the budget deficit came in at $3.1 trillion, and it’s projected to be $2.3 trillion this year according to the CBO. The Fed also has a new inflation framework in which it is willing to look past the initial spike in inflation and focus more on a “symmetrical” inflation level. In essence, this means that the Fed will tolerate higher levels of inflation to make up for the years of inflation running below its target.
I believe that both of these factors are positive for silver. Now, let’s look at 3 ETFs that will benefit:
Sprott Physical Silver Trust ETF (PSLV)
PSLV is unique among silver ETFs in that it uses inflows to buy silver. It also allows investors to redeem shares and receive delivery of silver bullion. And, it’s easy to see that PSLV could get even more inflows among silver bulls as silver can be bought through PSLV at less of a premium than silver bars or coins.
While many focus on silver’s investment demand, industrial demand for physical silver makes up 75% of its total demand which makes it much more susceptible to a squeeze. And, industrial demand should increase as silver is used in many electric vehicles and batteries.
Overall, PSLV seems to be becoming more popular, while SLV has plateaued in terms of AUM. I expect this trend to continue especially as PSLV has the power of Reddit traders behind it. The POWR Ratings are also constructive on PSLV as it has a B rating which translates to a Buy. It also has a B for its Buy & Hold Grade which makes sense given silver’s improving fundamentals in terms of investment and industrial demand.
Global X Silver Miners ETF (SIL)
SIL is the largest and most liquid silver mining ETF. It has a diversified mix of the top silver miners that are listed in North America. Silver miners tend to outperform the underlying metal in bull markets as their earnings increase substantially as do the value of a company’s assets.
For example, since the bottom in March 2020, silver is up 138%, while SIL is up 205%. Many of the silver miners in SIL have a cost of production between $10 and $13 per ounce. This means that the bulk of these producers are quite profitable at current prices. Further, they are already starting to exceed 2020 production levels despite lingering challenges from the coronavirus in terms of labor and procuring new equipment.
The POWR Ratings are also optimistic on SIL as it has an A rating which translates to a Strong Buy. Over the last year, SIL has been consolidating between $40 and $48. Given recent positive developments for silver and the potential for a squeeze, a breakout seems likely. Thus, it isn’t surprising that SIL has a Trade Grade of A as it’s showing strong momentum on multiple timeframes.
ETFMG Prime Junior Silver Miners ETF (SILJ)
SILJ is an ETF composed of junior silver miners. Often, these are companies that are more speculative as they are still in the exploration stage, or they are just starting to produce silver. Thus, there is certainly a higher level of risk but in bull markets, junior miners tend to post the best performance.
So, SILJ is certainly an interesting ETF. It gives investors exposure to the asset class while reducing single-stock risk. Most junior miners end up failing given the difficulty and expense of starting new production projects. Some reasons include that deposits end up being of lower quality than anticipated, management making poor decisions, or prices dropping which leads to projects becoming unviable.
Someone could be correct in anticipating that silver prices will go up, but they could still lose money if they invest in the wrong junior miner. SILJ reduces this risk. The POWR Ratings are also bullish on SILJ as it is rated an A which translates to a Strong Buy. It also has a Peer Grade of A indicating that it’s one of the better precious metal ETFs at this moment.