简体中文
  • HOME
  • ABOUT CN FIRST
  • CONTRACT
  • DOWNLOAD
  • CONTACT US
CNF Focus | Is the rise of silver price short-lived?


On February 1, the COMEX silver futures price reached $30/oz, setting a new high in the past eight years. The price of silver rose by more than 12% that day, which was directly driven by retail investors in the WallStreetBets (WSB) forum.

Last Week, retail investors in the WSB Forum won big in the short squeeze of the Game Station (GME). In half a month, GME's stock price rose from less than $20 to a high of $480, a up of more than 20 times, which even attracted the attention of the SEC and Biden's office.

Why did WSBs attention shift to silver?

WSB forum user "jjalj30" said that the silver market is now one of the most manipulated markets in the world. Dozens of banks manipulated the prices of gold and silver to hide the actual inflation. The current easing actions of global central banks are supposed to push up the price of silver. The inflation-adjusted price of silver should be $1,000/oz rather than the current $25/oz. [1]

A retail investor with the user name "TheHappyHawaiian" called for "the biggest short squeeze of silver in history". He said that the market manipulation of silver prices is represented by JP Morgan Chase through naked short selling. The current average ratio of silver traded in future market to physical silver is 250:1, meaning that most trades are completed through cash settlement rather than physical delivery. As long as retail investors can force more futures contracts for physical delivery, they can squeeze short silver positions. [1]

Short-squeezing silver has indeed happened in history, but not just a fantasy. In 1979, the Hunt Brothers controlled 53% of the NYMEX’s silver stock and 69% of the CME’s silver stock, pushing the price of silver from $6/oz to more than $50/oz. In one year, the price of silver rose more than 8 times. Finally the US government intervened, and the exchange took measures including increasing the margin and setting position limits. The Hunter brothers' price manipulation of silver ended in failure, and the price of silver fell by more than 80% in the next year. [2]

Now, the call of the WSB forum has attracted a lot of funds to follow. According to Bloomberg, during the weekend of January 30th & 31st, many retailers including Money Metals, SD Bullion, JM Bullion and Apmex had to suspend sales of silver products before the opening of silver futures market on Monday because they were unable to handle the crazy demand for silver. Silver bars and coins were also in short supply on retail websites. [3]

Exhibit 1. Silver ETF (SLV) Single Day Fund Flow

Data show that the silver ETF (SLV) had a single-day fund inflow of $1 billion on January 29, twice the previous record of this 15-year-old ETF. [4] For a time, both spot and futures silver prices rose sharply, and the rising trend even spread to other markets. Silver mining stocks in various countries were affected and rose sharply.

Is WSB able to repeat the success of GME in silver?

On the day after silver hit an 8-year high, COMEX silver futures fell 8.44% and quickly fell back to where they were before the rise. The market does not seem to approve the logic proposed by retail investors in the WSB forum. Is the price of silver really being manipulated by institutions? Or is there another reason behind it?

Although gold and silver are both precious metals, they are not the same in terms of supply and demand. Gold has typical investment attributes. More than 90% of its demand comes from investment and gold jewelry consumption, while industrial consumption accounts for less than 10%. [5] Silver is an important industrial product, with industrial demand accounting for more than 50% of total silver demand and less than half of the demand for investment and silver jewelry.[6] Therefore, the price of silver is not only affected by inflation and interest rates, but also similar to iron ore and other commodities that affected by industrial supply and demand.

The oversupply of silver has lasted for 5 years. The supply structure of silver is stable, with about 80% coming from minerals and 20% coming from recycled silver. Silver supply grew at an annualized rate of only 0.16% from 2011-2019, basically stabilizing at around 31,000 tons per year. The investment demand for silver declined significantly in recent years, resulting in an average annual surplus of 1,180 tons of silver in 2014-2019. [6] COMEX silver inventory has increased from less than 5,000 tons in 2016 to more than 12,000 tons now. [7] Adding the 30,000 tons of silver in LME inventory, at a price of $30/oz, it would take 44 billion US dollars to buy all LME and COMEX silver inventories. This hypothesis has not taken into account the inventory in other regions such as the Shanghai Exchange, nor has it considered the investment silver products that are already widely available in society. GME's market capitalization was only $1.5 billion before the short squeeze occurred, which is not even in the same order of magnitude as the amount of money needed to short squeeze silver.

It is basically impossible for the WSB investors alone to trigger a short-squeeze of silver.

The long-term basis for silvers rise

Compared with the short-term fluctuations caused by WSB retail investors, the changes in the long-term supply and demand relationship are more worthy of attention. In the past 10 years, due to the substantial cost reduction, photovoltaic power generation has become the most important choice in the field of renewable energy. At present, photovoltaic power generation accounts for only 1% of the global energy supply, and there may be dozens of times more room for growth in the future. As the governments of various countries attach importance to green energy, the speed of photovoltaic development may further accelerate. Silver is an indispensable material in the photovoltaic industry.

Exhibit 2. Trend of Silver industrial demand and photovoltaic demand

From 2011 to 2019, global silver for photovoltaic use is compounded at a growth rate of 15%. In 2019, the silver demand of the photovoltaic industry was 3,069 tons, accounting for 10% of the total silver demand. According to the estimation of Zhongtai Securities, if the photovoltaic industry can continue to improve the efficiency of silver use, then the global silver supply will be restored from oversupply to a balanced state by 2030. However, if the pace of technological progress slows, the photovoltaic industry will consume as much as 7,000 tons of silver per year in 2025, and the world will begin to face a silver shortage at that time. [6]

Conclusion

As an important industrial raw material, silver has been in a state of oversupply in recent years. At present, the amount of silver in COMEX and LME inventories is at a historical high, with a total value of more than $40 billion. Although silver price has hit an 8-year high, without significant changes in fundamentals, only the funds from the WSB forum retail investors cannot provide a sustainable upside momentum for silver.

What is more worthy of investors' attention is the changes in the demand for silver in the photovoltaic industry in the context of the world's vigorous development of green energy. At present, the silver consumption of photovoltaics has accounted for 10% of the total silver demand. If there is no major technological innovation in the use of silver, the development of the photovoltaic industry will drive the total consumption of silver to increase rapidly. It is the change in supply and demand that will be the main factor in determining whether silver can enter a bull market.

References

[1] 方凌,华尔街见闻,《开盘暴涨超7%!白银真的被散户炒起来了?》

https://wallstreetcn.com/articles/3619021

[2] 华夏时报,《美国历史上期货市场操纵经典案例解析》

http://finance.sina.com.cn/money/future/fmnews/20140410/085718756227.shtml

[3] Yvonne Yue Li & Eddie Spence, Bloomberg,Silver Coin Sites Seize Up as Buying Frenzy Takes Hold

https://www.bloomberg.com/news/articles/2021-01-31/silver-retail-sites-grind-to-halt-as-reddit-horde-moves-to-coins

[4] 许超,智通财经《WSB论坛“新口号”:发动史上最大的白银逼空!》

https://www.zhitongcaijing.com/content/detail/404278.html

[5] 林伯谦,华南期货《黄金需求比例》

https://www.entrust.com.tw/upload/entrust/research/%E9%BB%83%E9%87%91.pdf

[6] 谢鸿鹤,中泰证券《白银:光伏行业对供需关系影响几何?》

https://pdf.dfcfw.com/pdf/H3_AP202008121398055414_1.pdf?1597247314000.pdf

[7] COMEX白银库存数据,数据中信,东方财富网

http://data.eastmoney.com/pmetal/comex/by.html



___________
Disclaimer: This report is a translated version. The content of this report is solely for the purpose of providing information, and is only used for general reference purposes, not to induce investment and other behaviors. The contents of this report have replaced the published information and may be selected by third-party suppliers or other reference materials or sources. Although we believe the reliability of the information in the report, we do not guarantee the accuracy and precision of this information. If the original text is quoted and published, the source must be “CN First International Futures Limited” and all rights of investigation shall be reserved.


2021/02/16
CN First International Futures Limited