Did you miss the Gamestop short squeeze? For most investors, a rational fear of getting in too late and being the greater fool that paid the higher price for an overvalued stock and being stuck with a money loser with no buyers left at the purchase price saved them from over paying for Gamestock during the $400 per share height of the squeeze.. .
Well, there is another short squeeze in play. This one is moving at a slow pace, and is focused on a deeply undervalued asset. The asset is silver. Silver is in a supply deficit and there is a huge short position in silver. At some point, the supply deficit will lead to an increase in price, and short covering may rocket the price higher.
The Supply Deficit
My forecast is that demand for silver in 2021 will exceed supply by at least 20%.
The deficit in silver in 2021 will be due to three sources:1) an increase in commercial demand for silver due to growth in the new energy era products, including use in EV's, solar panels, and electronics, 2) investment demand as an inflation hedge; and 3) a short squeeze from purchases being fueled by the Reddit crowd.
Supply
1.0187 billion - Mining and recycling will produce slightly over 1 billion ounces of silver in 2021.
Demand
1.237 billion - Demand for silver will exceed supply in 2021 by at least 218 million ounces
Components of demand
- 600 million - Commercial users will consume about 600 million ounces in 2021
- 174 million - Demand for silver for jewellery will consume 174 million ounces
- 257 million - Purchases of bars and coins were forecast to take 186 - 257 million ounces off the market. But this was prior to the Reddit launch of a silver squeeze movement. The silver squueeze movement has vastly increased consumer demand for silver.
- 200 million - The launch on Reddit of the silver squeeze in late Januuary has expanded the number of silver buyers and significantly increased demand. This new horde of buyers is buying both physical (coins and bars) and paper investments (Silver ETF's and futures). And the flood of new buyers has energized long time silver bugs, who are increasing their purchases of silver..The subreddit, WallStreetSilver, has grown to 64,000 members since it's creation just four months ago and is adding 100's of new members every day.. A leading ETF/Trust, PSLV, has had to add almost 40 million ounces of silver to their inventory already in 2021 in order to have sufficient supply to meet potential redemptions . At this pace, PSLV will take over 100 million ounces off the market in 2021. .
The impact of the increase in demand for this precious metal with a limited supply is evident in the retail market. Local coin shops and online dealers are short on supply and are adding huge premiums to the price for coins and bars. The price for silver coins and bars is 20% above the futures market price of silver, currently in the $25-27 oz. range. (The futures market is based on 1000 oz bars) This divergance in the price of coins and bars versus the price of 1000 oz bars and futures is unsustainable. The arbitrage opportunity is simply too large to remain is place. And not surprisingly, the inventory of 1000 oz bars is being drained from the vaults of the Comex and the LBMA in London. The Comex (silver futures exchange) inventory of silver available for delivery has declined from 151 million ounces in mid Febuary to 117 million ounces as of April 26.
Potential Short Squeeze
Silver is the most shorted commodity. As shown in the chart below, the 8 largest traders of silver on the Comex are short 170 days of production. Currently, sellers of Comex futures are short 860,000,000 ounces of silver (172,000 SI contracts @ 5000 troy ounces per contract). And this is just the transparent shorts on the Comex. The total numbr of ounces sold short worldwide is an opaque number but could be a significant multiple of the shorts on the Comex.
There are many commentators that are skeptical that the silver shorts can be squeezed. However, even if the skeptics are correct, silver remains a good investment opportunity. Pandemic fueled fiscal deficit spending and monetary injections by central banks are debasing fiat currency. The Fed is actively working to increase inflation into an environment where prices are already rising. The Fed's assumption that inflation will be transitory seems short sighted. Further, the Biden administration announces a new spending plan every week. And don't even get me started on how absurd and dangerous MMT (modern monetary theory) is. Has MMT promoter Stepanie Kelton ever heard of the Weimar Republic?
Conclusion
There is a strong likelihood that the price of silver is headed higher. There is a supply deficit and an increase in demand. The question is not whether the price will increase, but whether it will A) rocket higher due to a short squeeze, or B) slowly grind higher due to increased demand.
