The so-called silver squeeze is making headlines worldwide. As of 1 February 2021, the price of the precious metal has hit a seven-year high at $29.40 (£21.48) per ounce.
So should I buy silver today to make the most of this upwards swing?
There are a number of ways I could buy silver. I could buy shares in a silver fund, for example. And the iShares Physical Metals Physical Silver ETC (ticker SSLN) has just shot up into the top 10 most viewed investments on the Hargreaves Lansdown website. Because this fund tracks the market price of silver, SSLN is up nearly 10% today.
What is a silver squeeze?
The idea of a silver squeeze, in very basic terms, is this.
The silver price — so the theory goes — has been artificially held down by people (hedge funds, institutions, etc.) who ‘short’ silver. This means they are betting that the price of silver will fall.
To short, or short-sell means borrowing a share or commodity, and then selling it. If the price falls, I can buy it back at a lower price, return it to the lender, and pocket the difference. But if the price rises, I’m forced to buy it back at a higher price, and I lose money.
If a lot of new investors rush to buy silver, raising the price, the short-sellers will be forced to buy it back at a much greater price. This ever-increasing upward pressure forces prices higher. It’s more complex than that, but this is the bones of a silver squeeze.
All from GameStop short squeeze
I couldn’t fail to have seen the GameStop buying frenzy that has consumed US markets in the past week. The American video game retailer is in a very unusual situation.
More than 100% of its shares have been shorted! So retail investors, driven by Reddit and social media, are piling cash into GameStop shares.
They believe that by buying and holding GameStop, they can force the price higher, and force GameStop short-sellers to buy back the shares at ever-higher prices.
In the past week, a new thesis appeared on Reddit and across social media. That the same thing could happen to the silver price. Hence the so-called silver squeeze.
There are some investors (and a lot of traders) who can’t resist chasing the latest hot stock or investing story. I’m definitely susceptible. I like fun. I like excitement. Who doesn’t? And there’s nothing else to do with everything locked down!
But if I start getting a buzz from buying stocks, shares, silver or whatever else, then I’ve got the beginnings of a real problem. I know I’m forever going to be chasing that feeling. And if there are no sound investments on the day I need that dopamine or adrenaline hit? Then I could start making riskier and riskier decisions. I could start gambling.
It’s entirely possible the idea of a silver squeeze could force prices up. It could even break all-time highs. But this would only be short-term euphoria. In a few weeks, when the short squeeze story gets stale, and everyone moves on to the next shiny bauble? I see the price falling hard. And retail investors like me will be the ones who lose out.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
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TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.