Goldman Sachs says it's impossible for retail traders to short squeeze silver

Published Tue, Feb 2 202110:20 AM ESTUpdated Tue, Feb 2 202110:50 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Goldman Sachs strategists said retail investors would not be able to force a short squeeze in silver. Goldman global commodities head Jeff Currie and other strategists said a short squeeze would be "unattainable" and that regulations have made it nearly impossible for someone to corner the market. They noted that during the infamous squeeze in 1980, the Hunt brothers were able to acquire a third of the world's supply, driving the price up by 713% in three weeks. Silver has been the target of intense speculative buying in recent days, particularly in the iShares Silver Trust ETF. The ETF was down about 6% on Tuesday after rising 7% Monday. On Monday, the Commodities Futures Trading Commission said it was closely monitoring the situation. The CME Group also raised maintenance margins on Comex 5000 silver futures by 17.9% on Monday. Silver futures were down 7% in early trading Tuesday. The strategists said in order to pull off a Hunt brothers-like squeeze, the Reddit WallStreetBets forum traders would need to own roughly 4,600 troy ounces of silver each. Precious metals are traded in troy ounces, which are slightly heavier than ounces — 14.6 troy ounces to a pound versus 16 ounces. Investors on the forum appeared to be targeting silver after they drove up the prices of a number of stocks shorted by hedge funds. The most notable was GameStop, which has been sliding since hitting a peak of $483 on Thursday. The Goldman strategists noted that the current regulations on the COMEX have position limits of 7.5 million troy ounces, so the position would have to be split at least 53 ways with each position valued at $217 million. "It is now nearly impossible for someone to corner the silver market," they wrote. "In the current environment, a co-ordinated surge in investment by retail traders into the silver market would simply raise volatility and generate small regional dislocations in supply-demand dynamics." Shorting a commodity is also different than shorting a stock, the Goldman strategists added. An equity short position involves borrowing shares of the company that is being shorted with the promise to return those shares to their owner at some agreed date. There is an implicit guarantee that the stock will be purchased at some point. That is not so in the commodities market. The Goldman strategists noted that some shorts are speculative and require covering before they expire, but most are driven by hedging by industrial producers. When short positions are mostly backed by real physical commodities, there is no subsequent buying and there is no short squeeze. To create a short squeeze would require ownership of a large portion of the physical commodity market. The Goldman strategists said silver is their preferred precious metal, and it has been outperforming gold as global industrial output improved and on expectations for solar energy. "We stress that our core view on silver remains the same, as does our price target of $30/toz or $33/toz if an aggressive solar push is confirmed by the Biden administration," they wrote. "On net, silver benefits from both the dollar debasement theme and the green energy led industrial recovery."

One-kilogram silver bars sit stacked at Gold Investments Ltd. bullion dealers in this arranged photograph in London, U.K., on Wednesday, July 29, 2020.

Chris Ratcliffe | Bloomberg | Getty Images

Goldman Sachs strategists said retail investors would not be able to force a short squeeze in silver.

Goldman global commodities head Jeff Currie and other strategists said a short squeeze would be "unattainable" and that regulations have made it nearly impossible for someone to corner the market. They noted that during the infamous squeeze in 1980, the Hunt brothers were able to acquire a third of the world's supply, driving the price up by 713% in three weeks.