(BEWARE) All Eyes on Silver

Katusa's Investment Insights February 5, 2021 (BEWARE) All Eyes on Silver By Marin Katusa Headlines this week were dominated by manic retail investing inspired by the WallStreetBets (WSB) subreddit. I can’t believe how many text messages I’ve received in the past week regarding Reddit and the GameStop and AMC short squeezes. If you need a primer of what happened there and how it started, you can watch [my video explanation here](. Recently, a few Twitter users created a silver version of the Reddit post, which got up-voted (ranked higher so the community could see it) to the point that it became major news next to the GameStop post. With that, it has come a major spike in interest for all things silver – miners and physical especially. Most dealers are telling me that they are out of stock. And the Vancouver bullion exchange which is on the main floor of our office building had a lineup down the block like it was an Apple store during iPhone launch day. This is truly rare. - But it does not mean that silver is about to shoot up to $100. It’s a textbook example of a crowd experiencing FOMO with a major injection. But I want to warn everyone of the dangers of confirmation bias – and this is a perfect example. You will likely find the top posts, tweets, and news stories that confirm what you want to hear: - “Silver is going to $50, $100.” - “New silver traders are about to moonshot the price and stick it to the hedge funds and banks.” Sounds great—but I have some serious reservations. Silver is a unique market because it’s both a store of value and an industrial metal. Nearly 60% of silver is used in industrial applications, with the residual 40% used in jewelry, silverware, and silver bullion. There’s certainly an argument to be made that silver is a precious metal dressed up and partying at night… and a base metal in the morning with a vicious precious metal hangover from the activities the night before. Silver has no shortage of war and fortune making stories… From the days of the Hunt Brothers cornering the silver market… to Warren Buffet buying 112 million ounces of silver calling it “for investment purposes” rather than outright cornering… To the JP Morgan short position… The booms and busts of silver have been truly exceptional, putting the testicular fortitude of even the strongest silver bugs to the test. I like silver just like any other resource investor… but I like gold more. When silver Booms, it moves fast and swift. But when it Busts and there’s no bid, it collapses just as hard… I always buy my metals during Echo’s, which [I’ve talked about in the past](. The “Wall Street establishment” Just like the GameStop squeeze that’s been grabbing all the headlines the last few weeks, this attempt to ‘liberate’ the silver markets isn’t about fundamentals, profitability, or arbitrage. It’s about sticking it to Wall Street. Few dislike the suits more than me. I’m born and raised in East Vancouver of Dalmatian heritage. I come from an amazing family that had a lot of love and little else financially. I was lucky, I had tough older brothers that paved the way for me in a neighborhood of majority immigrants (like my parents) where literally it was dog eat dog world. Suits were only worn at weddings and funerals where I grew up. Ironically, most suits (and in a large part their trust fund children) are evolving into Champagne Socialists which I equally dislike. You know the type… They went to university (most likely were part of a frat to feel cool), pretend to care about society and the environment but drive Ford Raptors to pretend to be masculine because they lost their masculinity long ago. As they’re nothing more than eunuchs parading around as modern corporate citizens. Wow did I just say that? Hell yeah. Where I come from, you do what’s right. Regardless of if it makes you popular or not. And I’m cheering for the retail crew. I’ve been taking on the suits for years—and kicking ass. And this time, I don’t see the WSB, social media, and Robinhood succeeding on the silver shorts for the following reasons (and I published this previously to my paying subscribers): - No one is betting against them. - They lack the capital to bring the commodity futures market to heel. - The asset managers who operate silver-backed exchange-traded products (ETPs) are already way ahead of them and can change the rules legally on them. - Unlike GameStop and other companies, silver actually has a strong long-term outlook. Silver Mining Stocks One of the easiest ways for traders to play the #silversqueeze is to target the silver miners, most of which have secondary listings on the NYSE or NASDAQ. These stocks have seen heavy trading action this week: some stocks gained as much as 28%... Only to immediately fall back 20% the following day after the #silversqueeze started losing steam, essentially giving up the gains. But there are a few reasons why what happened to stocks like GameStop and AMC Entertainment won’t happen to silver miners. The chart below compares the surge in trading volumes of the five largest silver miners against the five largest companies targeted by WSB. You can see that is not nearly as much volume going into silver miners. Second, other than First Majestic Silver there aren’t any major institutional short positions in silver miners to squeeze. As the table below shows, short interest, or percent of shares sold short, in the major silver miners is actually quite low when compared to WSB darlings like GameStop or AMC. Lack of short interest means, of course, no short squeeze. Which would take away one of WSB’s supposed driving forces behind a major share price runup. Get to Know the Silver Futures Market This past Monday, silver prices surged to an 8-year high of over $30/oz. While many would be quick to attribute this to WSB and the retail crowd shifting their focus from stocks to commodity futures, this was simply not the case. The very next day, silver plummeted as professional traders started taking profits and the CME raised the maintenance margins on its standard silver contracts by 17.9%. The Wall Street pros had effectively crowded out novice retail traders by stirring up price action to overbought levels and driving up volatility. The posters on WSB appeared to capitulate, warning their followers to stop trading silver futures. Unlike buying stocks, trading in commodity futures poses much higher barriers of entry to the retail trading crowd. For silver products traded on the CME, these barriers include: - High initial margins and maintenance margins - $15,000 for standard silver futures, for physical delivery of 5,000 oz. - The complexity of the instruments being traded and their high degree of leverage to the underlying commodity. At $30/oz. the standard contract stipulates the delivery of 5,000 oz. of physical silver of at least 99.5% purity. As a buyer, unless you offset this contract by selling an equivalent futures contract at a forward month, you’re on the hook for $150,000. - Market access is more complicated – futures can’t be traded at all on Robinhood, and they can’t be traded commission-free on most other brokerages. In short, you cannot simply open an account with a $1,400 balance and start day trading silver futures. Even the micro silver contracts have an initial margin requirement of $3,080 and a contract size of 1000 oz. These financial instruments are outside the reach of investors who don’t have at least $100,000 allocated to trade exclusively in futures. In fact, the CFTC doesn’t require exchanges to report positions held by individual traders because the dollar value of these positions makes up such a small proportion of the futures market. - In the latest Commitment of Traders report, over 80% of the long positions were held by producers, industrial users, swap dealers, hedge funds, and the like. As we can see in the chart below, these hedge funds, classified as ‘managed money’, have been net long since June 2019. The CFTC reported a net increase in these spec longs positions last Tuesday, long before #silversqueeze was trending. The chart below shows the notional value of all the open futures contracts for silver on the Chicago Mercantile Exchange for the last 40 years. As of Jan. 29th of this year, this value was $21.4 billion, of which $9.4 billion (or 44%) was attributable to hedge funds. - In other words, it’s the total value of the silver currently being traded on the CME. Note that the notional value of the futures market does not reflect the dollar value of the futures. This is because most traders who are long (buyers) never take physical delivery of the metal but instead offset their positions by selling next month’s contract. Those who are short (sellers) will avoid having to deliver the silver by buying next month’s contract. Since producers and merchants are currently on the short side of the trade, it’s the hedge funds who are going long and driving the recent surge in silver futures prices. With the value of the silver being traded on the CME and inventories worth $40 billion, retail investors would barely move the needle. This part of the battle takes place on a front that Main Street can barely even step foot into, let alone hope to win. The reason that silver can make big moves really fast is because the market cap is tiny, on a global perspective. Because of this massive demand for silver, and with the mainstream crowd (and a whole new millennial generation) waking up to the fact that silver can be a real asset, there’s a big appetite to put money into passive funds. We’ve just witnessed the largest inflows since the summer when gold broke $2,000 and silver last neared $30. And to be clear, there isn’t an excessive amount of short interest in funds like SLV, which had less than 4% short interest at the time of writing. Silver Linings Playbook Hedge funds aren’t going to get squeezed. And asset managers who run these ETPs like BlackRock or Sprott will be just fine. That is, unless the ringleaders on WSB can somehow find a way to control the silver bullion market. Where are they going to find the hundreds of billions of dollars to do that? Furthermore, it looks like asset managers are well ahead of the curve. Over a week before WSB decided to shift its attention to #silversqueeze, the guys at BlackRock, Sprott, and Aberdeen Standard, to name a few, had the foresight to add almost $600mm to their silver ETP holdings. This was the largest weekly inflow reported in the last six months. To put this in further perspective, on Jan 20th, SLV reported $500mm in daily inflows – the highest BlackRock reported in seven years. This was two days before the NYSE halted trading on GameStop Corp and the phrase “short squeeze” became ingrained in everyone’s consciousness. Nobody dislikes the short funds more than I do. I’ve openly talked about and taken on some large short funds in the past. - But to truly cripple the shorts in the silver sector, over 200 million ounces will need to be purchased for the synthetic derivative and paper contracts to be exposed. That’s over $6 billion in new silver demand purchased and requested for delivery—and that’s very different from increasing the market cap of a company by $6B. To purchase the silver and cripple the synthetic market manipulators, $6B in actual silver purchases demanding delivery would be required to come in from outside sources. That’s a big buy ticket and very different than bringing in a couple hundred million dollars of buying volume to take GME from a $1B market cap to $22B market cap. Don’t Forget Junk Silver… In addition, unlike in the equity markets, even if WSB were successful with their silver purchases you can expect millions of ounces of “junk silver” to come off the shelves and hit the market. That includes anything and everything from coins to silverware, which would require new funds to absorb the new supply. And while many online bullion dealers are reportedly overwhelmed trying to keep up with the surge in retail demand, their supplies represent a tiny fraction of the bullion supply that goes through the LME and CME. On top of that, market-ready stockpiles of silver, the kind stocked by wholesalers, are 3 times the average daily futures volume. Silver Can Do It All Remember, silver isn’t just a precious metal – it’s primarily an industrial metal. In the last 10 years, the value of annual silver production has been worth anywhere from $16 billion to $36 billion – according to Metals Focus. Nearly 60% of annual global silver consumption goes towards industrial fabrication and similar uses. And less than 20% of demand is made up by investment products like bars and coins. So, even if there’s a shortage of silver coins and bullion, there’s still plenty of silver in other forms going around. There’s no doubt that retail investors, in their latest insurgent efforts, are driving up the share prices of silver ETPs and silver miners. But they aren’t the ones driving up bullion prices. I still think we’re just in the [early stages of an upcoming silver bull market](. That was the case even before all of these short squeeze shenanigans, and my thesis remains unchanged. Retail investors have proven they’re a force to be reckoned with… So powerful, in fact, that Robinhood had to band together with other brokers and banks like Interactive Brokers, Charles Schwab, and TD Ameritrade to put a block on buying more GME stock. So much for a “free market”. As a result, all of these brokerages are facing multiple lawsuits. Robinhood, in particular, has been hit with dozens by angry WSB members. And their CEO, Vlad Tenev, is expected to testify before the House Financial Services Committee in two weeks’ time. But however that ends up settling, silver is a different beast, as I’ve explained. With the forces at play in the silver markets WSB will be hard-pressed to be able to do much more than bump silver miner and SLV prices – and in almost all cases that bump has already been reversed. WallStreetBets needn’t worry, however. Even without their help, silver is poised for the run of a lifetime. I and my [Katusa’s Resource Opportunities]( subscribers are already taking on the establishment and old ways of doing things. The walls are opening up for a new generation of people and a new way of investing. The moat around opportunities formerly reserved for the ultra-connected is coming down. And our army is growing in size and capital. Everyone from college students to very high net worth family offices and all in between. Regards, Marin [Share]( [Share]( [Tweet]( [Tweet]( [Share]( [Share]( Big Ideas We’re Covering Now Get up to speed on where Marin sees huge opportunities. Below are the most important trends and opportunities we’re tracking right now. [GAMESTOP: The Greatest Short Squeeze and why Wall Street STILL wins in the end...]( “Sir, This is a Casino” – Shorts and What’s Next The Birth of the Meme that Killed a Hedge Fund. Full details on this [link here](. [Beware of the US Bond Bomb, Tik-Tok "Investors" and Buffett Indicator]( Beware of the US Bond Bomb, Tik-Tok "Investors" and Buffett Indicator A bull market can make an average or even rookie investor feel smarter than a Wall Street or Bay Street vet. But buyer beware and prepare. To learn more, [click here](. Copyright © 2021, Katusa Research, All rights reserved. If you wish to stop receiving our emails or change your subscription options, please [Manage Your Subscription]( Katusa Research, Suite 530 - 800 West Pender St, Vancouver, BC V6C2V6, Canada