Silver Vs GameStop
It’s been a wild few weeks on Wall Street. Chances are that even if you don’t follow the stock market, you’ve come across any number of stories on the incredible rise of GameStop’s stock prices, and to some extent AMC and a handful of other companies.
On Friday, January 29, 2021, GameStop’s stock went as high as $380 and became one of the most traded stocks on the market.
The events were the result of a power struggle that has been brewing for years, the rich vs. the poor. The establishment vs. the populist.
Over the last decade, programmatic trading using sophisticated technology has allowed hedge fund managers to exact enormous profits by short-selling companies that they believe will fail.
At the same time, using websites like Reddit and new financial technology apps like Robinhood, amateur investors (or what the media calls retail investors, those who day trade to try and get personal gains) have quietly built a rebellion against hedge funds.
As MSN Money writes:
The internet has been used to prognosticate about stocks for decades, but there’s never been anything quite like the Reddit community called r/wallstreetbets, also known as WSB.
WSB takes something of an internet extremist’s approach to investing. Its slogan is “Like 4chan found a Bloomberg Terminal,” alluding to the fringe message board and the Bloomberg computer system that is nearly ubiquitous in finance.
Amateur investors on WSB have discussed GameStop (which they refer to by its stock ticker abbreviation, GME) for years, but things changed early this year. As the price of the shares rose, more WSB posters jumped on board. “100% of my portfolio on GME because of you idiots,” a person posted on Jan. 10. On Wednesday, the people who run WSB temporarily made the community private and said they were “experiencing technical difficulties based on an unprecedented scale as a result of the newfound interest in WSB.”
There’s also Robinhood, the app that is the unofficial stock trading platform of choice for WSB. It lets people trade stocks and even more exotic investments, like options, for little or no charge.
As a result, short sellers (mostly hedge funds) lost $23.6 billion on GameStop alone this month.
That’s what we call a bloodbath.
Now, these so-called Reddit warriors have set their eyes on silver. A post on Reddit by aalaja30, declared “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV silver 25$ to 1,000$.
Here’s how the silver squeeze unfolded. From seekingalpha.com:
“A Reddit subgroup called WallStreetBets sent out a call-to-action to buy silver on January 28th. Retail investors piled in en masse and kept doing so on Friday, Jan. 29 and Monday, Feb. 1. By Sunday, January 31, most bullion dealers were outright sold out. By Monday, February 1, silver was up nearly 8% from the Friday close.”
A good friend of mine, Peter Schiff, noted in a tweet, there is a difference between GameStop and silver. His tweet said:
“It looks like the #reddit raiders have turned their attention to #silver stocks. They’re getting smarter. SIlver stocks are actually cheap and represent good investment value. The fact that some investors were foolish enough to short these stocks makes their trade even better.”
However, the advice wasn’t just to buy mining stocks or silver ETFs, but also to buy actual physical silver.
In a recent interview with Peter, he told me:
“Here’s the big thing. Most of the silver that’s traded, is traded on futures exchanges.
People aren’t calling up Schiff Gold and buying their silver and we’re mailing it out to them. They’re just buying a contract on the Comex. And a silver contract is 5000 ounces of silver. That’s a lot of silver, but you don’t have to pay for all of it. The margin requirement, maybe you just put down 3% or 5%, whatever it is, and now you have a contract that entitles you to 5000 ounces of silver. Now somebody else sells that contract to you. So you have the right to buy 5000 ounces of silver, and that somebody else has the obligation to deliver you 5000 ounces of silver.
Except for the person who is entering that short and has the obligation to deliver, they don’t have the silver. They don’t own any silver. And they’re confident that they’re never going to actually have to deliver it. Because the person who bought it doesn’t want the silver either. He’s just betting that the price goes up. So this is the key. What happens if all these people who are buying silver or futures contracts, decide or a big number of them decide, I actually want my silver.”
The problem with all of this, is they don’t just pay the margin, they pay the balance that they owe. And now the guy that short the silver gets sent a letter from the Comex, “You owe us 5000 ounces of silver.” And then the guy is like, “But I don’t have any silver.”
But they have to deliver on the contract.
Where The Silver Squeeze Failed
Silver is a real asset, and GameStop is a fake asset, and so they’re also two completely different assets.
Silver is a $200 billion industry whereas GameStop is probably $500 million. It’s not an asset and it’s being chased by amateurs. The Reddit warriors are not investors, they’re gamblers.
Silver has an industrial component which incentivises heavy industrial companies to want to keep the price low. There are a lot of companies, like the battery makers, guys like Tesla, Toshiba, and Sony, who do not want the price of silver to go up.
Gambling vs. Investing
Most people think of investing as any situation where you put down money with the expectation of getting a return on your money. Unfortunately, what many people think of as investing is actually gambling. This is why so many people have been burned by recent events.
When you’re investing in true cash-flow opportunities, you’re in the driver’s seat. This means that you know how to manage your money, what to look for, and the appropriate actions to take when an opportunity presents itself. You have control over your decisions and your cash, and this improves your chances of increasing your wealth. That’s risk management at its finest.
Now, we’ve all heard the one-off stories of success in a scenario where there was no control. There are always those lucky people who win at the casinos and come home with a small fortune. The same goes for some investors who hand all of their money over to a financial planner, spouse, or family friend and do well.
Gambling may seem like an easy way to make money, but it’s very risky. On the other hand, getting a financial education to increase your cash flow is not difficult—and the rewards usually far outweigh the risks.
In any kind of investing, what sets the gamblers apart from the true investors is understanding the fundamentals. Knowing and following the fundamentals takes much of the risk out of investing. There’s always some risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.
Editor, Rich Dad Poor Dad Daily