All That Glitters Is Not Silver

Who among us is old enough to remember the Hunt Brothers? If you were in the market in the late ‘70s or early ‘80s, their attempt to corner the silver market became an unforgettable saga – one that ended in financial ruin for many. Those of us who entered the business even a decade or more after that were still familiar with the story, as veteran traders imparted the lessons of that quixotic quest onto their trainees. I just checked Google trends and saw only a mild increase in searches for the Hunt Brothers. Today’s trading activity makes me think that many of those lessons have been forgotten.

Image by Mylene2401 from Pixabay

Last week we started to hear that the r/wsb crowd was starting to look at silver. At a superficial level, that fits with the theme of looking for heavily shorted names. The main silver ETF, the iShares Silver Trust (SLV), had a short interest of just over 24 million shares as of January 15th (remember that short interest is reported bi-weekly by the major exchanges). Yet there are many different dynamics at work in the commodities market than in the stock market, and I fear that those are not fully understood by those who are rushing headlong into silver and the companies that produce it.

Silver is not just a precious metal; it has industrial uses as well. That pits retail traders against a wide range of traders at large companies who possess an incredibly nuanced understanding of the mechanics of that market. When the Hunt Brothers were in vogue, the largest consumers of silver were Kodak, Agfa, Fujifilm, and the like. It was key to the photo processing business. That business has faded in popularity of course, but there are still a wide range of other uses. It is important to acknowledge that it is much easier to move an individual company like GameStop (GME) or AMC than it is to move a commodity with a global web of international producers, users, and traders. 

The Hunt Brothers began their quest when inflation was rampant, and silver was viewed as a hedge against that inflation. They primarily utilized the commodity futures markets, which afforded them a very high degree of leverage. Then they continued to pyramid their leveraged positions, borrowing more money when it became time to take delivery on their contracts.

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