Viral Effect Of Investor Rebellion On Money Flows Could Blow Up Physical Silver Market

Well, it’s been an extraordinary week in financial markets – and perhaps a pivotal one in the silver market.

The big story wasn’t the Federal Reserve’s policy announcement or any other actions by central planners. Instead, all eyes were on a loosely connected group of traders who gather on internet discussion boards to plot purchases of depressed stocks such as GameStop.

Hedge funds had taken out large short positions on GameStop, AMC, Koss, and other beaten-down stocks – betting that their share prices would continue to fall in value. They typically offset their short positions by going long other stocks. That theoretically mitigates risk and gives them something close to neutral overall market exposure.

The problem is that in extreme circumstances the losses on a short position can be orders of magnitude greater than the gains on a corresponding long position.

In fact, short sellers have unlimited risk since a stock or commodity or other asset has no defined maximum upside.

GameStop shares traded under $15 at the beginning of the year and spiked to as high as $483 on Thursday. The unexpected surge in buying from individual online traders created an epic short squeeze – forcing panicked shorts to cut their losses by buying to cover at higher and higher prices, adding even more fuel to the rally.

So, what does this have to do with silver

For years, many silver bugs have envisioned a time when the concentrated short positioned held by banks and other large institutions in the futures market got squeezed, blowing the lid off silver prices.

Up until now, the big players have always managed to get their way whenever they have piled on massive naked short positions – selling into the market more ounces of silver than they could ever possibly deliver and counting on being able to trade out of their contracts for cash.

The effect of the concentrated short position has been to cap rallies, trigger outsized selloffs, and depress sentiment toward silver.

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