Silver is a good story for the populist craze that sweeps retail investments. But creating a so-called short squeeze on the precious metal is impossible, according to commodity analysts at Goldman Sachs.
A tightening of the sale occurs when rising prices force pessimistic investors to buy back an asset that they had sold at a higher price, thus suffering financial losses.
But that doesn’t work in commodity markets, according to Jeffrey Currie, commodity analyst at Goldman Sachs. This is because most of the short positions in commodities are contracts used by production companies to protect themselves against future price fluctuations.
In the stock markets, the shares already exist and the hedge fund that borrows them must at some point return them. In the silver markets, short sellers promise to deliver a new batch of silver that producers are digging up from the ground.
In stocks, “the guarantee of a future purchase is the mechanism that drives a little pressure,” Currie wrote in a note on Tuesday. “When short positions in commodities are largely backed by real physical shares, there will be no subsequent purchase or tightening of short positions. To short open a commodity market, you would need to own a substantial portion of the underlying real physical market.
In addition, there are rules that limit the size of positions that individual investors can take. They were implemented after “Silver Thursday” in 1980, when the Hunt brothers, two wealthy Americans, monopolized the market by buying almost a third of the world’s supply, raising the price by 713% in three weeks.
However, Currie said the persistence of a general populist theme in US policy is positive for commodity prices in general. The Covid-19 pandemic brought about a change in the objectives of governments and central banks, moving away from economic and price stability and towards social needs, which most likely will involve inflationary spending.
“Higher spending on social needs not only increases consumption, but also creates more intensive consumption in commodities, as low-income families consume more commodities per dollar spent,” he wrote.