By Michelle Jones. Originally published at ValueWalk.
When Reddit users on the WallStreetBets forum turned their attention from GameStop to silver for an attempt at a squeeze, someone remarked that gold would be next. However, one firm said the attempted silver squeeze would not roll over into the gold market.
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Silver squeeze won’t spill into gold
RBC Capital Markets strategist Christopher Louney and his team noted that the concerns about a silver squeeze automatically trigger questions about whether something similar could happen to gold because both are precious metals. However, they believe current market conditions do not support a spillover of the silver squeeze into the gold market.
The RBC team noted that the gold market is larger than the silver market in all forms. The World Gold Council puts global gold liquidity across over-the-counter, exchange and ETF trading at a daily average volume of $182.75 billion last year. Like silver, the market has been net long on gold for quite some time.
However, Louney and his team added that the precious metals markets are more unique than other mainstream markets. They explained that while gold is accepted as part of the global financial system, precious metals have “long had a unique vein of investor psychology.” That psychology has resulted in large numbers of investors moving in and out of the market in mass.
Why the squeeze failed
The RBC team believes the “short squeeze narrative” for silver was a “mischaracterization” of what happened, which is another reason not to expect such a frenzy in the gold market. They noted that there probably was a lot of retail trading in silver, and precious metals could move higher due to interest from both retail and institutional investors.
However, they believe the silver squeeze idea is an “exaggerated narrative,” even if it did have a short-term impact on prices. Louney and his team added that precious metals could rise if online sentiment shifts significantly and market conditions were more conducive to a squeeze. Still, they see little evidence that the alleged silver squeeze will spill into the gold market or other commodities as things stand now.
Goldman Sachs analysts seem to agree with the RBC team. Goldman analysts said in their own note that the attempt at a silver squeeze actually failed. They pointed out that some shorts are speculative and must be covered before they expire, most are “driven by industrial producers hedging their forward earnings.”
“When commodity short positions are broadly backed by real physical stock, there will be no subsequent buying and no short squeeze,” Goldman Sachs analysts said in a note.
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