Last week, WallStreetBets members started to discuss what could be their next move in what is being called the “Reddit Rebellion”. The users started to debate that it was time to make an entrance into the most manipulated market on earth: the precious metals market. They argued that in addition to the enormous gains they could make with the assets, a really appealing plus would be sparking the implosion of several banks that have been manipulating gold and silver to cover real inflation, including JP Morgan. And considering the massive flows into the Silver Exchange-Traded Fund (SLV), it seems that they are already putting their plan into place. SLV witnessed inflows of nearly one billion dollars on Friday, almost double the previous record inflow for this 15-year-old ETF.
Consequently, that helped to induce a spike in SLV off Wednesday’s lows of more than 11%. Short-interest in the ETF has also been building. As ZeroHedge reported in a recent article, this upswing has happened right after Reddit user ‘TheHappyHawaiian’ posted a very detailed thesis on the advantages of buying silver and highlighted that it was possible to make history by triggering the world’s biggest short squeeze.
According to the Redditor, currently, those who are shorting silver via the futures markets are a couple of big banking corporations and, the user stresses that “making them pay dearly for their over-leveraged naked shorts would be incredible”. This time, it’s not a hedge fund that will take the coup, their main target are now major banks and Redditors are going for blood. “It’s not Melvin capital on the other side of this trade, it’s JP Morgan. It’s time to get some payback for the bailouts and manipulation they’ve done for decades – just look up silver manipulation fines that JPM has paid over the years!” he exclaimed.
In that sense, the squeeze could be set off by forcing a significantly higher percentage of the futures contracts to be actually delivered in physical silver. Taking into account that there is a very small amount of silver in the COMEX vaults or available to be effectively delivered, if massive purchases happen on the open market, the prices will be sent to record-highs since it’s impossible to suddenly create more physical silver which is also ready to be delivered. Different from stocks, in which traders are able to just issue more shares if prices rise too much, there’s no way to keep up with ramping demands for physical silver.
To provide a clearer picture of how that would occur, let’s picture a situation in which a futures seller gets really unlucky with a buyer who demands to take delivery. If the seller doesn’t have it and starts to see that will be incredibly difficult to find the silver, he would likely go long a matching number of futures contracts and require actual delivery on those. That would solve the problem in the short-term because the seller would attend to the demand of the buyer with a new seller, but then, that new seller would have the same issue as the previous seller and would likely make the same move, generating a cascade effect and potentially provoking a melt-up. In that way, all the naked shorts would attempt to offload their position to someone who actually own some silver. The Redditor reveals that this is the exact desired effect and says that the goal is to have the silver and do not sell it until it is at a much higher price due to desperation.
Finally, the last dominos to fall as a part of this narrative are inflation and currency debasement. As we repeatedly discussed on the channel, the government and the Federal Reserve have been recklessly printing money which is debasing the value of real dollars. For that reason, investors have been turning to hard assets as a form of wealth protection, which also contributes to drive up the demand for silver. The additional $1.9 trillion bill that will probably be passed over the next few weeks or months, combined with the reopening of the economy, will be the perfect catalyst for hyperinflation, as the Redditor signals, “once inflation starts it often feeds on itself”. And altogether, that’s the perfect catalyst for much more financial chaos. Let the buyers beware.