Analyzing the Failed Silver Short Squeeze by Reddit Users

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By now, everyone with even a passing interest in financial trading will know about the exploits of the now-infamous Reddit group, wallstreetbets. The GameStop trade was one of the most intriguing trading phenomena of recent times. And even as the furore dies down, GME stocks are worth around ten times the amount today than they were at the beginning of the year.

Traditional investors, of course, can see a threat and opportunity simultaneously from groups like wallstreetbets. While the stated goal of the group is to hurt those in short positions for certain stocks and commodities, you can see the sense of jumping on board when huge numbers of small investors make a move with a single purpose. The GameStop trade was proof of that, as many of those making the most gains were wealthy Wall Street investors and hedge funds – the very targets wallstreetbets intended to hurt.

Nevertheless, the next trade arguably raised a few eyebrows. The original post on wallstreetbets had the headline, “Silver Biggest Short Squeeze In the World $SLV 25$ to $1000”. The post then went on to explain that “billion (sic) banks are manipulating gold and silver” and “inflation adjusted Silver should be at $1,000”. The post also told readers to “think about the banks like JP Morgan you’d be destroying along the way”.

 

Silver price is back to where it was

Now, over a month later (March 23rd), silver is trading at just over $25, an almost identical price to the day of the original Reddit post. And, as far as we can see, JP Morgan has not been destroyed. Perhaps some people got rich when silver spiked towards the $30 mark as the frenzy hit the markets and reporting was picked up by the mainstream media. But this was no GameStop trade, and the silver market looks exactly as it did.

What happened? To understand, you arguably need to understand Reddit more than the silver markets. With the latter, it was plain to see that only a modest manipulation of the price was possible – $1,000 was preposterous. Goldman Sachs said a price of $33 was possible. In a news piece, Kitco, often cited as the best place to buy gold and silver online and a reputable source for news on precious metals, pointed out that the global silver market was worth about 200 billion dollars annually.

In short, this squeeze was always going to be out of reach for retail investors. Other reporting pointed out that most positions – certainly the type of investor wallstreetbets wanted to hurt – were long on silver. Who were the Reddit users intending to squeeze? Is JP Morgan somehow noted for its huge short positions on silver?

 

Reddit is rife with conspiracy theories

And that gets to the root of the problem. If you look through the posts and replies on wallstreetbets, you will find that they are often littered with misinformation and conspiracy theories. It’s certainly not all rubbish, and some of the posts are intriguing, even insightful. But there is an overarching theme of overzealousness, as well as an anger that the system is rigged against them. The banning of GameStop stock purchases through the Robin Hood app only served to reinforce this perception that the establishment wants to see them fail.

Indeed, once the silver trade didn’t materialize, Reddit came alive with a new theory – that this was a ploy on behalf of the hedge funds. The new posts talked about how fake wallstreetbets accounts were deliberately trying to punish the retail investors after the GameStop trade. The new posts (rightly) pointed out that buying silver en masse was likely to benefit the hedge funds, not hurt them. And thus, the only conclusion that can be drawn is that the hedge funds themselves started to silver squeeze movement.

This idea that your enemy is responsible for any mistakes you make is straight from the playbook of conspiracy theorists like Qanon. The language used is remarkably similar to the chatter that appeared after the Capitol Hill protests, where wild theories were floated that it was all a left-wing plot to make Donald Trump look bad. As with Qanon, the mainstream media is also a target. The media was cited as one of those “trying to push you to buy silver” in one post on Reddit.

And that’s the lesson here for investors looking at Reddit and wallstreetbets. Most of it is harmless, and it can actually feel exciting to get on board with a trade like GameStop. But many of these posters don’t have a clue about markets and how they work. Moreover, some hold a worldview that seems ultimately dangerous. By all means, look at Reddit for an insight into the next GameStop-style trade, but tread carefully.

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