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Should You Bet on a Silver Short Squeeze?

Should You Bet on a Silver Short Squeeze?

Exactly one week ago, GameStop (NYSE: GME) was up 1,744% to start 2021.

But the speculative frenzy surrounding the stock is leaving as quickly as it arrived.

GME fell nearly 31% on Monday and was down another 60% yesterday. Shares are down 74% off the recent high.

GME Year-to-date performance chart

The WallStreetBets crowd is moving on. They’ve set their “short squeeze” sites on a new target.

Silver.

The commodity’s price jumped over 9% on Monday to the highest level in eight years, only to slump 8% yesterday.

But don’t expect silver to post the same meteoric gains as GameStop. Here’s why…

Why You Can’t Squeeze Silver

The mechanics of shorting gets a little complicated, but it works like this.

Let’s say you want to bet against GME. You have to borrow the stock from another investor that owns the shares. You’d then sell those borrowed shares on the open market with the hope that the stock falls. And then you can rebuy them at the cheaper price and return them to the owner.

It’s a common strategy among hedge funds and other institutional investors.

But something unique stood out with GameStop. Investors borrowed and shorted the stock at a rate that exceeded the actual supply available.

When a Reddit-driven wave of buying washed over GameStop, investors who were short the stock were suddenly faced with potential losses. So they rushed to buy the borrowed shares back … creating a textbook short squeeze that drove GME higher.

That’s how a small band of retail traders leveraged a little buying power into an explosive share price move for the ailing company.

GameStop was a perfect candidate for a short squeeze.

There was a shortage of GME stock. There is no shortage of silver.

Most speculative investors are already wagering on higher prices as indicated by silver futures. So there really isn’t anyone to squeeze.

What’s more, silver has already rallied 128% since finding a bottom back in March 2020.

This week’s rally in silver is simply a continuation of the favorable backdrop underpinning the precious metal. And there’s still time to get in.

Buy Silver, but for the Right Reasons

On Monday, the Federal Reserve’s Neel Kashkari said that he’s not thinking about modifying his views on monetary policy because of speculators in these individual stocks. You can rest assured that the Fed will keep its foot on the monetary gas pedal until the labor market gets better or inflation starts to run hot for too long.

Short-term interest rates will stay at zero and quantitative easing will continue to the tune of $120 billion every month.

That’s why silver is rallying.

In addition, there’s a finite supply of the stuff and it has industrial uses in rapidly growing areas such as renewable energy and electric vehicles. I’ve already written about some of those factors here.

All of this puts a strong, steady tailwind behind silver.

You can get silver exposure with the iShares Silver Trust (NYSE: SLV).

It’s still moving higher so make your move now. And how will you know when it’s time to sell? We put together a special video yesterday to answer that question. You can watch it here.

Consider taking this step as well…

Best regards,

Turn Your Images On

Clint Lee

Research Analyst, The Bauman Letter

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