Dominik Osswald / Bloomberg via Getty Images
Is silver the new GameStop? The question remained on Monday as the metal rebounded, suggesting it was the next hot ticket product in the market.
The answer is both yes and no – and both signal that investors should be careful.
Silver prices hit an 8-year high on Monday, rising to $ 29 an ounce after interest rose late last week. The iShares Silver Trust ETF, an exchange traded fund, was up more than 11% last week.
The metal’s boom appeared to resemble the speculation fueled by Reddit, which has brought GameStop and other stocks like AMC Entertainment to staggering levels in recent weeks.
More from Personal Finance:
Why the GameStop madness can hurt retirees and hedge funds
Financial advice from TikTok and Reddit? That could backfire
Republicans are pushing for $ 1,000 stimulus checks. Here’s who would qualify
The frenzy does not appear to be tied to the underlying fundamentals of the investment, but rather to tying it to Wall Street funds that bet against GameStop and silver.
Many are likely to get burned if investor enthusiasm wears off and the bubble bursts, experts say.
“These are two very different things,” said Charlie Fitzgerald, a certified financial planner and principal at Moisand Fitzgerald Tamayo in Orlando, Florida, of the investment. “But it’s speculative trading. It can make you bad.”
Silver fell more than 8% at 11 a.m. ET on Tuesday. GameStop shares fell more than 50% on Tuesday. (GameStop was up more than 1,000% on Monday for the year, even though it had dropped a third that day.)
There has been some backlash against silver among Reddit users this week. Some claimed the silver craze was driven by Wall Street traders trying to divert attention from GameStop stock.
Commodities versus stocks
Investors who buy stocks are technically buying a piece of that company. Investors benefit from company profits.
Unlike stocks, silver is a commodity. It is a physical thing that is used by manufacturers, for example. Buying is like investing in other tradable goods such as gold, oil, coffee, wheat, cotton, or corn.
Investors often buy commodities through “futures” contracts. This means that they could get a physical delivery of the goods if they didn’t sell it before the contract expiration date. Oil traders faced this problem last spring when oil prices fell and it was difficult to find buyers.
Long-term commodity investors should generally expect a return around the inflation rate, Fitzgerald said.
According to Fitzgerald’s calculations, silver has produced an annualized return of 1.6% over the past five decades.
But it can go through rapid boom-and-bust cycles. For example, between September 1979 and January 1980, silver prices doubled to $ 120 an ounce. By April, prices had dropped to $ 41 – meaning someone who bought at the top has lost two-thirds of their money in a matter of months.
It’s buying emotions. And gravity will bring it back to reality.
Headmaster with Moisand Fitzgerald Tamayo
“In moments of panic and speculation, it will separate from reality,” said Fitzgerald. “You will get huge spikes.
“It’s emotion buying,” he added. “And gravity will bring it back to reality.”
Of course, there can be legitimate long-term investment reasons for owning silver as part of a diversified portfolio, experts say. For example, aspects of President Joe Biden’s green infrastructure plan would require greater use of the metal.
Move the price
Investors hoping to plunge into silver en masse to boost the price – as GameStop stock did after a “short squeeze” among hedge funds – would likely get a different result on silver and other commodities, said Experts.
For one, the silver market is global. It is therefore much bigger, which makes it harder to move prices up and down.
“It is very different from a small-cap stock,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “”[Retail investors’] The ability to really influence market prices will be much more limited than it is with GameStop. “
Additionally, the dynamics of commodities trading are such that attempting to cause another short squeeze may not work in this market.
Hedge funds that had bet by short selling the stock to GameStop had to sell their positions to reduce losses as the stock price rose. This in turn increased the price even more.
Commodity buyers – perhaps a manufacturer who needs silver for a product – often buy futures contracts at a price below the current market price of the commodity. In this way, the manufacturer can guarantee a price and hedge against drastic fluctuations.
To the casual observer, this may seem like a short position. That said, such buyers generally wouldn’t have to sell their contracts to reduce losses and add stock, as GameStop did, Baird said.
“Your hand was forced to do it,” Baird said of hedge funds. “The likelihood of being in the silver market is incredibly small.”