What Is a Silver Short Squeeze?

 

What is a Silver Short Squeeze?

If you’re active in investing communities, you’ll probably hear the term “short squeeze” quite a lot. This is particularly true when it comes to the silver market. Every year, analysts who are bullish on the price of silver sound the alarm that a silver short squeeze may be happening and that prices for the precious metal may start to rise. For the most part, an actual silver short squeeze is uncommon. More often than not, silver bulls use the term to build excitement in the market and, sometimes, to influence the spot price of silver to increase. 

So what is a silver short squeeze? In a silver short squeeze, a significant rise in the price of silver forces traders who bet that the asset would depreciate to either sell their shorts or cover their bets by buying stocks of the asset they’re shorting. In essence, this process “squeezes” bearish silver investors out of the market and can lead to a cycle of higher asset prices. Short squeezes can happen outside of the precious metals sector, too. 

On this page, we’re taking a closer look at the concept of a silver short squeeze and answering some of your questions about how it may (or may not) apply to the current silver market. 

Defining a Short Squeeze

On the stock market, investments are called either long or short. When a trader is “long,” that means they actually own and possess a stock that they hope will go up in value, at which point they will sell. Traders can also “short” stocks, meaning that they are betting that these assets will go down in value over time. Usually, investors short stocks they believe to be overvalued due to a variety of possible reasons. 

As you might imagine, short traders are in big trouble if the stock they’re shorting suddenly becomes more valuable. Just like a trader who is long on a stock loses money in proportion to how much that stock loses value, short traders lose money when a stock appreciates, or becomes more valuable. Short traders can sometimes lose even more money than traders who are long on an asset, since stocks have a floor ($0) but no definitive ceiling. 

When the price of a stock, asset, or commodity rises especially quickly, it can trigger what’s called a short squeeze. During a short squeeze, investors who were betting that the investment would become less valuable lose money, effectively “squeezing” them out of the position. When these traders limit their losses by buying more of the stock they were previously shorting, the price of the asset increases even more, creating a cyclical pattern that accelerates a stock’s rise in value. 

What Causes a Short Squeeze? 

Short squeezes typically happen naturally after favorable data drives the price of an asset higher. Several key indicators can lead to the kind of quick rise in value that facilitates a short squeeze, including: 

• Favorable company earnings reports
• Spikes in demand for a company’s main product
• The closure of a competing company 

Whatever the underlying reason, the main cause of a short squeeze is that the rising value of a stock forces short traders to sell their positions. Because short squeezes lead to this cyclical pattern that drives an asset’s value higher, some investors eagerly search for investable assets they believe could trigger a short squeeze in the near future. 

Silver Short Squeezes Explained 

So what’s a silver short squeeze? Like a traditional stock short squeeze, a silver short squeeze happens when the price of silver rises so quickly and dramatically that investors shorting the metal are forced to cover their losses by buying the same stock they were shorting. What follows is a cyclical pattern where the price of silver rises and forces more traders to sell their short positions or buy more stock in the appreciating asset, which, in turn, drives prices even higher. 

Clearly, a silver short squeeze would be great news for silver stackers and investors who are hoping for prices to rise. That’s one reason why silver bulls often say that a silver short squeeze is imminent; this sort of claim makes investors want to buy more silver. 

In reality, true silver short squeezes are rare. Because the price of silver tends to increase slowly over time, it’s unusual for the asset’s value to increase quickly and dramatically enough to trigger a mass sell-off of short positions. And unlike traditional stocks, silver doesn’t benefit from quarterly earnings reports, the closure of competing businesses, or other fundamentals that drive short squeezes on Wall Street. 

Still, it’s not impossible for the market to face a silver short squeeze. Disruptions to the global silver supply chain, notable mine closures, and spikes in safe haven demand can drive silver prices higher. In some cases, certain key indicators and safe haven demand may be enough to force silver short traders to sell their positions or buy favorable positions in the asset to limit losses. 

Short Squeeze Examples

The idea of a short squeeze garnered international attention in 2021, when members of a stock trading Reddit forum intentionally bought so many shares in GameStop, a company projected to lose value in the near future, that it shot up to an all-time high of $483 USD. But this intentional short squeeze was not the first in Wall Street’s history – and it certainly won’t be the last. 

In the Stock Market

Short squeezes in the stock market can either happen naturally or via deliberate, coordinated efforts. Below, we’ll cover two of the most notable short squeezes of the past decade. 

GameStop Short Squeeze (2021)

The most notable short squeeze of the 21st century was the GameStop short squeeze orchestrated by investors on WallStreetBets, a Reddit forum dedicated to stock trading. Prior to the exposure on Reddit, GameStop was being shorted by several large hedge funds and institutional traders. According to short position holders, the growing dominance of digital video games would deal a significant blow to the profitability of GameStop, a chain of brick-and-mortar video game stores that specialize in physical games.

This movement to buy GameStop stock emerged from Reddit but quickly reached investors outside of that community, driving the stock price so high that many institutional traders were forced to spend billions of dollars, triggering a serious short squeeze. The price of GameStop’s stock peaked at $483 USD in January of 2021, and the saga became such a cultural touchstone that it inspired a movie. 

Nickel Short Squeeze (2022)

Markets for nickel (the metal) also experienced a notable short squeeze. After the invasion of Ukraine by Russia in 2022, markets reacted by buying more contracts in nickel, since nickel is a vital wartime component used for weapons, vehicles, and other gear. Months before, a wealthy trader named Xiang Guangda shorted nickel. When news of Russia’s formal invasion reached the international community, the price of nickel increased so quickly that Guangda was forced to buy nickel to cover his losses. 

If the London Metal Exchange (LME) had not paused and reversed trades during the short squeeze, Guangda stood to lose billions of dollars as the price of silver skyrocketed. 

In the Silver Market

Silver short squeezes are far rarer than stock short squeezes, primarily because the price of silver rarely rises dramatically enough to force short traders to buy large amounts of silver to cover their losses. 

The Hunt Brothers Short Squeeze (1979-80)

The most successful example of a silver short squeeze happened in 1979-80 and led to the precious metal’s highest price ever. In the late 1970s, the wealthy brothers of the Hunt family began buying up as much silver as they could. At its peak, the Hunt brothers’ hoard was comprised of over 200 million ounces of silver. As a result of their efforts, the price of silver rose rapidly, peaking at $49.95/ozt – the highest price of silver ever recorded. 

The Hunt brothers hardly had time to celebrate, though. After the massive price increase of silver, markets introduced new rules to prevent the brothers from continuing to buy futures in the precious metal. Since the Hunt Brothers had purchased hundreds of millions of dollars in silver futures and could no longer do so, silver short traders were able to place their bets without being squeezed out. 

As the price of silver fell, the Hunt brothers were forced to pay millions of dollars each day to cover their calls and interest fees. Eventually, they failed to do so, leading to Silver Thursday. Silver Thursday, the biggest single-day loss in the history of the silver market. Silver lost over 50% in one day – and the Hunt brothers lost billions. 

Attempted Silver Short Squeeze (2021)

Silver short squeezes are far rarer than stock short squeezes, primarily because the price of silver rarely rises dramatically enough to force short traders to buy large amounts of silver to cover their losses. 

The same traders who orchestrated the GameStop short squeeze attempted to do the same thing to silver in 2021. Silver is a heavily shorted asset, and Reddit investors believed that they could cause a silver short squeeze by buying both physical and paper silver. In a sense, the plan was successful; the stock of iShares Silver Trust (SLV) rose to a nine-year high by the end of January 2021. In London’s metals exchange, silver gained nearly 11% by the beginning of February. 

Like we mentioned earlier, a true silver short squeeze is difficult to execute because of silver’s steady long-term price action. Demand for silver in the industrial sector increases relatively consistently each year, and retail investment in physical silver is a constant fixture of the market. As a result, the price of silver never increased dramatically enough to trigger a squeeze on short traders. 

Are Silver Short Squeezes Illegal? 

A silver short squeeze is only illegal if it is the project of deliberate market manipulation, which is a crime. The Hunt brothers faced charges from the IRS and CFTC for their efforts to corner the silver market and trigger a silver short squeeze. In several of the examples we discussed on this page, a combination of manipulation and natural market movements drove short squeezes. 

Unless market manipulation is involved, silver short squeezes – or any short squeezes, for that matter – are not against the law. A silver short squeeze is a natural market phenomenon that occurs when the price of an asset rises quickly and dramatically, so there’s nothing inherently illegal or market manipulative about it. 

Are We in a Silver Short Squeeze? 

Contrary to the rumblings of some analysts in the precious metals space, there is little reason to suspect that we are currently experiencing a silver short squeeze. In order for the market to trigger a short squeeze, the price of silver would have to climb quickly and considerably. Like the Redditors who attempted to trigger a silver short squeeze in 2021 rightly pointed out, silver is a commonly shorted commodity, making it prime for a short squeeze in the right market conditions. 

However, even a quick 11% increase in the price of silver during WallStreetBets’ 2021 short squeeze attempt was insufficient to trigger a genuine short squeeze. At least for now, silver price action is far too muted for anyone to convincingly call it a short squeeze. 

Final Thoughts: Understanding the Silver Short Squeeze

The concept of a short squeeze may seem complicated, but it’s actually relatively easy to understand. When a stock or other investable asset rises in value quickly and dramatically, investors who bet that the asset would depreciate may be forced to buy stocks in that asset to cover their losses. When this happens, prices for the asset climb even higher, creating a pattern known as a short squeeze. 

A silver short squeeze is far less common than some bullish investors would lead you to believe. Silver remains a commonly shorted asset, and efforts in recent years to deliberately trigger a short squeeze in the silver market have been largely unsuccessful. 

You might also be interested in: 

• Silver Thursday: The Day Three Brothers Almost Collapsed the Silver Market
• When Was Silver’s Highest Price Ever? 
• When was Gold Cheapest? | Historical Gold Price Charts and Analysis