First, they went for stocks (GME, AMC etc) and this past weekend they went for silver. The new financial player on the block, the Reddit group r/WallStreetBets, made the financial world sit up and take notice this past week. By forcing the price of GME stock exponentially this ragtag group of retail traders wiped out over half the capital of one huge hedge fund, forcing them to take a bail out and changing the face of the trading landscape forever.
The above chart is not a sign of a healthy market or a healthy system. A number of other stocks with high short-interest from hedge funds also made similar moves. As the hype in GME faded, the Reddit traders turned their attention to silver which opened at an 8 year high yesterday.
One of the main rationales of the group’s purchases was the apparent disconnect between paper silver and real silver. This theme is now really in the open so expect to see this discussion spill over more and more in assets such as gold.
Aside from the exposure/ETF/paper silver vs ownership/physical debate the spike had real-world repercussions. The demand for physical silver skyrocketed causing supply problems globally.
Gold, silver coin demand surging, straining U.S. Mint’s capacity
The whole issue is a timely reminder that although markets may seem abstract, seeming to exist purely in a world of electrons, synapses and networks, they are in fact thoroughly interconnected and interdependent with physical reality.
What started as a bulletin board meme trying to get paper/ETF silver shorts squeezed higher ended up pushing the physical price upwards also.
Whatever It Takes – Redux
Back in the midst of the European Debt Crisis that crippled European banks, and the European economy in 2011-2012 a fairly recently appointed Head of the ECB ushered the following words:
“The ECB [European Central Bank] will do whatever it takes to preserve the Euro, and believe me, it will be enough.”
At the time the speech was seen was vitally important. Markets ripped higher correctly anticipating the speech meant a huge, cultural shift in monetary policy from the ECB. Previously, there was as perception that the Bundesbank would never let QE happen, given the historical hyperinflationary Weimar period which helped lead to WWII.
Mario Draghi, the man who uttered these now famous words, broke this taboo. QE in Europe finally happened and those words “whatever it takes” remain the bywords for how central banks support markets.
And now he is back. Mr. Draghi has been asked to form a government in Italy. If this appointment can persist for an extended period of time, then expect markets to rally. The mantra of “Whatever it takes” returning will continue to buoy precious metals also. Perhaps, the next level of monetary policy will emerge from this appointment.
And if we look at the Fed example then there is a lot more room to go:
Gold remains remarkably resilient in the face of so many of the typical headwinds. Economic news is picking up, there is renewed optimism geopolitically thanks to Biden’s presidency beginning on a rather assertive footing. And the vaccine programs globally are slowly but surely picking up pace. The latest set of lockdowns in Europe and the US look to slowly be relaxed as March approaches with Austria, Scotland and Denmark all issuing plans to reopen schools. Even the recent US Dollar strength has done little to gold.
Indeed, it has remained in an even tighter range than previously. Perhaps this is because so much attention since the start of year was focused on Biden, the Capitol riots, Tesla, Bitcoin and the r/WallStreetBets. The bringing back of the old guard of Janet Yellen to Treasury Secretary and now Mario Draghi as Prime Minister in Italy serve to show that the expansionary policies of central banks since 2008 are here to stay.
So, despite all time highs in stocks, euphoria, high valuations gold has remained very stable, and to be frank, fairy boring. This is a positive thing. Gold should not be volatile and should remain rather boring. Especially when so many other assets are showing such volatility, especially assets which are “meant” to replace gold as a stable store of value. The price action of Bitcoin and silver suggest otherwise.
The price action of gold compared to other assets is a case tranquil calm, at least so far, compared to its so-called rivals to the crown of the ultimate safe-haven. To paraphrase Rudyard Kipling from the poem “If”, gold is keeping its head when all about they are losing theirs.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.