What’s happening with Silver?

In today's Finshots we talk about the crazy rally in silver.

The Story

Silver prices are on the ascendency. Okay, not technically Silver. But Silver futures are on the rise. The prices jumped 9% on Monday and they were poised to rally even further on Tuesday. But then things happened and the surge fizzled out a bit. But there’s something funky going on with the precious metal and we need to get to the bottom of this. However, before we get too ahead of ourselves, some background on Silver futures.

Silver futures are simple contracts. You make an agreement with a counterparty — say a silver miner in Peru and you pay him $25 for an ounce today. The agreement states that the counterparty is supposed to supply you a large quantity of silver at this price six months from now. And look, from your point of view, this is a great deal. You want to minimize uncertainty and by tying down the price, you are eliminating the possibility of having to pay $30 an ounce in the future. It works for you. So you sign off the deal and you agree to meet six months later. Unfortunately, this isn’t exactly a silver futures contract. It’s a forwards contract — Remarkably similar in many ways but not exactly the same.

Because in this case, you decided to find the counterparty yourself. But you can’t do it all the time. Sometimes you need a bit of help. Which is why we have commodity exchanges that facilitate the buying and selling. They also standardize all contracts and that’s when a forward becomes a future. That’s them deciding how much silver you can buy with each contract, when you’ll need to settle payments, and the kind of collateral you need to post just in case one of you decides to bail on the agreement. Anyway, when you are dabbling with these silver futures you could either be doing it to hedge against future uncertainty or you could be doing it to simply make some money.

Imagine the actual price of silver goes on a spectacular rally during the next 6 months. Imagine it goes to $50 an ounce. Then automatically your contracts will be worth a lot more. So if you think prices could rally in the future it makes sense to BUY “futures”.

And right now, people are buying in bulk. But who exactly?

See mainstream media has been talking about wallstreetbets. The same people on Reddit that pushed stocks like GameStop and AMC. If you are new to this story, we urge you to read our explainer here. But if you are already well versed with this bit, then you know these people have been pushing prices of certain “meme” stocks to crazy heights. So the argument goes that they have now shifted their focus to silver.

However, the people at Wallstreetbets deny this claim. They state they have nothing to do with this. Instead, they believe this is the doing of hedge funds who they suspect are trying to convince retail investors about the potential to make money on silver. But despite who’s pushing the price, it’s crazy what’s happening with the metal. Prices soared and the exchange had to intervene. They asked people dabbling with futures to start putting up more collateral. After all, if prices tank tomorrow, then it’s quite possible that some of these investors might fail to honour their end of the contract. So collateral helps. And once people realised they had to put up more collateral (in this case money) to trade futures, the surge fizzled out a bit. But nonetheless, stocks of silver producers have seen spectacular gains since this rally took shape.

Will this actually translate to a rise in silver prices in the long run? We don’t know. But right now, it seems the markets have gone bonkers. So there’s very little utility in predicting the future.

Until next time…

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Correction: In yesterday's newsletter we noted that senior citizens will be exempt from filing Income Tax returns if they are 75 and above. However this is applicable only if their income involves proceeds from pension and interest. In the event they make gains elsewhere, then they will have to file their returns