Silver is a good story for the populist mania that retail retailers do. However, according to Goldman Sachs commodity analysts, it is impossible to create a so-called short pressure in the precious metal.
A short squeeze occurs when rising prices force clumsy investors to buy back an asset they sold at a higher price, suffering financial losses.
According to Jeffrey Currie, commodity analyst at Goldman Sachs, it does not work in commodity markets. This is because most short positions on commodities are contracts used by manufacturing companies to protect against future price fluctuations.
In stock markets, the stock already exists and the hedge fund that borrows it must repay it at some point. In silver markets, short sellers promise to deliver a new quantity of silver that producers dig up from the ground.
In equities, “the guarantee of a future purchase is the driving force for a short press,” Currie wrote in a note on Tuesday. “When short positions on commodities are broadly backed by real physical shares, there will be no purchase later and no short pressure. To squeeze a commodity market short, you need to own a significant portion of the actual underlying physical market. ‘
In addition, there are rules that limit the size of positions that individual investors may take. It was launched after ‘Silver Thursday’ in 1980, when the Hunt brothers, two wealthy Americans, seized the market by buying up almost one third of the world stock, which increased the price by 713% over three weeks. .
Nevertheless, Currie said that the persistence of a common populist theme in American politics is positive for commodity prices in general. The Covid-19 pandemic has brought a shift in the goals of governments and central banks, away from economic stability and prices and to the social need, which is likely to involve inflationary spending.
“Increasing spending on social needs not only increases consumption, but it also creates more commodity-intensive consumption because lower-income households consume more products per dollar,” he wrote.