Silver's 'Reddit Rally' Rattles the Market

RAPAPORT... A sharp rise in silver prices over the past week has shocked the jewelry industry and raised concerns that consumers will steer clear of the precious metal until the volatility ends.Prices have jumped around 9% since last Wednesday, according to Silverprice.org.The hike is thought to be a result of posts on the Reddit social-media platform encouraging amateur traders to bet on assets popular among short sellers.APMEX, a major bullion dealer, suspended silver sales on its website in response to the overwhelming demand. Silver miners such as First Majestic Silver, Pan American Silver and Wheaton Precious saw their share prices soar. And the US Commodity Futures Trading Commission said it was checking if there was any misbehavior involved."We've done more volume on silver in the last three days than we did in all of December," said Ken Lewis, APMEX's CEO, in an interview with Bloomberg TV on Tuesday. "Some people believe they can take physical [silver] off the market and drive the price up, and they're doing a good job of it, based on the amount of demand we're seeing in the last few days."The rally comes amid a battle between financial institutions and users of WallStreetBets, a group on Reddit in which members discuss stocks. Last week, posts on the group reportedly called for people to buy shares in GameStop, a video-game retailer that investors often sell "short" - meaning they enter contracts that pay off if the stock price falls. The aim was to take on hedge funds that profit from downward movement in equities markets.Shares in GameStop skyrocketed over the period of a few days, before cooling off a little. A similar trend followed with other highly shorted stocks, such as Macy's, and later with silver - a commodity that's also popular among short sellers. As with GameStop's stock price, silver prices have eased slightly from a peak of about $950 per kilogram. Some WallStreetBets users deny the group is behind the metal's sudden popularity, reports have said."Silver was the best candidate [for amateur traders] because of its low ticket price compared to gold," explained Ashish Pethe, chairman of India's All India Gem and Jewellery Domestic Council (GJC). "Anyone who wants to have a position, it's easier to do it in silver."Threat to demandThe volatility will likely deter serious buyers looking to purchase for consumption or for a long-term investment, Pethe cautioned. Most consumers who acquire the metal do so by buying usable silverware or jewelry, with the investment potential only a secondary factor, he added."If [the silver price] jumps too fast, they'll keep waiting for the prices to come down," Pethe said. "If it drops suddenly, they'll keep waiting, hoping it will go further down."Jewelry, bars, coins and silverware account for 44% of demand for the metal, with industrial uses accounting for the rest, according to Berenberg. The current economic recovery is likely to support demand for industrial silver, but "should prices move too far, then thrifting and substitution would become significant," analysts at the investment bank said in a research note Monday.Silver is hard to produce in response to demand trends because two-thirds of supply originates as a by-product at gold or base-metal mines, Berenberg pointed out. It's also less liquid than gold, making prices more volatile, the analysts said."The scale and liquidity of the gold market would make it far harder to move the price," they commented."While the move in silver may drag gold higher, we believe it is less likely that gold would be targeted in the same way." Image: Silver bars. (Shutterstock)