Silver is the Reddit army’s next target. Will it tarnish their crusade against Wall Street?

The market has moved in response but it’s much bigger, deeper and more complex than the market in an individual share like GameStop, says James Moore

Silver: its market is the latest to experience a Reddit-led gold rush  (AFP via Getty)

Silver’s looking shiny as the Reddit peasants’ revolt against Wall Street turns to the metal in the hopes of forcing the price up and burning some more hedge funds’ fingers by so doing.

Accomplishing the sort of “short squeeze” they pulled off with GameStop, the retailer that kicked off this extraordinary story, would seem to be much harder for the followers of WallStreetBets and similar forums. 

We’re talking here about a global market worth hundreds of billions of dollars, orders of magnitude larger than that in an individual stock like GameStop – which has surged to levels far above even the most optimistic assessment of the struggling computer game retailer’s fair value.

It’s a deeper market too, involving some of the world’s biggest banks, which manage both short and long positions for clients, including the miners who extract the metal from the ground and the companies that use it.

There are a lot of those. Silver is used in consumer goods, jewellery, cutlery, kitchen utensils, mirrors, but it also has multiple industrial uses. It’s found in solar panels, dental alloys, batteries, printed circuits. It is also still used to mint real money, coins mostly, that can be exchanged for goods and services and won’t disappear in a puff of smoke like the paper profits in your trading account if you don’t close out your position soon enough.

• Follow live: Latest market updates as Redditors eye silver

A lot of the business in the commodity is conducted off-exchange.

Yet despite all this, silver has moved, surging in price in response to the Reddit army planting its flag through buying silver-linked exchange-traded funds.

So is another short squeeze confronting those funds betting against the price? Well that’s the question. 

Commodities, like silver attract a lot of professional speculators in addition to those working in the real economy.

Sentiment can easily move the market, and the people who moved GameStock, AMC, even Cineworld, have clearly boosted it.

For how long though? Those riding this tiger would be well advised convert their paper profits into real money as soon as possible (as with GameStop). There’s nothing like commodities or currencies when it comes to burning hands.

In the meantime concern among regulators, and some trading firms, is increasing.

Over the weekend, spread betting outfit IG barred traders from taking out new positions in GameStop and updated its website with a prominent new risk warning at the top of the page.

Robinhood, the app much in vogue among the Reddit traders, took a beating after it prevented its users from buying shares or call options on a bunch of highly volatile stocks including GameStop.

The backlash was swift, fierce and bipartisan. Ted Cruz, on the hard right of the Republican Party and Alexandra Ocasio-Cortez, on the Democrats’ left, both weighed in.

Having seen its business boom by promising to democratise finance, and aggressively hawking its service, the Silicon Valley startup deserved the heat it took.  

In Britain, the politics are different. And IG is a very different outfit to Robinhood with a very different history.

The company got into a lot of hot water over through dealing with small investors playing speculator in the wake of the Swiss franc affair of 2015.

The controversy was kicked off when the Swiss National Bank dropped a bombshell into the money markets by scrapping its €1.20 cap for the “Swissie” against the euro. The value of the currency suddenly shot up. The move was so sharp and so sudden that it destroyed the “stop loss” facilities a lot of small punters had taken out to limit their downside.

Yes, on this occasion it was small punters who were among the shorts. And they got badly hurt. 

The Independent highlighted the story of a part-time teacher in Ireland on about £18,000 who lost £280,000 betting against the Swissie, and a concert pianist on not much more whose £2 exposure turned into a £5,500 loss.

IG took a lot of heat over the affair, and deservedly so. The cost of putting things right ran to millions of pounds. Its caution this time around is understandable and sensible.

The previous day the Financial Conduct Authority had warned British punters joining the stampede that they most likely wouldn’t be covered by the Financial Services Compensation Scheme if they got hurt.

It also said: “Broking firms are not obliged to offer trading facilities to clients.  They may withdraw their services, in line with customer terms and conditions if, for instance, they consider it necessary or prudent to do so.”

IG clearly took note. 

Silver has the potential to tarnish this amorphous movement. It has garnered some applause for the way it has punctured some big Wall Street egos, scuppered some big bonuses. It has created enough noise to have Hollywood sniffing around. 

But it also has some unsavoury aspects. Illegal ones too? Potentially, although whether regulators stand any chance of unearthing them is open to question. Even if they do, the fact that richly rewarded establishment traders have so frequently seemed to get away with cheating won’t make their jobs any easier. 

The prevailing wisdom is that it will all end in tears. Bubbles are a feature of investment markets and while this one is of a type no one has ever seen before, there’s no reason to think it won’t ultimately pop.

Neither the FCA nor IG want to get caught in the blowback when that happens because that blowback could be fierce indeed.