The ongoing silver squeeze has been 2021's seminal event for precious metal stackers and hard asset investors alike. But what exactly is a silver squeeze? Where did it come from and where is it going? The Antique Sage will answer all these questions and more, so read on!
Oddly enough, 2021's silver squeeze saga all began with GameStop (ticker: GME) - a U.S.-based brick-and-mortar retailer that specializes in selling gaming consoles, video games and peripherals. The firm's physical retail-centric business model is in terminal decline as the video gaming industry slowly but inexorably moves to an online digital distribution system. As a result, Gamestop's physical sales have been slowly drying up as time goes by.
I consider companies in this predicament to be in "run-off mode".
If GameStop's management was honest, they would be distributing almost all of the company's earnings as dividends. Shareholders would have to hope that they could collect enough dividends to recover their original investment before the firm goes to corporate heaven. Of course, in reality GameStop's management is hoarding its earnings so that they can extend the life of the (almost certainly) doomed company. It is effectively a make-work program for C-suite executives.
I mention this because a Reddit message board populated by Millennials called Wall Street Bets recently engineered a spectacular short-squeeze in GME stock. A short-squeeze is where buyers pile into a stock that has been heavily shorted (in the expectation of its impending bankruptcy), forcing those shorts to cover (buy-back stock) and thus driving the price skywards.
In a rational market, GME would be worth $2 or $3 a share as investors wait to see if management can (improbably) save the company from bankruptcy. But the short squeeze was so intense that the stock momentarily reached a 52-week high of $483! Proponents of the strategy considered it vindication for the little guy, as retail investors (theoretically) stuck hedge funds and other sophisticated speculators with massive losses.
The GameStop (GME) short squeeze momentarily drove the stock price to $483 a share.
A portion of the Reddit crowd decided to apply the same logic to silver and spontaneously self-organized under the banner of "Wall Street Silver". These silver fanatics refer to themselves as "apes" or "silver-back gorillas". They commonly declare that they have "diamond hands" (i.e. they'll never sell). And they love to post hilarious memes about stacking silver.
As strange as it might sound to more traditional investors, the Wall Street Silver crowd's strategy is simple.
Persistent rumors have circulated for years that a cabal of large Wall Street investment banks has suppressed the price of silver by shorting huge quantities of the metal on the paper futures market. If a coordinated silver squeeze were to force these investment banks to cover their shorts en masse, the price of the precious metal would theoretically explode higher.
That's the theory anyway.
No one knows exactly how high silver could go in the event of a successful silver squeeze. On the low end numbers range from $50 to $100 an ounce. But some hardcore stacking enthusiasts speculate about $500 or even $1,000 an ounce silver. In any case, if you owned the physical metal under these circumstances, you would instantly become rich (or at least much better off financially than you are right now).
Well, Wall Street Silver members put this radical idea into practice (sort of) in early 2021. Adherents to the cause began to buy silver in whatever quantities they could afford. Those of modest means bought a little, while those with fat bank accounts bought a lot. On Thursday, January 28th (before the silver squeeze got underway) London's silver market closed at $25.21 a troy ounce. On Friday, January 29th, it closed at $27.42. On Monday, February 1st, it popped to $29.59.
And that's where things started going sideways. Instead of the silver spot price continuing to rocket skyward, it gradually fell back into the mid $20 range over the course of the next several weeks. This definitely wasn't a repeat of the GameStop scenario.
However, all those physical silver buyers taking part in the silver squeeze did have an effect. Although the paper futures market hardly blinked, the physical silver market experienced a severe shortage. Precious metal dealers sold out of most silver products almost instantly. And despite refineries' and mints' concerted efforts to keep the proverbial shelves stocked, they simply cannot fabricate retail products fast enough to meet the burgeoning demand.
Consequently, the silver squeeze is very real, but only for the sorts of products that small investors like: silver bars, government-issued coins and privately-minted rounds ranging from 1 to 100 troy ounces in weight.
Pre-1965 U.S. Junk 90% Silver Coins for Sale on eBay
My personal silver scrapping story starts just a bit earlier than the 2021 silver squeeze drama, though. Back when the COVID-19 pandemic hit in March 2020, the spot price of silver momentarily plunged to less than $12 an ounce. However, it was impossible to buy physical silver bullion anywhere near that price at the time.
As the bullion supply shortage began to ease going into early summer 2020, I resolved to add some silver to my portfolio. But I am always cost conscious and wanted to invest in the most cost effective way possible. I targeted two different strategies: buying pre-1967 Canadian junk 80% silver coins for stacking and vintage sterling silver flatware for scrapping.
Throughout my antiquing career, I haven't been shy about scrapping precious metal items that are damaged or don't measure up to my standards. This has mostly been confined to 20th century sterling flatware patterns from U.S. manufacturers - largely incomplete sets with monograms, random souvenir spoons or other orphan pieces.
American sterling silver flatware design went downhill during the 1930s and the 1940s. I attribute this to the rise of stainless steel as a cheap, versatile alternative to sterling silver. Silverware manufacturers began designing flatware patterns for stainless first and sterling second - or, to be more precise, they made patterns that would work in either metal in order to save money on design and tooling costs.
But stainless is a very tough material that doesn't conform well to stamping, so stainless flatware designs must be in low relief with relatively spare details. Unfortunately, this negates silver's primary advantage of being wonderfully malleable, which means it takes complex, high relief designs well.
As a result, mid 20th century silverware patterns can be...well...boring, particularly when compared to their wonderfully ornate Victorian and Art Nouveau counterparts.
When I buy scrap silver I am very careful to salvage anything truly rare or worthwhile. The silver pieces I scrap aren't cultural treasures that will be missed - I'm not trashing 18th century Georgian silver here! And yet, I still have a twinge of guilt when shipping material off to the refiners. I am keenly aware that I'm consigning these silver items to be melted down and lost forever. While this does leave me a little emotionally bifurcated, the fat check I receive in return will have to console me.
I chose to start accumulating scrap sterling silver in the summer of 2020 for one very good reason: it was the absolute cheapest silver around by a wide margin! As the price of silver rose to the high $20s in late summer, I bought every sterling silver spoon, fork and knife I could find with a melt value below $22 an ounce.
Here is a classic Batman & Robin meme from Reddit's Wall Street Silver board.
And here's the surprising thing - I found quite a bit of it. According to the efficient market hypothesis this shouldn't be possible, as any rational person would price the items they sell online at or above melt value.
And yet here I was buying scrap silver with both fists on platforms like eBay and Etsy for significantly below spot. For example, I purchased a set of vintage Gorham sterling silver butter knives in the Camellia pattern at -32% under spot. In another instance, I bought a lot of random Lunt sterling flatware for -58% below spot. One of my biggest coups was buying $100 face value (5 pounds or 2.2 kilos!) of pre-1967 Canadian junk 80% silver quarters for -33% under spot. I didn't even bother to melt these coins, but instead added them directly to my silver stack.
Throughout my investing career I've repeatedly found the concept of efficient markets to be bullshit. The (highly abridged) list of deals I've enumerated above is proof of that. Even after accounting for shipping charges, refining fees and sales tax, I was still ahead of the silver squeeze wave.
So I bought...and then I bought some more. In the end I acquired over 16 pounds (7.3 kilos) of scrap silver. My original plan was to ship this off to be refined immediately. But the 2021 silver squeeze has raised the fabrication fees most refiners charge. This is the cost to have your silver turned into bars or rounds and is only charged if you want physical silver returned to you rather than a check.
Because I want physical silver in exchange for my scrap, I have resolved to wait until fabrication fees become more reasonable. Luckily, this is easy to do with close to zero risk. I simply have to sit on my hoard of scrap silver until the situation normalizes, content in the knowledge that the money I've invested is immune to the ravages of inflation.
If you're a silver squeeze enthusiast who is interested in trying out silver scrapping for yourself, I have a few pointers.
First, stay away from silver plated items - they have no precious metal scrap value! If you don't know the difference between solid silver and silver plate, then you are in over your head.
Second, just because a piece of silver flatware is marked sterling, it doesn't mean that it is exactly 92.5% fine (which is the theoretical standard for sterling silver). Back in the late 19th and early 20th century, large-scale silverware manufacturers had a lot of incentive to cheat on the assay. When a silver item is being mass-produced, a 1% or 2% drop in the purity will pad out the manufacturer's profit margins nicely while being impossible to distinguish by the retail customer.
As a result, I always assume that "sterling" silver is actually 90% fine for scrap purposes. This applies to other silver flatware and hollowware purities as well. So I treat 90% coin silver as if it was 87% fine and 83% silver (which used to be popular in Scandinavia) as 80% fine. British hallmarked sterling items are an exception to this rule because the government rigorously enforced their assay standards. Silversmiths who broke these hallmarking laws suffered harsh penalties.
Old (1960s and earlier) circulated silver coins struck by national governments will generally adhere pretty closely to their stated purity as well. But I still deduct 1% from old silver coins to account for dirt, tarnish and the fact that most silver alloys are not perfectly homogenous. A sheet of silver used to fabricate coin blanks might nominally be 90% pure, but that doesn't mean the alloy was evenly distributed within the sheet. As a result, a silver coin punched out of one end of the sheet may end up being 89% fine, while another coin struck from the other end of the same sheet may be 91% fine. This issue is more pronounced when dealing with very old (pre-1900) coinage struck by less technologically advanced national mints (i.e. those from Latin America, South Asia and the Middle East).
Third, expect to only receive around a 90% payout (at most) on the actual silver content of the items you send to the refiner. The refiner needs to make a profit and it is tough for them to make money if they charge less than about 10%. So if a sterling silver spoon assays at 90% fine and you receive (at best) 90% of that, it means your payout will be 90% x 90% = 81% of the gross weight.
Scrap Sterling Silver Flatware Lots for Sale on eBay
A refiner's fee is also impacted by the amount of scrap material you send them. A small lot of 10 troy ounces of silver scrap will generally be charged a much higher refining fee than an industrial-sized lot of 1,000 ounces of scrap. So the more scrap you can send to a refiner at once, the better. Each refiner has its own fee break-point policy, so be sure to check out their terms first.
Make sure that the overall assay of your lot is better than 75% or 80% fine. Most refiners charge a higher fee if the total assay comes out lower than this amount (although the exact cut-off varies by individual refiner). This is because it requires more chemicals and time to refine lower purity silver, driving up costs.
This is one reason I avoid buying U.S. silver war nickels (which are 35% fine) or U.S. silver-clad Kennedy halves (which are 40% fine). If you ever have to send a bag of these coins off to the refiner, you will pay dearly in refining charges.
However, it should be alright to judiciously mix a few lower purity coins into a large lot of higher grade sterling silver, provided the overall assay remains above the magical 75% to 80% cut-off. Many nations historically struck lower-purity silver coins that can be disposed of in this way. For example, the Netherlands, Mexico and Austria have all struck 720 fine coins in the past, while Great Britain, Canada, Australia and South Africa minted 500 fine coins at one time or another.
Also make certain that your silver lot has been thoroughly stripped of any iron or lead contamination if at all possible. Iron is poison to precious metal refining and will foul the assay of both silver and gold. If it makes it into the initial melt it will float to the surface as a semi-solid slag, but will trap a lot of precious metals with it. This will lower your final assay results considerably.
I recommend using a magnet to screen for iron in your scrap. Old knives with silver-plated steel blades and sterling handles are a common trap for new scrappers. These have to be dissembled before they can be sent to the refinery. Worse yet, only 25% to 30% of the gross weight of an average steel-blade, silver handle knife will be good sterling.
Lead is a less damaging contaminant than iron, but has a special affinity with both gold and silver. As a result it makes the purification process of silver alloys more complicated than it would be otherwise. Happily, you won't usually find lead mixed in with silver items (although it can occur where soft-solder was inappropriately used for jewelry or hollowware repairs).
As a final warning, if you hope to make a profit with scrap silver you must buy it substantially below spot. -20% below spot is a good starting target. Even when buying scrap that cheaply, it still only implies a meager 5% to 10% net profit margin after shipping costs, sales taxes and refining fees.
In addition, most of the really cheap (i.e. sub-$20 an ounce) silver flatware that used to be available online is gone. I should know, I bought much of it. But even if Etsy and eBay aren't great venues for picking up cheap silver scrap right now, garage sales, estate sales and thrift stores remain viable sources of cheap material for the adventurous silver squeeze investor.
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