By Tom Westbrook

SINGAPORE (Reuters) – Silver prices surged to a five-month high on Monday, silver-mining stocks leapt and coin-selling websites were swamped as small-time investors piled in to the metal, the latest target of a retail-trading frenzy that has set financial markets on edge.

Organised in online forums and traded with fee-free brokers, such as Robinhood, the phenomenon has driven a 1500% rally in the shares of videogame retailer GameStop as the crowd targets assets big fund managers had bet against.

The move into silver, following thousands of Reddit posts and hundreds of YouTube videos suggesting that a rise in the physical price could hurt large investors with bets on it falling, is a foray in to a much bigger and more liquid market.

Spot silver leapt as much as 7.4% in Asia to $28.99 an ounce, taking gains to about 15% since last Wednesday and the price to its highest since mid August.

Silver mining stocks soared in Australia and China and Money Metals, an online exchange for precious coins and bullion, posted an “EXTREME DEMAND ALERT” banner across its homepage, and announced it restricted orders to between $1,000 and $10,000.

“The Reddit crowd has turned its sights on a bigger whale in terms of trying to catalyse something of a short squeeze in the silver market,” said Kyle Rodda, an analyst at brokerage IG Markets in Melbourne.

“This is their big, bold Moby Dick moment,” he said.

Volumes in small miners’ stock in Australia were unprecedented and jumps in some exploration firms, which do not actually produce silver, topped 90%. Bullion dealers had brisk trade.

“Yeah, we’re seeing buying and it’s been sparked by this subreddit,” said Nicholas Frappell, global general manager at ABC Refinery in Sydney, adding such customers liked to buy kilogram bars or smaller because of the convenience.

The Perth Mint said it noticed elevated demand for silver in the United States via online dealers.

(GRAPHIC: Silver prices versus ETF silver holdings – https://fingfx.thomsonreuters.com/gfx/ce/yxmvjywngpr/SilverETFHoldingsvsPrices.png)

FUND FOCUS

The popularity of dabbling in stockmarkets has grown during the COVID-19 pandemic as volatility, stimulus cheques and lockdowns have driven account openings and investment.

The craze hit fever pitch last week when the GameStop pile-on resulted in a “short squeeze,” which turned price gains stratospheric as hedge funds with bets against the stock desperately bought it at high prices to close their positions.

Discussion turned to silver late last week as Reddit posts suggested that higher prices could hurt big banks with large short positions, and said buying easy-to-access exchange-traded silver funds could quickly ramp up the metal’s value.

“(The) gain in silver prices is a very solid lift … it certainly does suggest that the impact of messaging in social media is becoming much more significant,” said Michael McCarthy, strategist at broker CMC Markets in Sydney.

Global short interest in silver, or the cumulative value of bets it falls in price, is equivalent to about 900 million ounces – just short of global annual production.

Banks and brokers hold most of that, with about 610 million ounces, though it is not clear whether they are net short on the metal or whether their bets offset very big physical holdings.

Nevertheless, the squeeze is moving money. Australia’s ETF Securities’ Physical Silver fund had a daily record A$40 million ($30.6 million) in inflows by Monday afternoon, ETF Securities’ head of product, Evan Metcalf told Reuters.

“It’s quite a big day of flows on what was previously around a A$220-odd milion fund,” Metcalf said. “Our product being listed on the ASX kind of gave people a head start timing-wise as well because it’s open before U.S. and European markets.”

Those funds can drive silver prices because they end up paying for the physical metal to back the ETF’s units.

A silver ETF in Japan surged 11% and the flows could point to more gains for iShares’ U.S.-listed $16.5 billion Silver Trust ETF which rose 5.6% last week.

(GRAPHIC: Comex silver futures prices vs trader short positions – https://fingfx.thomsonreuters.com/gfx/ce/qzjvqmlwxvx/ComexSilverCFTCPositions.png)

TEARS

The broader showdown between small traders and professional short-sellers, besides making paper millionaires of the former, is testing brokers, regulators and other investors’ patience.

Robinhood, the online broker used by many new investors has lifted some of the buying restrictions it imposed during wild trade last week, but limits remain on eight companies including GameStop, AMC Entertainment and BlackBerry.

U.S. regulators are circling both Robinhood and the Redditers’ forums, while hedge funds nurse their wounds. Melvin Capital, a hedge fund which bet against GameStop, lost 53% in January.

In South Korea, where retail traders dubbed “ants” have turbocharged a long equities rally by investing borrowed money are applying pressure to quash a government plan to lift a pandemic-imposed short-selling ban.

It is unclear how much longer the Reddit-fuelled rally can run.

“I’ll tell you one thing, absolute guarantee this ends in tears, I just don’t know when,” said CMC’s McCarthy. “

($1 = 1.3072 Australian dollars)

(Reporting by Tom Westbrook. Additional reporting by Gavin Maguire; Editing by Daniel Wallis, Lincoln Feast & Shri Navaratnam)