A massive scandal recently rocked the financial world…
And like so much of the news today, it involves the war in Ukraine.
You see, Russia is one of the largest producers of nickel in the world. So it’s not surprising that when Russian troops invaded Ukraine a month ago, the price of nickel shot up.
The problem is that it didn’t just go up a little bit. It went up a lot – and fast!
And I don’t mean 30%… or even 100%. The price of nickel soared 240% in 24 hours.
Now, maybe you’re thinking, “Wow, I wish I would’ve gotten in on that.” After all, who doesn’t want to more than double their money overnight?
But as the saying goes, “There are two sides to every coin.”
On the other side of this massive price move was an absurdly large “short” position… And it led to a company losing $8 billion in a single day.
Of course, you likely aren’t in a position to lose $8 billion. But if you’ve ever shorted a stock – or even thought about shorting a stock – it’s worth understanding what happened…
When investors “short” an investment, they’re betting its price will go down. That’s true of stocks and commodities. And to place that bet, it’s normal to “borrow” the shares necessary to execute the trade.
Most of the time, the prices of commodities aren’t that volatile. So it’s normal to see very large short positions in the space.
But if the short sellers are wrong and the price starts rising quickly, they must find and buy that asset immediately. That’s called “covering” the position.
However, this process can create a vicious cycle – a “short squeeze.”
When short sellers try to find the asset and buy it, demand increases. That makes the price go even higher. And in turn, the price to cover the short position keeps going up.
So as we said earlier, the price of nickel spiked 240% in 24 hours soon after Russia invaded Ukraine. The rapid rise meant big trouble for the short sellers.
The next part of this story is where it starts to get surreal…
One of the biggest short sellers of nickel was a Chinese holding company. However, it’s also the world’s largest nickel producer…
So in theory, the company should’ve been able to cover the amount of nickel that it was short. After all, it had more than enough nickel on hand.
The problem was… it wasn’t the same quality of nickel. So the company would’ve needed to go into the open market and buy enough nickel to cover its entire short position.
On paper, the company had lost an estimated $8 billion by the end of the day. That’s nine zeros… $8,000,000,000.
Now, if this story involved a regular investor who got mixed up in a short squeeze, it would end here. It wouldn’t be $8 billion, but the investor would be out a lot of money.
However, the Chinese holding company got a lifeline…
You see, the metal exchange where this incident happened felt differently. It was such an extreme event that the exchange canceled all the trades from that day.
The exchange said it took this unprecedented action for the “stability of the market.”
Folks, this event might seem like a distant and strange market anomaly. But the fact is, when you short an asset that you don’t own, you’re exposing yourself to unlimited losses.
A Chinese company learned this lesson the hard way. And it lost $8 billion – even if it was only for a day.
While the company got off the hook in the end, you won’t be as lucky.
Good investing,
Karina Kovalcik
