Silver’s young
bull market got off to a typically-slow start, lagging gold’s own
new bull. But recently the white metal surged to catch up in a
record summer rally. That left silver very overbought and facing
near-term correction risks led by a record futures selling overhang
and weak late-summer seasonals. But this strengthening bull still
has a long ways higher to run yet before silver prices reflect
prevailing gold levels.
Silver is
something of an enigma. By the global supply-and-demand numbers,
it’s inarguably another industrial metal. According to the
venerable Silver Institute which gathers the world’s best
fundamental data, industrial fabrication accounted for 50.3% of
total demand last year. That was followed by coins and bars at
25.0% and jewelry at 19.4%. Most of the silver mined is consumed,
not hoarded for investment.
On the supply
front, the Silver Institute found that only 30% of global silver
mine supply in 2015 came from primary silver mines. The great
majority of silver produced is simply a byproduct from mining
base metals and gold. These byproduct miners often think so little
of silver that they sell the upside on their production to
silver-streaming companies at relatively-low prices. That doesn’t
sound like a precious metal.
Yet contrarian
investors still love silver with a zeal unparalleled in all the
markets. Silver is a tiny market with extreme volatility, so
investors can earn fast fortunes when this metal periodically soars
higher. At 2015’s average silver price of $15.68, the Silver
Institute’s 1170.5m ounces demanded was worth just $18.4b! That’s a
rounding error compared to the size of global capital markets,
giving silver huge upside potential.
It doesn’t take
much capital inflows through new investor buying to catapult silver
higher. And usually the catalyst that rekindles silver demand is
gold powering higher.
Gold has always
driven silver, as the silver investors and speculators take
their trading cues from gold. They only flood into silver after
gold has powered high enough for long enough to convince them its
upside is sustainable. So silver lags gold.
That certainly
happened in its young new bull. Back in mid-December around the
Fed’s first rate hike in 9.5 years, gold and silver carved major
6.1-year and 6.4-year secular lows within days of each other. No
one wanted anything to do with the precious metals, they were left
for dead. I argued otherwise late last year, pointing out silver’s
deep
undervaluation relative to gold. Silver was languishing
at stock-panic levels.
If such extremes
weren’t sustainable in late 2008 in that epic maelstrom of fear
spawned by the first stock panic in a century, they certainly
couldn’t last without panic-grade fear. And indeed silver soon
started to rally, but it really lagged gold’s initial advance in the
early months of 2016. By early March as gold entered formal
bull-market territory with a 20.1% gain off its secular low, silver
had merely rallied 15.0% at best.
That was terrible
relative performance, as silver’s far-smaller market size enables it
to leverage advances in gold. Per the World Gold Council, total
gold demand in 2015 ran 4193.1 tonnes. At gold’s average price last
year of $1159, that works out to a market size of $156.3b. That is
8.5x larger than silver’s! So every dollar of investment capital
that flows into silver has 8.5x the upside price impact of a
dollar into gold.
By early April
gold had rallied 21.0% at best from its secular lows but silver was
only up 16.1% at best, not even in a new bull market yet. Some
silver investors were getting discouraged, but they didn’t have to
worry. Silver lags gold, and was
wound like a
coiled spring ready to explode as I outlined at the time.
Silver finally started outperforming in April, taking its
bull-to-date gains to 30.1% versus gold’s 23.1% by month-end.
Following that
dazzling April surge into official bull-market-dom, silver was
overbought and retreated in May. I didn’t expect much from summer,
as silver has a long history of drifting sideways to lower during
June, July, and early August even in the strongest bull-market
years. Yet silver bucked this
summer-doldrums
trend to soar in June and early July! By mid-July it had blasted
48.7% above its recent secular low.
By that point gold
was up 29.9% at best in its own young bull, so silver’s upside
leverage to gold was only running 1.63x. That’s still pretty weak,
as silver tends to amplify major moves higher in gold by 2x to 3x.
The former is typical, while the latter occasionally flares up when
silver grows popular enough to capture investors’ and speculators’
imaginations. While silver hasn’t hit 2x yet, it’s definitely
catching up.
With a lot more
excitement about silver now than back in early April, traders are
wondering where silver is heading next. After such a strong
counter-cyclical run, silver is certainly very overbought. So a
healthy mid-bull pullback or correction is probable. But from a
longer-term perspective, silver’s young new bull market is barely
getting started. And silver’s greatest gains historically come
late in bulls, not early on.
There are two
major short-term risk factors for silver. The most-pressing one is
the positioning of silver-futures speculators who are exceedingly
long. The secondary one is silver’s weak seasonals this time of
year. Let’s start with those. By July 13th, silver had rocketed a
spectacular 27.7% higher since its final close in May! That’s a
radical new bull-year record utterly dwarfing everything
that’s come before.
Between November
2001 and April 2011, silver skyrocketed 1104.7% higher in a mighty
9.4-year secular bull. In 2012 silver consolidated high, not
collapsing until the
Fed’s gross
market distortions spawned by the wildly-unprecedented QE3 began
in early 2013. Between 2001 and 2012 which were amazing years for
silver, on average by July’s same 8th trading day silver was
actually down 1.9% summer-to-date.
Nothing like this
year’s incredible 27.7% summer-to-date gains have ever been
witnessed before. Silver tends to make
a major seasonal
low in mid-August, where it averaged 4.0% summer-to-date
losses in that bull-year timeframe between 2001 and 2012. There’s
definitely a risk silver will soon see some of this year’s massive
record upside summer-performance delta erode back down toward normal
seasonal levels.
Unfortunately
investment demand didn’t play a big role in silver’s anomalous
summer strength. That leading SLV iShares Silver Trust silver ETF
is the best daily proxy available for investment capital flows into
and out of silver. Its managers have to respond to differential
SLV-share buying or selling pressure by buying or selling actual
real physical silver bullion, or else SLV will decouple from
silver and fail its mission.
Between the end of
May and silver’s latest mid-July peak, SLV’s holdings merely grew by
3.8% or 12.8m ounces. That’s far from enough to explain silver’s
enormous upside breakout. It wasn’t stock investors who’ve been
aggressively buying silver, but futures speculators. The
hyper-leveraged bets that these guys make necessitate an
extreme-short-term focus, they are momentum players who buy and sell
as a herd.
This chart looks
at the total long and short silver-futures contracts held by
speculators over the last 3.5 years or so. Their long bullish
upside bets are shown in green, and their short bearish downside
bets in red. Silver’s summer surge and its entire young bull have
largely been driven by extreme long-side silver-futures buying by
speculators. That ramped their total longs to record levels, for
a record selling overhang.
Silver-futures
positions collectively held by speculators are published each Friday
afternoon by the US Commodity Futures Trading Commission in its
famous Commitments of Traders reports. As of the latest data
available when this essay was published, speculators held 141.0k
long silver-futures contracts. This is the highest in our dataset
going back to early 1999, and almost certainly a new
all-time record peak!
Major interim
highs in silver, in bull markets and bears alike, tend to arise when
speculators’ upside bets grow excessive. Their very buying forces
silver higher, but the moment something spooks them they are quick
to rapidly exit these risky positions as a herd. That hammers
silver lower until the futures selling storm passes. Silver-futures
traders are forced to have a radically-shorter time horizon
than normal investors.
Every single
futures contract controls 5000 troy ounces of silver. At $20 an
ounce, that’s worth $100k. But the minimum cash margin required to
trade each contract is only $5250. So speculators can run leverage
on silver futures up to 19.0x! The legal limit in the stock
markets has been 2.0x for decades for good reason. At 19.0x,
speculators risk getting wiped out by relatively-small adverse moves
in silver prices.
A mere 5.3% move
in silver, which is nothing in this volatile market, would
obliterate 100% of the capital risked by fully-margined speculators
who bet wrong on its near-term direction! Even if they were only
running half the maximum leverage at 9.5x, a 10.5% silver move
against them would force total losses of their capital bet. These
guys can’t afford to be wrong for long, they have to exit fast
when silver moves against them.
We recently saw
this happen in May. By early that month, silver-futures
speculators’ longs were up at a then-all-time-record 134.9k
contracts. Then a gold selloff on Fed hawkishness spooked silver
traders into selling in sympathy. Over the next several weeks,
speculators liquidated 16.9k long contracts or merely 1/8th of their
peak holdings. This forced silver 6.7% lower, which is well into
formal pullback territory.
Today speculators’
silver-futures longs are even more extreme at that
all-time-record 141.0k contracts. To put that into perspective, it
represents leveraged upside bets on a whopping 705m ounces of
silver! That is the equivalent of fully 4/5ths of the entire
world’s mine production in 2015. And because of the risks inherent
in hyper-leveraged futures trading, these positions will be unwound
fast when silver turns.
Within a span
of weeks speculators could sell 1/8th, 1/4th, or even a 1/3rd of
their record futures longs which would really hammer silver. If
they sell and close 1/3rd of their excessive longs, that would still
leave their total position at a lofty 94.0k contracts which still
remains far above the 2009-to-2012 average of 63.9k. Those were the
normal years between 2008’s stock panic and 2013’s dawn of the Fed’s
QE3 distortions.
Over the 7.0-month
span of silver’s new bull market seeing that 48.7% gain, futures
speculators added 46.6k long contracts while covering 22.5k short
ones. That works out to around 233m ounces and 113m ounces
respectively, serious buying. If these guys are forced to
rapidly exit even half of these new silver-bull positions alone, we
are looking at 173m ounces of silver selling slamming the markets
within weeks.
That’s simply too
much for normal demand to absorb. In all of 2015, which is the last
comprehensive fundamental data available, global silver coin-and-bar
investment demand ran a record 292.3m ounces. That averages
out to just 24.4m ounces per month. Even if silver investment
demand has doubled this year, which is likely far too optimistic,
the amount of potential silver-futures selling will temporarily
dwarf it.
So just like gold,
silver faces a record futures selling overhang today. Last
week I explained gold’s own
record futures
selling overhang in great depth. So check that out if you’d
like a deeper background on why excessive speculator long positions
are a major near-term threat even within the mightiest of bull
markets. All bull markets flow and ebb, and futures
speculators’ collective bets often control the timing.
But mid-bull
corrections are a great boon to investors and speculators alike.
They help keep sentiment balanced, which is essential to ensuring a
healthy bull market enjoying a long lifespan. And they also provide
the best relative buy-low opportunities within ongoing bull
markets! Traders looking to add to their silver or silver-stock
holdings should rejoice when corrections near, and get ready to
deploy more capital.
Despite silver’s
near-term downside risks from futures speculators’ excessive longs
and the potential for this year’s record summer rally to mean revert
down towards more normal performance, silver’s young bull has far
from run its course. Silver’s vast upside potential from here is
most apparent when looking at the silver price relative to its
primary driver gold’s. The telling Silver/Gold Ratio remains
super-bullish.
Since
gold drives
silver to a dominant degree historically, prevailing silver
price levels can be considered overvalued or undervalued relative
to gold. If silver is exceptionally low relative to gold prices
it remains a strong buy, which is certainly the case today. As of
the middle of this week, it took 68 ounces of silver to equal the
value of a single ounce of gold. That level of SGR is still quite
low by modern standards.
Before 2008’s
incredible stock panic cast silver into that brutal maelstrom of
fear, the SGR averaged 54.9x. Silver generally traded in a
fairly-tight range around 1/55th the price of gold. But since
silver is so highly speculative and subject to traders’ collective
greed and fear, it was pummeled so low that the SGR briefly averaged
just 75.8x in the stock-panic months. But as I
argued at the time,
such extremes weren’t sustainable.
Indeed silver soon
started soaring relative to gold, actually becoming so popular in
2011 it entered a speculative mania. When investors and
speculators really get excited about silver and start pouring
capital in, this metal’s upside is mind-boggling. Still over that
entire 2009-to-2012 normal-year span between the stock panic and the
Fed’s gross QE3 distortions, the SGR averaged a very similar 56.9x
level.
During the large
majority of its bull-market years between 2005 and 2012, silver
tended to trade in range between 1/55th to 1/50th the price of
gold. But let’s call a 55x SGR normal to be a little conservative
here. At this week’s prevailing gold price of $1315, a 55x SGR puts
silver at $23.90. That’s another 24% higher from this week’s
levels, which is a considerable gain from here. Silver is too low
relative to gold.
And silver easily
has the potential to head a heck of a lot higher than that before
its young bull market gives up its ghost. Gold is in a major new
bull market of its own driven by
massive
investment buying. Gold should easily at least mean
revert back up to its pre-QE3 levels like 2012’s average price
running $1669. Plug a 55x SGR into that and it yields a juicy
silver target of $30.35, another 57% higher from here.
But this is pretty
conservative as well on two fronts. Gold is likely to not only mean
revert after seeing extreme lows driven by epic fear in recent
years, but to overshoot proportionally towards the opposite
extreme. The higher gold goes in its mighty new bull, the more
upside potential silver has. And the greater the coming bull-market
gains in gold and silver, the more likely they will grow
increasingly popular.
When investors and
speculators get excited about silver, they can bid it far above
normal levels relative to gold. That stunning late-2010-early-2011
episode where silver entered a speculative mania to climax its last
bull is a great case in point. Traders got so excited about the
tiny silver market rocketing vertically that they bid silver high
enough to temporarily see an SGR under 35x. Such extremes
are great selling
opportunities.
At relatively-low
non-overshoot $1669 gold, again 2012’s average price, an SGR of 35x
implies a silver price way up at $47.70. That’s another 147% higher
than this week’s levels, a heck of a bull run from here! Personally
I suspect gold will head much higher before this new bull
fully runs its course, so the potential gains silver could see
are much greater. You can plug in your own SGR numbers to suit
your outlook.
So even though
silver faces a healthy near-term correction, its bull-market upside
remains vast. Those record excessive silver-futures longs held by
speculators will be considerably unwound over a relatively-short
span, and silver will soon pass through its weak summer seasonals.
Investors and speculators alike should be preparing their buying
lists and readying their capital for the big opportunities coming.
Silver’s next
interim low will likely be first signaled by futures speculators’
collective bets, so all traders interested in adding positions
should watch them closely. That will likely prove the
most-advantageous time, the lowest prices, at which to add silver
bullion, SLV shares, and silver-mining stocks for a long time to
come. Far from being a threat to this young silver bull, a
correction is a great boon for everyone riding it.
But such great
opportunities to buy relatively low are only seized by prudent
investors and speculators who are aware they’re coming and stay
informed. We can sure help you with that at Zeal. Each week I
carefully study and analyze the current gold-futures and
silver-futures situations, and then report the resulting
implications in our popular
weekly
newsletter. Its subscribers will know when silver is likely
bottoming.
We will use this
coming silver correction to add new silver-stock trades, augmenting
our existing ones that have already seen staggering unrealized gains
up to 550%+ this year alone! We also publish a
monthly
newsletter more tailored to investors, which will help keep you
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The bottom line is
this young silver bull faces a healthy correction. Futures
speculators have ramped their silver longs to extreme record levels,
igniting a record summer rally counter to normal seasonal weakness.
This has left silver very overbought, at risk of a considerable
near-term selloff once something inevitably spooks the
hyper-leveraged futures speculators into unwinding their excessive
longs.
But far from being
threats, mid-bull corrections are great opportunities. They
rebalance sentiment which is necessary to keep bulls healthy and
long-lived. And they offer investors and speculators the lowest
buying prices seen within ongoing bull markets. So if you want to
ride silver’s young bull much higher in the coming years, now is the
time to research and prepare for the coming smorgasbord of relative
bargains.
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