Silver’s dazzling parabolic surge this summer was overwhelmingly
driven by enormous silver-ETF-share buying. Led by momentum-chasing
millennial traders, unprecedentedly-huge amounts of stock-market
capital deluged into the dominant SLV iShares Silver Trust silver
ETF. But since silver’s resulting lofty peak, silver-ETF-share
selling has been mounting. An acceleration is a major downside risk
for silver prices.
Silver has certainly lived up to its wildly-volatile reputation this
year. Ahead of mid-March’s brutal stock panic driven by
governments’ heavy-handed national lockdowns to slow the spread of
COVID-19, silver was inconspicuously grinding higher. In late
February before pandemic fears flared in the US, silver was running
$18.62. But it was then soon sucked into the epic maelstrom of fear
as stock markets cratered.
Outsized stock-market fear infecting silver is normal. Herd
psychology has an unusually-strong influence on silver price
levels. Traders rush to buy silver when they grow bullish and
excited, catapulting its price far higher. But when they get
bearish or worried for any reason, they drop silver like a bad habit
forcing steep plunges. The global silver market is tiny, further
amplifying the price impacts of material capital flows.
Over
the next several weeks or so into mid-March, silver collapsed 35.8%
to $11.96. That deep 10.9-year secular low utterly annihilated all
bullish sentiment. And 4/9ths of that plummeting was compressed
into just two trading days where silver collapsed 18.9%! That
proved a near-crash, crowding the formal crash threshold of a
20%+ loss in two trading days or less. That stock panic totally
rebooted silver psychology.
It
left silver radically oversold, trading at just 0.704x its
200-day moving average. Anything under 0.90x is extremely oversold
and unsustainable. Sub-$12 silver prices were fundamentally
ridiculous as well. In Q1’20 hosting that rare stock panic, the
world’s major silver miners reported average all-in sustaining costs
of $13.45 per
ounce. No commodity’s price can languish well below the world
production cost for long.
Silver indeed started violently V-bouncing out of those crazy
stock-panic lows. Its initial gains were big and fast, with silver
blasting 19.4% higher in the first four trading days out of that
deep nadir! After that silver’s post-stock-panic upleg throttled
back into something much more sustainable. By early June silver had
surged 52.8% over 2.5 months, hitting $18.27. Fully 95% of its
stock-panic losses had been regained.
Silver stalled from there, consolidating high over the next five
weeks into early July. It wasn’t overbought at all at that initial
post-panic interim high, trading at just 1.081x its 200dma.
Historically, extreme levels of silver overboughtness warning of
imminent selloffs start at 1.25x. Silver’s strong post-panic gains
to that point were fueled by heavy differential SLV-share buying.
Understanding how silver ETFs work is essential.
The
mission of silver exchange-traded funds is to track silver price
action. But the supply and demand for ETF shares is independent
from silver’s own, leading to constant imbalances that must be
addressed. Excess ETF-share supply or demand relative to silver’s
own must be directly shunted into the underlying global
physical silver market. If that didn’t happen, silver-ETF-share
prices would soon decouple from silver’s.
The
American iShares Silver Trust overwhelmingly dominates the
silver-ETF space. It pioneered silver ETFs, launching way back in
April 2006. Its lead has grown insurmountable since. The world
authority on silver’s fundamentals is the venerable Silver
Institute. Once a year it publishes comprehensive data on global
silver supply and demand in World Silver Survey reports. The most
recent was released in April.
That
covered 2019, where SLV exited holding 362.6m ounces of physical
silver bullion in trust on behalf of its shareholders. The WSS
declared that gave SLV a commanding 49.8% share of all the silver
bullion held by all the world’s physically-backed silver ETFs! SLV
has gobbled up half of the global silver-ETF market. The
next-biggest competitor out of Switzerland only ranked at 11.4%.
SLV is truly in a league of its own.
Silver-ETF-share buying and selling really moves silver prices at
the margin because it is the most-volatile source of silver demand
by far. Most silver usage is relatively stable year after year, as
evident in the Silver Institute’s annual data. But silver-ETF
silver demand is radically volatile. It swung from -22.3m
ounces in 2018 to +81.7m in 2019, up to 8.2% of overall demand. The
WSS forecast for 2020 is +120m or 12.5%.
And
that pre-pandemic outlook for exploding silver-ETF-share demand is
wildly understated in this crazy new world we find ourselves in. By
mid-August, SLV’s holdings had skyrocketed to an astounding new
all-time-record high of 581.0m ounces. That made for +218.4m ounces
in silver-ETF demand from SLV alone year-to-date! That
exploding SLV-share demand was off-the-charts unprecedented, utterly
incredible.
SLV’s underlying physical-silver-bullion holdings are reported
daily, and their trends reveal whether stock-market capital is
flowing into or out of silver. When American stock traders buy SLV
shares faster than silver itself is being bought, SLV-share prices
threaten to decouple from silver to the upside. That would cause
SLV to fail its silver-tracking mission. So SLV’s managers must
step in to offset that excess demand.
In
near-real-time, they sell enough new SLV shares to absorb the
differential SLV-share demand beyond silver’s own. Then they
immediately plow the money raised from those share sales into
physical silver. So when SLV’s holdings are rising, stock-market
capital is flowing into silver. That happened in spades
since the stock panic, an unprecedented frantic rush to gain silver
portfolio exposure via those SLV shares.
When
American stock traders sell SLV shares faster than silver itself is
being sold, SLV’s share price will disconnect from silver’s to the
downside. SLV’s managers must avert this by buying back enough SLV
shares to sop up that excess supply. They raise the capital
necessary to do these buybacks by selling some of SLV’s physical
silver bullion. So falling SLV holdings show stock-market capital
flowing back out of silver.
This
chart superimposes SLV’s holdings over silver’s price action during
its secular bull, which started to run in mid-December 2015. Since
silver is so exceedingly volatile, its bull and bear markets are
often rendered off gold’s which is its
dominant primary
driver. Silver has never witnessed differential-ETF-share
buying of the magnitude seen since the stock panic! The vertical
explosion in SLV’s holdings is epic.
Interestingly silver’s plummeting into the stock panic didn’t spawn
much differential SLV-share selling. Inside that 3-week span where
silver cratered 35.8% into mid-March, SLV’s holdings merely fell
4.4% or 16.3m ounces at worst. Shrewd bargain-hunting traders
started flooding into SLV again a couple trading days before
silver’s nadir, so over its selloff’s exact span SLV’s holdings
actually rose 2.0% or 7.4m ounces.
The
heavy SLV buying accelerated dramatically from there. In late March
just six trading days after silver bottomed, SLV’s holdings surged
to their first new all-time-record high of 391.9m ounces. By the
time SLV’s holdings crested in mid-August, 45 new record closes
had been seen! At that initial silver interim high of $18.27 in
early June, SLV’s holdings had blasted up 25.8% or 95.8m ounces
during silver’s 52.8% rally.
Differential ETF-share buying certainly wasn’t the only
financial-market source of silver demand as this metal mean reverted
dramatically higher. Speculators were also flooding into silver
futures, which sport big leverage really amplifying their
silver-price impact. But American stock traders rushing into SLV
shares were the primary source of capital chasing silver’s big gains
to ride its strong momentum higher.
Interestingly when silver spent those five weeks consolidating high
between early June to early July, the heavy differential SLV-share
demand persisted. During that span where silver just ground
sideways at best, SLV’s holdings surged another 8.0% or 37.2m
ounces! The trading day before silver barely eked out its next new
post-panic high, SLV’s holdings hit a momentous milestone first
breaking above 500m ounces.
In
March, April, May, and June SLV enjoyed major holdings builds of
27.5m, 17.6m, 50.4m, and 34.7m ounces. But that paled in comparison
to July’s astounding monster 70.1m-ounce build! That is what
started to force silver parabolic. Silver’s strong post-panic upleg
had started to attract in an unusual new group of traders,
millennials. They started aggressively piling into SLV shares to
chase silver’s big momentum.
Millennials generally haven’t been big stock traders in the past.
Being younger, as a group they mostly haven’t been able to generate
the considerable surplus capital necessary to trade stock markets.
But in one of the more-significant unforeseeable market consequences
of this crazy pandemic, the millennials used it to start rushing
into the markets en masse. This is so unbelievable you
couldn’t make it up.
The
majority of millennials mostly had service jobs, which of course
were the most dramatically affected by governments’ draconian
national lockdowns. So many millions of young people were laid off,
suddenly finding themselves at home with nothing to do. But being
unemployed during this pandemic proved quite lucrative for
lower earners, thanks to the federal government’s gargantuan
pandemic stimulus payments.
Millennials who had long struggled to save were suddenly making out
like bandits. They got that one-time $1200 helicopter money. But
the big score came in Paycheck Protection Program payments and the
federal unemployment bonuses. For the first 2.5 months of being
laid off, millennials who were employed by companies taking out PPP
loans were paid in full. They were making normal wages with
far-lower expenses.
And
the millennials who filed for unemployment benefits sooner or later
during the lockdowns received not only their state payments, but
an extra $600 per week in bonuses Congress provided with the
CARES Act. $2400 per month of free money is not trivial,
annualizing to an extra $31,200 per year! Stuck in their apartments
and super-bored, millennials watched the stock markets rocket higher
out of March’s panic.
With
big surpluses of cash and time for the first time in their lives,
they decided they wanted to chase the blistering stock-market
gains. So they literally transferred tens of billions, likely even
hundreds, of their pandemic stimulus dollars to stock-trading
accounts! The millennials themselves confirmed this through
countless surveys, Internet postings, and anecdotal reporting. They
started trading stocks for their first time.
Their brokerage of choice was one few older traders had yet heard
of, the phone app Robinhood. This company pioneered
commission-free stock trading, which was really appealing to
usually-penny-pinching millennials. While Robinhood is private and
doesn’t disclose its total users often, it has revealed that its
userbase utterly skyrocketed this year. Millennials by the millions
opened up and funded Robinhood accounts.
For
years Robinhood published data on how many of its users owned
specific stocks, including SLV. Up until mid-March’s stock
panic, there was little interest in this dominant silver ETF.
Millennials crave high-tech things like electric cars, device
makers, and crypto currencies. Silver is pretty old-school and
boring for them. Still from the stock panic into late June,
Robinhood users owning SLV climbed from 7.7k to 14.1k.
Now
14k millennials trading SLV, with accounts averaging a few-thousand
dollars each, is nothing. That wouldn’t move the needle even in the
tiny silver market. But the thing that made Robinhooders’
collective trading market-moving was the way this brokerage makes
money. Instead of charging commissions, it instead sells its users’
collective real-time order-flow data to
high-frequency-trading firms and hedge funds.
Their computers instantly trade milliseconds ahead of the
Robinhooders, front running the millennials’ herd buying and
selling. The HFTs and hedgies were deploying orders of magnitude
more capital than the Robinhooders had, so the millennials’
stock trades were being greatly amplified in real-time! They were
the tail wagging the vastly-larger hedge-fund dog, effectively
directing capital flows vastly beyond their own.
Robinhood’s user-positioning data was also seen as a great proxy for
how millennials as a whole were trading across all brokerages.
And they started warming to silver in early July, increasingly
attracted to its strong upside price action. Gold surged back over
$1800 in the first half of July, which helped catapult silver up
6.9% month-to-date by mid-July. The Robinhooders owning SLV were
growing, hitting 15.0k at that point.
But
silver really started captivating millennials on July 20th and 21st,
when it surged up to first challenge and then smash through the
psychologically-heavy $20 level. From that point on, Robinhooders
owning SLV shares rocketed vertically. And orders of
magnitude more fund capital followed, front running their trades.
By August 10th when silver’s parabolic surge peaked at $29.04, 35.5k
Robinhooders owned SLV shares.
So
in essentially several weeks, millennial participation in the silver
market skyrocketed 137% higher! That catapulted SLV’s
holdings from 516.1m ounces on July 15th to 581.0m less than a month
later. This chart above reveals how silver shooting parabolic was
directly driven by the vertical explosion in SLV’s holdings.
Millennials trading pandemic-stimulus money with hedge funds
mirroring was the dominant driver.
By
silver’s early-August peak, it had skyrocketed 142.8% higher in just
4.8 months! Over 60% of those massive upleg gains occurred in
its final month alone, when Robinhooders flooded into SLV.
During that silver-upleg span, SLV’s holdings soared a staggering
53.6% or 198.7m ounces! That magnitude of SLV-share demand is
wildly unprecedented. Silver and silver ETFs had never before
witnessed anything close.
Parabolic surges are never sustainable for long, as the capital
firepower available for near-term buying soon exhausts itself. And
indeed within days of silver’s parabolic peak, SLV’s holdings topped
out at that incredible new all-time-record high of 581.0m ounces.
Both silver and SLV’s holdings have fallen since, with silver’s
abrupt loss of momentum increasingly driving SLV-share selling.
This is a serious risk for silver.
After blasting stratospheric to hit 1.659x its 200-day moving
average in early August, silver needed to see a major correction
to rebalance away the extreme euphoria and
extraordinarily-overbought technicals. That got off to a violent
start, with silver nearly crashing again by plummeting 15.2% in the
first trading day alone after its August peak! But silver quickly
bounced, and stayed above that $24.64 close until late September.
During that subsequent high-consolidation period between correction
lows, silver averaged $26.93. But SLV’s holdings have fallen
rather sharply, almost symmetrically with their euphoric build
into silver’s peak. By late September, SLV’s holdings had already
fallen 6.2% or 35.9m ounces at worst. The big question now is
whether SLV faces considerably-more differential selling, whether
American stock traders will flee silver.
Unfortunately Robinhood actually ceased releasing its users’
collective positioning data within days of silver’s early-August
peak. Robinhood was increasingly getting bad press, with that data
cited to show that millennials were speculating recklessly
with exceedingly-risky bets. They were doing ridiculously-foolish
trades as a herd, piling in to chase upside momentum regardless of
how terrible stocks happened to look.
Without that Robinhood data, we can’t know if millennials have
largely unwound their big SLV bets or if they are mostly still in.
I suspect the former, as these young traders quickly lose interest
once momentum flags and some other shiny stock crops up. But
regardless of who still owns SLV shares, this dominant silver-ETF’s
holdings remain far above pre-parabolic norms. That suggests
the risks of selling remain high.
Silver speculation is largely driven by gold’s fortunes, and
gold itself faces big near-term downside risks as I’ve detailed in
recent essays. Like silver, gold’s own summer surge was also
largely fueled by huge differential gold-ETF-share buying. But that
went missing in
action after gold peaked, just like silver-ETF-share buying. So
gold too has a massive overhang of potential gold-ETF-share selling
that could hammer it lower.
Also
like silver, gold consolidated high after early August’s lofty
peak. That left
it extremely overbought by its own secular bull’s standards,
like silver. Gold is also in its biggest seasonal selloff
between its large autumn and winter rallies. That normally drags
silver lower too. With gold’s high consolidation just rolling over
into a full-blown correction, silver will follow and amplify gold’s
losses like usual. So caution is in order.
Before this silver bull’s next upleg can start marching higher,
silver needs to see a healthy rebalancing selloff to bleed
away euphoric sentiment and extremely-overbought technicals. And
with SLV’s holdings so darned high, differential SLV-share selling
will certainly exacerbate any significant silver selloff. With
silver-ETF selling mounting, this necessary process is already
underway. That could push silver much lower.
After rocketing parabolically, silver tends to correct hard back
down to or even through its 200dma. As the black line on this chart
shows, that is a heck of a long way lower from here. This week
silver’s key 200dma baseline is still way down at $19.13! To
re-converge would require a 34.1% correction, making for lots more
pain. But that would lead to an excellent mid-bull opportunity
to buy back in relatively low.
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, greatly expanding bulls’ potential
gains. Look to aggressively buy silver and its miners’ stocks
as this silver correction runs its course.
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Corrections are the time to do your gold-stock and silver-stock
homework, preparing to redeploy as they pass.
The
bottom line is silver-ETF selling is mounting. Since silver’s
parabolic surge driven by massive capital inflows from differential
SLV-share buying peaked, this dominant silver ETF’s holdings have
been falling on balance. That reveals American stock traders are
exiting silver, selling SLV shares faster than silver is being
sold. And with SLV’s holdings remaining spectacularly high, they
could have much more yet to do.
This
potential-silver-ETF-selling overhang is a big downside risk for
silver. With silver’s high consolidation failing into a correction,
downside momentum will accelerate. That will scare many SLV
shareholders into dumping their positions, exacerbating silver’s
selloff. This vicious circle of selling could cascade until
silver’s sentiment and technicals are rebalanced. And that’s
probably a long way down from current prices. |