Silver has blasted higher in the last couple weeks, far
outperforming gold. This is certainly noteworthy, as silver has
stunk up the precious-metals joint for years. This
deeply-out-of-favor metal may be embarking on a sea-change sentiment
shift, finally returning to amplifying gold’s upside. Silver is not
only radically undervalued relative to gold, but investors are
aggressively buying. Silver’s upside potential is massive.
Silver’s performance in recent years has been brutally bad,
repelling all but the most fanatical contrarians. Historically
silver prices have been mostly
driven by gold,
with the white metal amplifying moves in the yellow metal. Silver
has generally leveraged gold by at least 2x in the past. And
rarely silver skyrockets as higher prices and bullish sentiment feed
on themselves in powerful virtuous circles fueling huge gains.
Silver’s legendary upside is largely the result of it being such a
tiny market. Silver’s leading fundamental authority is the Silver
Institute. In its latest World Silver Survey covering 2018, it
reported that total world demand ran 1033.5m ounces last year. That
was worth a mere $16.2b at 2018’s average silver prices, a rounding
error in markets terms. That was just 1/11th the size of
last year’s world gold demand worth $179.4b!
So
when investors grow interested in silver again and start deploying
capital, relatively-small inflows in absolute terms catapult silver
far higher. This classic dynamic last worked in 2016. In roughly
the first half of that year, silver rocketed 50.2% on the parallel
29.9% maiden upleg of this current gold bull. That made for 1.7x
upside leverage to gold, remaining on the weaker side historically
but still well worth riding.
Through gold suffered a severe correction in the second half of
2016, it still ended that year 8.5% higher. Silver’s 15.1% gain
amplified that by 1.8x. The secret to gaming silver is it tends to
act like a sentiment gauge for gold. When gold is relatively
high and has been rallying, traders start assuming that will
persist. And that’s when they want to buy silver. The white metal
thrives mostly only when gold psychology is bullish.
In
2017 and 2018 gold fell deeper out of favor. The yellow metal
wasn’t performing poorly, but it couldn’t break out to new
bull-market highs. And contrarian investing was dying, with stock
markets levitating to endless new record highs on hopes for big tax
cuts soon and extreme Fed dovishness. With gold apathy stellar,
silver didn’t stand a chance. Silver sentiment and thus price
performance is totally controlled by gold.
Even
though gold rallied a strong 13.2% in 2017, silver lagged at mere
6.4% gains. That 0.5x leverage to gold was terrible. The longer
silver underperformed, the more traders capitulated on it and walked
away. 2018 was even worse. Though gold only drifted 1.6% lower,
silver plunged 8.6% making for horrendous 5.5x downside leverage.
Silver wasn’t worth the big additional risk of its serious
volatility compared to gold.
Thankfully silver’s dire fortunes started to change in early 2019,
when I wrote my original essay on
Silver
Outperforming Gold. But unfortunately that was short-lived, as
silver is slaved to gold. In mid-February the young gold
upleg stalled out and reversed lower, after failing to break out to
new bull-market highs. That kneecapped silver’s budding
outperformance streak, casting it back to the underperformance
wasteland.
By
June 19th, silver was back to its recent miserable form. It was
down 2.1% year-to-date despite gold enjoying a respectable 6.1% YTD
rally. While we were taking advantage of the hellish sentiment to
buy and recommend fundamentally-superior silver-mining stocks at
crazy-low prices in our newsletters, it was hard to write about
silver. Virtually no one was the least bit interested, with
suffocating apathy universal.
But
silver started awakening from its bearish haze on June 20th, kicked
in the butt by an extraordinary watershed event. That day gold
finally surged to its first
new bull-market
high since way back in early July 2016, when this bull’s maiden
upleg peaked! Gold’s $1389 close was also its highest in 5.8 years,
starting to unleash powerful new-high psychology. In the 5
weeks since, that has increasingly infected silver.
Silver didn’t respond immediately to gold’s
decisive
bull-market breakout. On breakout day it stuck to its languid
ways, only rallying 1.8% on a major 2.1% gold up day. The silver
price action actually stayed relatively weak for the next several
weeks. By July 11th gold was 3.4% higher from the day before that
major breakout, while silver slumped 0.3% lower. But something
interesting was brewing behind the scenes.
Silver investment demand is notoriously difficult to monitor. The
best fundamental data available for this white metal is again from
the Silver Institute’s World Silver Survey. But as awesome as that
is, it is only published once per year. There is a
high-resolution proxy for silver investment demand available daily
though, the physical-silver-bullion holdings of the world’s largest
and dominant silver exchange-traded fund.
That
is the American SLV iShares Silver Trust, which has a huge
first-mover advantage after launching way back in April 2006. As of
the end of 2018, the Silver Institute’s data showed SLV commanded
fully 49% of all the silver held by all the world’s silver
ETFs! SLV’s holdings are published daily, and when they climb it
reveals American stock-market capital flowing into silver. This
dynamic is important to understand.
SLV’s mission is to track the silver price, giving stock traders
full silver exposure. But the SLV-share supply and demand is
independent of silver’s own. If stock traders are buying SLV shares
faster than silver itself is being bought, SLV’s price will decouple
from silver’s to the upside. SLV’s managers prevent this by
shunting that excess share demand back into physical silver itself.
The mechanics are simple in concept.
When
SLV prices are being bid up faster than silver, new SLV shares are
issued to absorb that differential demand. The capital raised from
selling those shares is then used to buy more physical silver
bullion. This enables SLV to act as a conduit for stock-market
capital to flow into and out of silver itself. When SLV shares are
sold faster than silver, this process reverses. SLV holdings
reveal silver investment trends!
While silver was drifting sideways to lower in the first half of
July and looking unimpressive, American stock investors were
starting to buy SLV. Between July 2nd and 9th, SLV enjoyed daily
holdings builds averaging 0.7% in 4 out of 5 trading days! At the
same time the leading gold ETF’s holdings, which is of course the
GLD SPDR Gold Shares, were mostly draws. Silver was attracting
investors while gold wasn’t.
With
gold consolidating high and largely holding over $1400,
precious-metals sentiment was improving. After long ignoring gold
and silver, investors were starting to take another look. Silver
had not only really lagged gold’s breakout rally since mid-June, but
it was radically undervalued compared to its dominant primary
driver gold. We’ll explore that shortly. So smart contrarians were
starting to shift back into silver.
This
didn’t first become evident in silver’s price action until July
15th, just a couple weeks ago. That day silver rallied 1.2% despite
gold only edging 0.1% higher. That was peculiar and out of
character for silver in recent years, so it could’ve been an
anomaly. But it proved otherwise. As of this Wednesday’s data
cutoff for this essay, silver has outperformed gold in a major way
for 8 trading days in a row! That’s incredible.
On
the 16th silver climbed 0.9% while gold fell 0.9%. On the 17th and
18th silver surged 2.6% and 2.3% on 1.5% and 1.4% gold up days. The
19th saw silver only retreat 0.7% as gold dropped 1.4%. Then on the
22nd and 23rd silver rallied 1.0% and 0.2% despite gold’s 0.1% and
0.5% declines. This Wednesday the 24th saw silver climb 1.1%
outpacing gold’s 0.6%. Such a strong outperformance streak is
important.
Thus
in the past couple weeks or so, silver has blasted 9.7% higher
despite a mere 1.3% gold rally! That makes for epic 7.4x upside
leverage, the kind silver enthusiasts dream about. This
outperformance stretch is even more impressive because it was driven
by big capital inflows into SLV by American stock investors
returning to silver. As of this Wednesday SLV saw strong holdings
builds for 6 trading days in a row.
That
started with a monster 2.6% SLV build on the 17th, which proved the
biggest seen by far since way back in January 2013! Gold largely
holding over $1400 rekindled American stock investors’ interest in
silver in a way not seen in 6.5 years. Over the next 5 trading days
ending Wednesday, SLV’s holdings grew another 0.8%, 1.0%, 2.6%,
0.5%, and 0.5%. This silver-investment-buying streak is pretty
amazing.
While silver’s outperformance of gold has exploded only in the last
couple weeks, it has totally changed how silver looks since gold’s
decisive bull-market breakout on June 20th. As of Wednesday, silver
has now rallied 9.3% over that 24-trading-day span compared to
gold’s 4.8% gain. That’s right back up to that historical
2.0x-upside-leverage norm. SLV’s holdings enjoyed 13 build days, 11
flat days, and 0 draw days.
They
have catapulted SLV’s holdings 12.6% higher since the day before
gold’s breakout. Via this leading ETF, American stock investors are
now holding 1/8th more silver in absolute-ounces terms in just 5
weeks. Over this same span GLD’s holdings only climbed 7.6%. And
it only saw 8 holdings-build days, 5 flat days, and a whopping 11
draw days. Something special, major, and likely pivotal is
underway in silver!
Nevertheless, silver remains in an ugly place compared to gold. YTD
as of this Wednesday, silver was just up 7.1% compared to gold’s
11.1%. Gold’s $1445 upleg-to-date high achieved on July 18th was
its best level seen in 6.2 years. Silver’s own upleg-to-date high
of $16.55 this Wednesday was merely a 1.1-year one. So though
silver has started to outperform gold again, it has a long way to go
to look impressive.
There’s no sugarcoating it, the carnage in silver in recent years
has been catastrophic. Thanos himself couldn’t have done
worse with a fully-stoned Infinity Gauntlet! While there were a
half-dozen silver charts I considered sharing this week, this one is
the most telling. It shows the Silver/Gold Ratio over the past
decade-and-a-half or so. This SGR is the best measure of whether
silver prices are relatively high or low.
The
SGR simply divides the daily silver close by the daily gold close,
but yields hard-to-parse decimals like 0.0116 this Wednesday. So I
prefer to use an inverted-axis Gold/Silver Ratio instead, which is
the same thing but offers easier-to-understand numbers like 86.1
mid-week. Silver prices had almost never been lower relative
to gold in modern history before recent weeks! Silver is climbing
out of a stygian abyss.
Back
in mid-June just before gold’s decisive bull-market breakout changed
everything, the SGR had fallen to an absurd 90.4x. In other words
it took 90.4 ounces of silver to equal the value of a single ounce
of gold. That was wildly out of whack with historical precedent.
From 2005 to just before 2008’s first stock panic in a century, the
SGR averaged 54.9x. From 2009 to 2012 after that panic, it averaged
a similar 56.9x.
The
SGR had generally meandered in the mid-50s for decades, so
miners had long used 55.0x as the leading proxy for calculating
silver-equivalent or gold-equivalent ounces. The SGR also
experienced great cycles, long secular periods of silver
outperformance where the SGR generally fell followed by multi-year
spans of silver underperformance where the SGR rose on balance. SGR
extremes were short-lived.
As
gold surged over this past month, the SGR spiraled higher still to a
mind-boggling 93.5x on July 5th. That was an apocalyptic
26.8-year low, the worst silver levels relative to gold since
October 1992. That is longer than the average investing lifespan of
today’s traders, over a quarter century! And 93.5x isn’t much
better than the worst SGR since 1970, 100.3x seen briefly in
February 1991. Silver has just been slaughtered.
For
an incredible 8.2 years the SGR had been rising on balance, showing
chronic underperformance relative to gold. This secular cycle is
far-overdue to turn, and after extreme lows historically silver has
spent years mean reverting higher relative to gold. 2008’s
extraordinary stock panic offers a fantastic recent example of how
greatly silver can soar after being battered down to extreme lows
relative to gold.
Back
in November 2008 in that most-extreme market-fear event seen in our
lifetimes, the SGR was crushed to 84.1x. Silver was radically
undervalued relative to gold, investors wanted nothing to do with
it. Such a great disconnect between silver and gold wasn’t
sustainable given their relative market sizes and the ratio at which
they are mined. So over the next 2.4 years into April 2011,
silver skyrocketed 442.9% higher!
After SGR extremes silver doesn’t just revert to the mean, but
overshoots proportionally towards the opposite extreme. The SGR
fell as low as 31.7x when that silver bull peaked over $48 per
ounce. Odds are the SGR will again overshoot and at least return to
the 40s before silver’s next bull fully runs it course. With silver
not far off its lowest levels compared to gold in modern times in
early July, it has vast room to soar.
Gold’s current bull market was born in mid-December 2015, and is
what has driven silver higher during gold-bull uplegs. Since then,
the SGR has averaged just 77.8x. That is actually higher than
during that wild stock-panic span in late 2008, incredibly extreme!
Over the past several weeks or so, the SGR has already started mean
reverting falling as low as 86.1x this week. Silver’s upside
potential from here is epic.
At
$1400 gold and this miserable gold-bull-average 77.8x SGR, silver
would need to trade at $18.00. That’s another 9% higher from this
week’s levels. But again mean reversions off extremes don’t just
stop at the averages, but keep going like a pendulum. That yields
an SGR target of 62.1x, implying $22.56 silver at $1400 gold.
Silver would have to power another 36% higher to regain those
still-pathetic SGR levels.
If
gold’s young secular bull persists for years to come as it ought to
based on historic precedent, silver is going to climb far higher
greatly lowering the SGR. If it just mean reverts back to that
longstanding 55.0x average with no overshoot, that means $25.45
silver at $1400 gold. These SGR-mean-reversion-and-overshoot
silver-price targets grow far bigger at higher prevailing gold
prices and proportional-overshoot SGR lows.
The
point of all this is silver is so radically undervalued
compared to its primary driver gold that it needs to soar vastly
higher to reestablish normal relationships. While silver’s
outperformance over the past couple weeks is impressive, it hardly
even registers coming off such extreme lows. Digging out of such a
deep hole relative to gold, silver needs to rally higher on balance
for many months or even years to come!
While investment buying including via silver ETFs like SLV will be
the primary driver, silver futures will also play a big
role. A couple weeks ago I wrote about
gold’s high
short-term selloff risk due to how the gold-futures speculators
are now positioned, with excessively-bullish bets that are actually
very bearish over the near term. A healthy gold pullback or
correction would certainly drag silver down with it for a spell.
The
most-bullish situation possible for gold- and silver-futures is for
speculators to be all-out long upside bets and all-in short downside
bets. That leaves them nothing to do but buy. That is 0% longs and
100% shorts. In the latest weekly Commitments of Traders report,
specs’ gold-futures bets were running 75% on the long side and 10%
on the short side up into their entire bull-market trading ranges.
That’s really bearish.
By
bull-to-date precedent, gold-futures speculators had room to sell
347.4k contracts but only room to buy 80.5k. That made for an
ominous 4.3x ratio of potential selling outweighing potential
buying. I bring this up because speculators’ silver-futures
positioning was nowhere near as menacing. They are running 66%
on the long side and 44% on the short side up into their
gold-bull-market trading ranges, much less bearish.
Speculators had room to sell 97.4k silver-futures contracts and buy
65.8k in the latest CoT report, for a way-more-moderate 1.5x ratio
of potential selling to potential buying. The takeaway here is
silver has a lot more near-term futures-buying-driven upside
potential than gold does. Together silver investment buying and
silver-futures buying are powerful forces to catapult silver
higher. But it all depends on gold.
If
gold continues to consolidate high above or near $1400, that will
foster the bullish sentiment necessary for silver buying to
persist. New-high psychology driving gold investment buying could
make this happen. But if something spooks the gold-futures
speculators, they have massive room to sell which would quickly
cascade and hammer gold lower. That would suck in silver, driving
both into healthy short-term corrections.
But
once speculators’ excessively-bullish gold-futures bets normalize,
gold and silver should be off to the races again with silver
really outperforming. So any material weakness should be used
to aggressively accumulate physical silver bullion, SLV shares, and
stocks of fundamentally-superior silver miners. Their upside
potential trounces silver’s because their profits growth really
amplifies higher prevailing silver prices.
Again silver soared 50.2% higher in largely the first half of 2016.
The leading SIL Global X Silver Miners ETF rocketed a colossal
247.8% higher in essentially that same span! That made for huge
4.9x leverage to silver’s gains. Every quarter I analyze the
fundamentals of the major silver miners of SIL, with the latest
essay covering
Q1’19 results. Now is the time to do your homework before
silver really starts running again.
To
multiply your capital in the markets, you have to trade like a
contrarian. That means buying low when few others are willing, so
you can later sell high when few others can. In recent months well
before gold’s breakout, we recommended buying many
fundamentally-superior gold and silver miners in our popular
weekly and
monthly
newsletters. Mid-week our unrealized silver-stock gains
already ran as high as 113.8%!
To
profitably trade high-potential gold and silver stocks, you need to
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The biggest gains are won by traders diligently staying abreast,
always learning.
The bottom line is
silver really started outperforming gold again in the last couple
weeks. Silver surged dramatically on heavy investment buying, as
evidenced by big differential SLV-share demand. This looks like a
sea-change sentiment shift getting underway in silver, especially
after it was crushed to its lowest levels relative to gold in well
over a quarter century. Silver is long overdue to mean revert
vastly higher.
Silver effectively
acts like a gold sentiment gauge, with investment demand dependent
on gold’s fortunes. The longer gold consolidates high or grinds
higher, the more silver will be bought. Coming out of such
radically-undervalued levels, silver’s future bull-market upside
should greatly exceed gold’s. But silver will also get sucked into
periodic gold corrections, which can be used as lower entry points
to add silver positions. | 
