Silver is powering higher in a new bull market after getting
clobbered in March’s stock panic. Investors have been flocking back
to silver in the aftermath of that ultra-rare extreme-fear event.
That brutal selloff also utterly wiped out speculators’ upside bets
in silver futures, giving them massive room to buy back in. After
being pummeled to record-low levels relative to gold, an epic silver
mean reversion higher is underway.
A
couple weeks ago, I wrote a popular essay “Big
Silver Bull Running!”. It explained what happened to silver in
this recent COVID-19 stock panic, and why silver soared in its
wake. Sucked into that blinding fear maelstrom, silver was thrashed
to a miserable 10.9-year low. This metal plummeted in a near-crash,
fueled by speculators’ fastest long purge ever witnessed!
That exhausted their selling, totally resetting longs.
That
meant these super-leveraged traders’ capital firepower was fully
available to buy back into silver. And much more bullish than that,
strong and relentless silver investment demand emerged since that
mid-March collapse. That’s evident in the soaring silver-bullion
holdings of silver’s leading exchange-traded fund, the SLV
iShares Silver Trust! This dominant silver ETF is the best daily
proxy for global investment demand.
The
remarkable capital inflows pouring into silver through that major
SLV conduit from American stock investors were explored in depth in
that recent essay. But with surging investment demand as evident in
SLV’s holdings its primary thesis, I only had room to tangentially
touch on another very-important bullish silver factor. That’s
silver’s relationship to its overwhelmingly-dominant primary driver,
gold price trends.
This
white metal has always tended to
mirror and
amplify whatever is happening in the yellow one. Silver
effectively acts like a gold-sentiment gauge. Traders’
enthusiasm for silver mounts when gold is rallying on balance,
leading them to bid silver higher well-outperforming gold. Since
the world silver market is tiny compared to gold’s, worth just a
small fraction in any given span, capital inflows fuel outsized
silver gains.
But
when gold is generally drifting lower, or grinding sideways long
enough to shift sentiment to bearish, silver is abandoned.
Speculators and investors alike are only interested in silver when
they expect gold to continue materially advancing. With silver
joined at the hip with gold psychologically, it tends to leverage
significant gold moves by 2x to 3x. And where silver trades
relative to gold is analogous to its valuation.
The
best time to buy silver is when it is abnormally-inexpensive
compared to prevailing gold levels. That can be measured through a
simple construct called the Silver/Gold Ratio. But dividing silver
prices by gold prices yields tiny hard-to-parse decimals like 0.0089
this week. So I’d rather use an inverted-axis Gold/Silver
Ratio instead, which yields the same data in a
much-easier-to-understand format like 112.1x.
The
recent stock panic’s extraordinarily-extreme impact on silver
is really illuminated by this SGR proxy. This chart shows how
silver has fared relative to gold over the last decade-and-a-half or
so. When this SGR line is rising, silver is outperforming gold.
The opposite is true when the SGR falls, gold surpasses silver.
This chart is jaw-dropping, revealing exceedingly-anomalous SGR
levels which are wildly bullish for silver!
When
silver plummeted to that extreme 10.9-year secular low of $11.96 on
March 18th during the stock panic, the SGR soared to 124.1x! In
other words, it took 124.1 ounces of silver to equal the dollar
value of a single ounce of gold. That radical collapse literally
forced the SGR off the charts! For over a century, about
100x was the ultra-rare SGR edge-case limit. Now all the long-term
SGR charts have to be redrawn.
Our
daily silver and gold data extends back to June 1969, an
immensely-long 50.9-year secular stretch. Before March 2020’s stock
panic, the worst SGR witnessed in that past half-century was 100.3x
way back in February 1991. That only lasted two trading days before
silver mean reverted back higher relative to gold. Our monthly
silver and gold data runs much farther back to 1915. The SGR hit
97.3x in 1940 and 1941.
So
in the 105 years leading into March 2020, the SGR had briefly
challenged 100x precisely twice. And I’ve seen multi-century silver
and gold charts cobbled together despite data becoming increasingly
sparse the farther back in time peered. They imply this crazy
124.1x seen in mid-March was an apocalyptic all-time-record low
in silver relative to gold! We just witnessed something so extreme
it has never happened before.
Speculators’ most-extreme silver-futures long dump ever fueled
silver’s near-crash, which obliterated this white metal to its
most-extreme lowest levels ever compared to prevailing gold prices.
Silver had never been cheaper relative to gold! This
wildly-unprecedented anomaly is incredibly bullish for silver. All
past low-silver-price SGR extremes have been followed by massive
mean reversions higher in subsequent years.
The
last modern example came after the previous stock panic in October
2008. These ultra-rare selling events spawn such overwhelming fear
that they suck in everything else including gold and silver. In the
same single-month span where the flagship US S&P 500 stock index
plummeted 30.0%, silver collapsed 32.6%! That catapulted the SGR to
84.1x that month, which was a 13.6-year SGR high or silver-to-gold
low.
Financial markets abhor extremes in long-term relationships. They
not only never last long, but prices almost immediately start mean
reverting back towards normal ratios after they are dragged
way out of whack by anomalous shocks. And there is nothing more
extreme than ultra-rare stock panics. The epic fear necessary to
fuel them is so far beyond normal that there have only been 3 in the
last 113 years!
The
incredible carnage the frantic stock-panic mass selling inflicts on
silver only lasts as long as peak fear in stock panics. And that is
really fleeting since extreme fear quickly burns itself out.
Once that initial overwhelming wave of fear passes, silver
immediately begins mean reverting back higher absolutely and
relative to gold. Silver bull markets grow enormous after stock
panics, mean reverting before overshooting.
The
Silver/Gold Ratio, and indeed many long-term price relationships,
are like pendulums. Equilibrium is the long-term average, analogous
to a pendulum hanging straight down at rest. The farther a pendulum
is pulled to either side, the extremes, the faster and more
forcefully it swings back down into its arc’s bottom mean. But its
kinetic energy, like momentum in the markets, propels the pendulum
to the opposing extreme.
In
the years leading into late 2008’s stock panic, the SGR averaged
54.9x. That was right near the long-term secular mean as well,
which ran 54.5x between 1970 to 2007. So for many decades both
gold and silver miners used an SGR of 55x to convert byproduct
production of their secondary metal into equivalent ounces of their
primary one. When a relationship exists for decades, there’s good
fundamental reason.
But
like that pendulum, silver prices relative to gold’s didn’t just
stop near 54.9x after silver’s super-low extremes during 2008’s
stock panic. Instead they kept powering higher long after the mean,
overshooting proportionally to the opposing one! If you pull
a pendulum to the left, it’s going to swing back to roughly the same
height on the right before running out of steam. Silver’s last
post-panic bull market was huge.
In
absolute terms silver more than quintupled out of its
stock-panic lows, skyrocketing 442.9% higher over the next 2.4 years
into April 2011! Silver far outperformed gold in that post-panic
mean reversion and overshoot, with the panic-bottom 84.1x SGR
blasting through that longstanding 54.9x mean to soar way up to
31.7x when that post-panic silver bull ultimately crested! Silver’s
potential after stock panics is epic.
Investors flood back into silver for years after these ultra-rare
extreme-selling events deeply scar them psychologically. A stock
panic is technically a 20%+ S&P 500 plummeting in 2 weeks or less.
Falling that fast spawns such mind-boggling fear that the total
decline is often around a third in about a month! When stock
investors suddenly and catastrophically lose that much of their
wealth, they are forever changed.
They
remember the wisdom of prudently diversifying their
stock-heavy portfolios instead of foolishly being all-in stocks. So
they gradually increase their virtually-nonexistent pre-panic
allocations in gold and silver over the subsequent years. The
precious metals are fantastic diversifying assets because they tend
to rally on balance when stock markets are weakening or expected
to. Silver can be more attractive than gold.
After stock panics, battered investors desperately want to be made
whole again. After a 33% loss, getting back to break-even requires
a 50% gain! And silver’s upside potential is much greater than
gold’s simply due to the relative sizes of their markets. Think
of these like market capitalizations of individual stocks. The
smaller any market, the faster prices can be bid higher on any given
capital inflows from investors.
The
latest-available data for both world gold and silver demand is
full-year 2019’s. According to the latest report from the World
Gold Council, global gold demand last year ran 4,355.7 metric tons.
That was worth $195.2b at 2019’s $1394 average gold prices. The
Silver Institute’s latest data pegs world silver demand at 991.8m
ounces in 2019. That was worth just $16.0b at last year’s average
silver prices running $16.18.
So
the global silver market is only about 1/12th as large as the
world gold market! That means any given amount of capital flowing
into silver can exert about 12x the upward-price impact of that same
amount moving into gold. That’s the major reason why silver prices
tend to amplify material gold-price trends by 2x to 3x. Devastated
stock investors following panics also like the relative perceived
cheapness of silver.
With
an ounce of silver or SLV share costing far less than on ounce of
gold or GLD share, investors looking to diversify in precious metals
think they are getting more bang for their buck in silver. They
like to own more ounces or shares rather than less, which
makes them feel like their wealth has better potential to grow
again. And once silver runs, investors love chasing winners so
buying begets more buying.
All
these post-stock-panic dynamics that helped silver quintuple after
that last stock panic in late 2008 still exist today. And with that
far-more-extreme all-time-record-high SGR in mid-March,
today’s new post-panic silver bull has way more room to mean revert
and overshoot to even-greater gains! If investors continue
migrating back into silver in coming years like after the last stock
panic, silver’s upside potential is epic.
Today’s secular gold and silver bulls began marching out of deep
many-year lows in December 2015. From then until February 2020
prior to March’s extreme stock panic, the SGR averaged 79.0x. That
is really high historically, as silver was languishing low and out
of favor for much of recent years. But there’s no doubt the
panic-stricken SGR has to at least shoot back up to that
quasi-normal level in coming months.
With
today’s prevailing gold prices near $1717, a mere mean reversion
implies silver powering back up to $21.74. That’s another 41.9%
above current levels, which would make for a good upleg. Silver’s
maiden upleg in this bull peaked at 50.2% gains, while its
most-recent upleg this past summer ran out of steam at +40.0%. But
once silver regains that much ground relative to gold, its momentum
should carry it much farther.
A
proportional overshoot, the SGR pendulum swinging back towards
the opposite extreme, portends far-greater post-stock-panic
silver-bull gains. Silver would blast so much higher in that
scenario that it would drag the SGR back down to 33.9x. That
wouldn’t last long, it would mark the unsustainably-euphoric
parabolic peaking of this silver bull. The last post-stock-panic
bull shot the SGR even lower to 31.7x before failing.
At
that same $1717 gold and this proportional-overshoot 33.9x, that
implies silver soaring all the way up to $50.65 before this new
post-stock-panic bull gives up its ghost! That’s certainly not
unreasonable either, as silver peaked at $48.43 in April 2011 when
that last post-stock-panic bull went terminal. That would make
for a quadrupling out of March 2020’s extreme silver lows, a
323.5% bull run in coming years!
But
running SGR mean-reversion-overshoot scenarios off today’s gold
prices is way too conservative as it ignores gold’s own bull
market. As I explored in an essay a few weeks ago,
gold investment
is soaring as well in this stock panic’s wake. This is also
likely to persist for years, driving gold much higher. Gold will
prove way more attractive than normal for years to come given the
near-hyper-inflation gushing from the Fed.
In
literally just 6 weeks from mid-March to late April, the Fed’s
balance sheet exploded an eye-popping 52.4% or $2,261.2b
higher! This central bank is printing money like there’s no
tomorrow to monetize the colossal amounts of Treasuries the US
government is issuing. It is trying to fight the terrible
depression being forced upon us by governments’ own absurd draconian
overreactions to the COVID-19 pandemic.
Those trillions of new dollars being paid directly to Americans
through loans and grants are going to be competing for
vastly-slower-growing goods and services on which to spend them.
That is going to really bid up general price levels, unleashing
stagflation fears among investors! This near-hyper-inflation
will make gold and silver far more attractive and essential for
portfolio diversification than after the last stock panic.
Only
time will tell how high gold ultimately flies in this
radically-unprecedented broken world, but after that last stock
panic in October 2008 gold powered 166.5% higher over the next 2.8
years. So a doubling out of mid-March’s panic low of $1472 seems
reasonable if not conservative. $3000 gold is certainly achievable
in coming years! But let’s assume gold somehow only climbs 50% in
this post-panic bull, hitting $2200.
At
$2200 gold, a 79.0x silver-bull-mean SGR yields silver levels of
$27.84. That’s 81.7% higher than this week’s silver levels in a
mere mean reversion. If the inevitable overshoot fails early and
just carries silver back up to its decades-old 55x SGR average, we’d
be looking at a $40.00 silver target. And at that full proportional
mean reversion of 33.9x, $2200 gold would imply silver soaring to
new record highs near $64.90!
While these post-stock-panic silver-bull price targets are
interesting, they really aren’t very important. Even if you only
think silver has the potential to double or triple out of its recent
stock-panic low, which would carry it back up to $23.92 to $35.88,
you should be establishing a material portfolio allocation.
Maybe that’s 5%, compared to the 10% to 20% every investor should
always have deployed in far-less-volatile gold.
And
if silver is starting an epic mean-reversion-overshoot bull
run higher out of the most-extreme SGR levels ever witnessed by far,
the gains coming in the
major silver
miners’ stocks will dwarf silver’s! They tend to amplify
silver’s own moves by an additional 2x to 3x. So about a month ago
we started adding new trades in fundamentally-superior silver miners
in our newsletters, buying low before they soar far higher.
This
new post-panic silver bull’s upside potential is amazing! Silver’s
shocking all-time-record low relative to gold is just one factor.
Speculators’ extreme silver-futures long purge left them positioned
to be huge buyers. And investment buying has already been strong
and relentless in the stock panic’s wake. Add gold itself
heading way higher on big investment buying and
near-hyper-inflation, and silver looks incredible.
We do all the hard
fundamental stock-picking work at Zeal, winnowing the silver-stock
field to uncover the likely big winners. And we’re currently still
redeploying in these fundamentally-superior gold and silver stocks
as their latest upleg grows, which are recommended in our popular
weekly and
monthly
newsletters. The unrealized gains in our new trades deployed since
mid-March are already running up to 60% this week!
To
profitably trade high-potential gold and silver stocks, you need to
stay informed about broader market cycles driving gold. Our
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silver stocks’ next mighty upleg.
The
bottom line is silver is due for an epic mean reversion higher
relative to gold in coming years. The recent stock panic
obliterated silver prices to their lowest levels ever seen compared
to gold! Historically, similar but milder silver-low extremes were
soon followed by massive mean-reversion-overshoot bulls. After the
last stock panic in late 2008, silver more than quintupled over the
next couple years or so.
Silver’s new-bull-market upside potential after this latest stock
panic looks considerably bigger. Silver-futures speculators’ mass
exodus during the panic gives them vast room to buy back in. And
investment-capital inflows have already been strong and relentless
in this panic’s wake. Silver should amplify gold’s own
post-stock-panic bull on surging investment demand for prudent
diversification and on Fed-inflation fears. |