The
silver miners’ stocks have mostly drifted sideways this year,
looking vexingly comatose. Such dull price action repels
speculators and investors, so they’ve largely abandoned this
lackluster sector. That weak trader participation has led to silver
stocks’ responsiveness to silver price moves decaying. What can
shock silver stocks out of their zombified stupor? And how soon is
such an awakening catalyst likely?
Silver stocks’ flatlined behavior so far in 2017 is surprising and
odd. Silver-stock prices are ultimately driven by silver-mining
profits, which are overwhelmingly driven by prevailing silver price
levels. Silver in turn is
slaved to gold’s
fortunes, the yellow metal is the white metal’s dominant primary
driver. With gold faring quite well this year despite the euphoric
record stock markets, silver and its miners’ stocks should be
shining.
Since silver is a tiny market compared to gold, silver’s moves tend
to leverage gold’s. The best global silver and gold
supply-and-demand fundamental data available comes from the Silver
Institute and World Gold Council respectively. According to them,
worldwide silver and gold demand last year ran 1027.8m ounces and
4337.4 metric tons. Along with average prices, these can be used to
approximate market sizes.
Silver and gold averaged $17.12 and $1250 last year. Run these
numbers, and 2016’s total global silver and gold markets were worth
about $17.6b and $174.3b. This latest-available data shows silver’s
market is literally an order of magnitude smaller than
gold’s! With silver only enjoying 1/10th the capital flows of gold,
silver tends to be far more responsive. Any dollar of buying or
selling is 10x more impactful for silver.
The
silver market’s small size is one of this metal’s greatest
strengths. Compared to the vastly-larger broader markets, it
doesn’t take much new buying to catapult silver dramatically
higher. Speculators and investors alike usually get interested in
shifting capital into silver when gold is already rallying. Silver
then tends to rally much more than gold, leveraging its upside,
because silver inflows are relatively larger.
Given gold’s good performance this year, silver and the stocks of
its miners should’ve surged. Year-to-date gold is up 11.3%, well
ahead of full-year 2016’s 8.5% gain. But instead of amplifying
gold’s 2017 advance by 2x to 3x like usual, silver is only up 6.7%
YTD as of this week. This makes for really poor leverage to gold of
0.6x. Last year silver rallied 15.1%, yielding
still-weak-but-more-normal 1.8x upside leverage.
Silver’s serious underperformance relative to gold this year has
greatly retarded traders’ interest in the silver miners’ stocks.
The leading silver miners’ trading vehicle and sector-index proxy is
the SIL Global X Silver Miners ETF. Because of the
great profits
leverage to silver inherent in the silver miners, their stocks
usually amplify silver’s upside. But YTD SIL is only up 4.0%, for
extremely-poor 0.6x leverage!
Gold
stocks aren’t having a great year either, with their leading GDX ETF
only up 11.5% YTD compared to gold’s 11.3% gains. Like silver
stocks, their gains tend to multiply their underlying metal’s gains
by 2x to 3x. But the gold stocks’ weak in-line performance so far
in 2017 highlights just how bad silver stocks’ lagging performance
is. They have been largely drifting comatose this year,
hardly even responding to silver.
Silver stocks have serious problems, and they certainly aren’t
fundamental. Every quarter I analyze the latest operating and
financial results from the top silver miners of SIL. They will soon
start reporting their new Q3’17 results, but
the prior
quarter’s are the latest now available. In Q2’17 SIL’s elite
top silver miners reported average all-in sustaining costs of
$11.66 per ounce, well below average silver prices of $17.18.
That
implies hefty industrywide silver-mining profits of $5.52 per
ounce. While the average silver price did slump 2.0% sequentially
in Q3 to $16.84, that’s certainly no fundamental threat. Assuming
flat mining costs, the silver miners still should’ve been able to
earn $5.18 per ounce last quarter. That’s down 6.2%
quarter-on-quarter, but is still very profitable. Fundamentals
can’t explain silver stocks’ vexing malaise this year.
That
narrows down the suspect list to technicals and sentiment. This
first chart looks at the price action in SIL and silver over the
past couple years or so. Silver miners’ responsiveness to silver
moves was excellent last year, but is decaying dramatically
this year. With speculators and investors abandoning this sector,
it’s barely budging. That has spawned a vicious circle convincing
other traders to avoid silver stocks.
Silver stocks’ troubling lethargy is new this year. Back in
December 2015 two days before the Fed’s first rate hike
of this cycle,
silver slumped to a major 6.4-year secular low in concert with
gold. Silver stocks bottomed just over a month later in January
2016 paralleling the gold stocks. SIL fell to an all-time low in
split-adjusted terms that day. A couple months earlier, Global X
had executed a 1-for-3 reverse split in SIL.
Silver stocks were so deeply out of favor in late 2015 that this
leading ETF’s managers feared SIL’s price would collapse low enough
to risk delisting! Out of that very despair, strong new bull
markets in silver and its miners’ stocks were born. In just 6.9
months from mid-January to mid-August 2016, SIL rocketed 247.8%
higher on a 40.6% silver rally! That made for outstanding 6.1x
upside leverage to silver prices.
Naturally silver and its miners’ stocks were soon sucked into gold’s
correction following its own new bull’s initial upleg. Those silver
and SIL corrections ballooned to monstrous proportions, thanks to
gold-futures stops being run then Trump’s surprise election victory
unleashing stock-market euphoria. So over the next 4.2 months,
silver and SIL plunged 20.1% and 42.5%. SIL’s downside leverage to
silver of 2.1x was modest.
2016’s behavior is the way silver stocks normally react to
silver-price moves. The blue SIL and red silver lines above were
closely intertwined last year. Silver stocks generally rallied and
fell sharply in lockstep with silver itself. This normal behavior
carried over into the first couple months of 2017, when SIL surged
33.6% between late December 2016 and early February 2017 on a mere
12.5% parallel rally in silver itself.
Silver stocks were leveraging silver’s upside by 2.7x, near the high
end of their usual 2x to 3x range. So back in late January the
silver stocks’ 2017 prospects
looked really
bullish. Things started going awry in February and March. The
silver stocks corrected hard, plunging 21.1% in a month on a
relatively-small 4.5% silver pullback. That made for big 4.7x
downside leverage that was quite excessive, scaring traders.
So
they started to flee silver miners’ stocks, a trend that’s continued
ever since. With each subsequent silver rally since March, silver
stocks have become less and less responsive to silver upside. This
year’s blue SIL line above is no longer mirroring and amplifying the
underlying volatility in the red silver line. It’s as if silver
stocks are flatlining relative to silver, which is very strange. I
can’t recall seeing anything like this.
Thus
silver stocks have been stuck in a descending-triangle consolidation
pattern for much of this year. They finally enjoyed breakouts from
this triangle’s upper resistance and SIL’s 200-day moving average in
August, mirroring similar
major breakouts in
gold stocks. But silver stocks’ responsiveness to silver
continued decaying. In a month leading into early September, SIL
only climbed 11.3% on an 11.5% silver rally.
Technically it looks like silver stocks have largely disconnected
from silver. They’ve lapsed into this super-weird zombified
comatose state. Speculators and investors alike aren’t the least
bit interested in silver miners today, because they’re performing so
poorly. And the resulting lack of participation in this sector
scares away other traders, exacerbating the problem. Silver stocks
have effectively been left for dead.
After decades studying and actively trading silver stocks, I’ve
pondered this strange anomaly quite a bit in recent months. It’s
certainly not fundamentally-driven, as silver miners’ earnings are
looking good. It’s likely not technical either. While silver
stocks are really underperforming, they haven’t suffered a serious
selloff. SIL’s triangle support around $33 has held rock solid all
year long, so this is a consolidation not a correction.
That
leaves sentiment as the culprit behind silver stocks’ vexing
stupor this year. Traders’ psychology is important in all markets,
but disproportionately so in silver. Silver is a tiny
highly-speculative market, exceptionally sensitive to shifting winds
of sentiment. While weak technicals breed bearish sentiment and
that becomes self-reinforcing, there had to be some root causes
poisoning silver psychology earlier this year.
I
suspect multiple factors are to blame. Once again silver sentiment
is heavily dependent on gold. In the wake of Trump’s election win
almost a year ago, stock markets soared in Trumphoria on hopes
for big tax cuts soon. That hammered gold, which is
hostage to
stock-market fortunes. Gold is an anti-stock trade that usually
moves counter to stock markets, so
gold investment
demand collapsed after the election.
Gold’s own psychology was utterly miserable late last year,
exceedingly bearish. When gold fell to $1128 right after the Fed’s
second rate hike
of this cycle last December, Wall Street forecasts calling for a
plunge under $1000 exploded. Traders don’t get interested in silver
until gold is already rallying, so the extreme gold gloom and doom
late last year certainly tainted silver sentiment. It has yet to
recover from that.
Though gold bounced sharply and has enjoyed a good 2017, silver
oddly didn’t join in. Gold itself likely played a major role.
Despite gold’s gains this year, gold sentiment has remained pretty
bearish. With the stock markets magically levitating in Trumphoria
on those fervent big-tax-cuts-soon hopes, gold was flying under
traders’ radars. With virtually no enthusiasm for gold, silver
psychology had nothing to feed on.
The
speculative traders who flock to silver for its sharp rallies and
big gains were finding greener pastures elsewhere. Throughout the
year various mainstream stock-market sectors have surged, so traders
could find strong gains outside the precious metals. I’m certain
this year’s extraordinary bitcoin bubble diverted interest
away from silver too. The stratospheric skyrocketing of bitcoin
prices has captivated traders.
Bitcoin’s value is hyper-speculative, as bitcoins are a synthetic
virtual construct given perceived worth by software creating
artificial scarcity. Having been in the financial-newsletter
business for almost a couple decades now, I hear and read endless
market anecdotes. This year I’m seeing the same types of traders
who are usually interested in speculative silver raving about
bitcoin instead. Bitcoin is a speculative mania!
Both
in my own private feedback from countless traders around the world,
and on the Internet’s popular gold and silver forums, the usual gold
and silver conversations have shifted to gold and bitcoin
this year. There’s no doubt bitcoin has stolen some limelight from
silver, and almost certainly sucked away some of the capital that
would’ve flowed into silver in 2017 too. Bitcoin is this year’s
alternative speculation of choice.
But
bitcoin’s meteoric rise won’t eclipse silver forever. Silver
investment has been around for millennia, but bitcoin was just
introduced in January 2009. As of this week bitcoin is up an
astounding 485% YTD in 2017 alone! Such extreme vertical
gains are never sustainable, as history has abundantly proven. So
bitcoin’s epic competition this year for mindshare and capital from
traditional silver speculators won’t last.
While bitcoin is definitely a factor in the lack of interest in
silver and silver stocks this year, these record-high
Trumphoria-goosed stock markets are far more important. As
long as gold psychology is bearish as stocks seemingly do nothing
but rally forever, silver’s speculative appeal will languish. Once
these lofty stock markets inevitably roll over, gold and therefore
silver investment will return to favor just like in early 2016.
Gold
and silver slumped to brutal 6.1-year and 6.4-year secular lows in
December 2015, everyone hated the precious metals. But the US stock
markets finally succumbed to their first corrections in 3.6 years,
an extreme near-record span. As the S&P 500 fell 12.4% in 3.2
months in mid-2015 followed by another 13.3% in 3.3 months into
early 2016, long-neglected gold and silver demand returned with a
vengeance.
Gold
and silver surged 29.9% and 50.2% higher over the next half-year or
so, igniting their first new bull markets in years! The next
correction-grade stock-market selloff, over 10% on the S&P 500, will
spark another renaissance in gold and silver investment demand.
After being miraculously delayed for so long, that next major
stock-market selloff is overdue and imminent. The risk
factors stacking against stocks are legion.
The
US stock markets are literally trading in bubble territory,
over 28x earnings
on the traditional trailing-twelve-month basis. They’ve rallied so
long and so high that euphoria is extreme, with all measures of
sentiment showing dangerous bull-slaying levels. And the Fed just
birthed
quantitative tightening for the first time in history, which
is exceedingly
bearish for these quantitative-easing-inflated artificial stock
markets.
The
stock markets finally decisively rolling over is the most-likely
catalyst to shock silver and the stocks of its miners out of their
comatose malaise. The silver stocks are perfectly poised for a
first-half-of-2016-like scenario, where SIL rocketed 247.8% higher
in just 6.9 months. The driver will be silver’s next major
bull-market upleg. Silver remains radically undervalued
relative to gold, thus enjoying colossal upside potential.
This
next chart looks at the Silver/Gold Ratio, which simply divides the
daily silver close by the daily gold close. Technically that
results in little decimals that are hard to parse mentally, so I
prefer using a scale-inverted gold/silver ratio which is the
same thing. It yields more-meaningful whole numbers like 75.5 where
the SGR stands today. This is way too low based on historical
precedent, an unsustainable anomaly.
This
week it took over 75 ounces of silver to equal the value of one
ounce of gold. That’s a really-high SGR historically, meaning
silver prices are really low relative to gold. Silver’s
extreme undervaluation is a key reason speculators and investors
aren’t interested in silver stocks today. That will change
dramatically as silver inevitably resumes mean reverting higher
relative to gold. Silver will outperform for a long time.
Before 2008’s stock panic, the SGR averaged 54.9. After the stock
panic between 2009 to 2012, the SGR averaged 56.9. So outside of
the extreme SGR anomalies driven by the stock panic and later the
Fed’s QE3-conjured stock-market levitation from 2013 on, a
mid-50s SGR is normal. This has proved true all throughout
modern history due to geological and relative silver-and-gold
supply-and-demand reasons.
During late 2008’s stock panic, the SGR briefly averaged an
extremely-low 75.8. That soon gave way to a sharp mean reversion
higher to reestablish silver’s usual relationship with gold.
That mean reversion overshot dramatically, as is often the case with
silver after an SGR extreme. In April 2011 when silver was enjoying
mania-like popularity the SGR briefly peaked at 31.7! Silver’s
upside is extreme after low SGRs.
Incredibly since Q4’15, when silver and gold hit their major 6-year
secular lows, the SGR has averaged just 73.6. That’s not much
better than late 2008’s stock-panic levels! So silver is long
overdue to mean revert relative to gold, rallying much faster than
gold for months on end until this relationship is restored.
We don’t need to assume a likely overshoot, as a simple mean
reversion alone would drive huge silver gains.
Assuming a 56 normal SGR, at this week’s $1280 gold price silver
should be trading over $22.75. That’s 35% above prevailing price
levels. But with
gold itself readying to rally, silver’s mean-reversion targets
climb much higher with gold prices. Another 30% gold upleg like in
early 2016, which is modest by gold’s historical standards, would
take it to $1665. At a 56 SGR, silver would have to soar 75% to
around $29.75!
Since silver prices remain so depressed relative to their primary
driver gold’s, the silver upside potential from here is enormous.
This overdue silver mean reversion higher is what will shock
silver stocks back to life. Once speculators and investors see
silver starting to run, they are going to flood back into
beaten-down silver stocks with reckless abandon. That will catapult
this small sector radically higher like in early 2016.
The
trigger reigniting silver will be gold powering higher, and again
that will likely result from these crazy stock markets rolling
over. Once these bubble-valued stock markets start decisively
weakening, traders will rush to return to gold, silver, and their
miners’ stocks to prudently diversify their stock-heavy portfolios.
The Fed’s QT juggernaut ramping up over the next year will likely
set this chain of events in motion.
Recent months’ comatose silver stocks are largely the product of
general-stock euphoria leaving silver radically undervalued relative
to gold. Silver psychology is very bearish, so traders aren’t the
least bit interested in owning its miners. Sprinkle in the extreme
allure of the bitcoin mania for the speculative traders who crave
silver’s normal volatility, and that explains 2017’s serious anomaly
in silver and silver stocks.
When
this all changes, silver will move fast. This restless and
volatile metal has a long history of drifting sideways and doing
little. But occasionally the winds of sentiment shift enough to
ignite enormous bull markets and uplegs generating fortunes.
Traders who have the discipline to wait out silver’s
sometimes-vexing consolidations are greatly rewarded when capital
really flows into silver again, catapulting it far higher.
The
greatest gains in this next major silver upleg won’t be won in
silver-stock ETFs like SIL. They are burdened with too many
companies that
aren’t primary silver miners, the majority of their revenues
come from other metals. So they aren’t very responsive to silver’s
upside. But the purer individual silver miners with superior
fundamentals will enjoy massive gains trouncing the ETFs. They are
the best way to play silver.
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The
bottom line is silver stocks have largely drifted comatose this
year, with decaying responsiveness to silver moves. The extreme
stock-market euphoria has left gold psychology bearish, bleeding
into silver sentiment. And the spectacular bitcoin bubble has
diverted speculative traders’ interest and capital away from silver
as well. All this has led traders to largely abandon silver miners,
condemning their stocks to consolidate.
But
the likely catalyst to shock silver stocks from their zombified
stupor is nearing with each passing day. Once these QE-inflated
stock markets inevitably succumb to QT, gold and silver investment
demand will return. The tiny silver market will rapidly surge on
major capital inflows, with lots of room to mean revert far higher
relative to gold. Then speculators and investors alike will rush to
buy the cheap silver miners’ stocks. |