Silver is blasting higher after mid-March’s stock-panic-spawned
near-crash. This normal oversold mean reversion looks like the
start of something much bigger though. Speculators’ positioning in
silver futures utterly collapsed, leaving massive room for them to
buy back in. And silver investment buying since the recent lows has
been strong and relentless. All this argues that a big new silver
bull market is starting to run!
Since silver prices are usually slaved to gold’s, I don’t write
silver essays often. Silver usually follows and amplifies whatever
is going on in gold, which is its
dominant primary
driver. So
gold analysis by extension normally applies to silver, which
effectively acts like a gold-sentiment gauge. But the setup
in silver today is unique and extraordinarily-bullish, leaving it
with much-greater upside potential than the yellow metal.
After years of languishing deeply out of favor, silver started
soaring last summer after
gold broke out
to its first new bull-market highs in several years. Over 9.7
months into early-September 2019, silver rallied 40.0% achieving a
nice upleg. But that left it very overbought, stretched way up to
1.27x its key 200-day moving average. Anything beyond 25% above
that technical baseline warns of an imminent major selloff.
Silver indeed retreated 15.5% into early December. And though it
later bounced back with gold initially on a US-Iran military
conflict and later on COVID-19-pandemic fears, silver couldn’t
regain those upleg highs. In late February as gold itself pushed
6.8% above its original early-September peak, silver was still 5.0%
below its own! That unusual divergence suggested precious-metals
psychology still hadn’t recovered.
That
was another warning sign that late February’s high gold prices were
peculiar and
precarious, at risk of a major selloff contrary to mounting
enthusiasm. That soon came to pass during last month’s crazy
stock panic, an ultra-rare extreme-fear event. While gold got
hammered during the frantic rush for cash in panics bidding up the
US dollar, the resulting silver carnage proved much worse like in
the last panic.
In 7
wickedly-brutal trading days in mid-March, gold plunged 11.4%. The
massive gold-futures selling driving that was triggered by a huge
6.2% US Dollar Index rally in that span. Silver tends to leverage
big gold moves by 2x to 3x, and thus suffered a blitzkrieg 29.5%
plummeting during that panic! That almost qualified as a formal
crash, a 20%+ collapse in just 2 trading days. But silver lost
18.9% at worst by that metric.
It
takes incredibly-extreme selling to drive a crash or near-crash, and
what cascaded in silver futures certainly fit the bill. In just 3
weeks into mid-March, silver-futures speculators dumped an
astounding 58.0k long contracts! That 40.9% plummeting in several
weeks was the fastest long purge ever seen in silver-futures
history. It’s important to realize the breathtaking scope of that
much selling so darned fast.
Each
silver-futures contract controls 5000 ounces of silver, making that
colossal exodus the equivalent of 290.2m ounces in 3 weeks! To put
that into perspective, consider it relative to global silver mine
output per the leading authority the Silver Institute. In 2018,
still the latest-reported data, all the world’s mines produced
855.7m ounces of silver. Over a third that much was cast
into the markets in just several weeks!
Silver-futures trading dominates silver-price action, both because
of the big leverage inherent in this realm and the resulting price
is silver’s world reference one. To get an idea on that leverage,
this week traders are only required to keep a $9,000 maintenance
margin in their accounts for each silver-futures contract they
hold. Yet at $15.50 silver, those command $77,500 worth of this
metal yielding 8.6x maximum leverage.
Thus
every dollar speculators deploy in silver futures can have up to
8.6x the silver-price impact of dollars committed via outright
investment! That’s how speculators’ panicked stampede out of
silver-futures longs last month obliterated silver prices, nearly
crashing them. But that selling was so extreme it battered these
traders’ total silver-futures longs to a deep 6.1-year secular low
of just 67.1k contracts at the end of March.
This
chart superimposes silver over speculators’ total silver-futures
longs and shorts as reported in the famous weekly Commitments of
Traders reports. The recent record collapse in their upside bets on
silver is unprecedented, and is wildly-bullish for silver going
forward. Since speculators are now essentially all-out silver
futures, it leaves massive room for them to buy back in as
silver powers higher on investment demand.
Secular silver bulls mirror gold bulls, and today’s specimens
both started marching from deep lows back in mid-December 2015.
Throughout this entire span, speculators’ long positions in silver
futures have never been anywhere close to today’s super-low levels!
When gaming likely coming trends in gold and silver, it’s very
useful to consider where speculators’ futures positioning is
relative to their bull trading ranges.
In
this latest Commitments of Traders read current to last Tuesday,
speculators’ total longs and shorts in silver futures were running
2% and 0% up into their silver-bull trading ranges! The
most-bullish possible for silver is 0% longs and 100% shorts,
indicating these super-leveraged traders’ selling is exhausted but
they have vast room to buy back in. The most-bearish possible is
the opposite 100% longs and 0% shorts.
That
means their buying firepower has been expended, leaving nothing to
do but sell big to mean revert back down near normal positioning.
Today’s odd silver-futures scene is a mix of that, with super-low
longs and shorts at the same time. But longs are more important,
because traders usually have more of them. Speculators’ average
longs during this bull have run 118.0k contracts, 2.0x more
than their 59.6k average shorts!
So
while there is room for massive long buying as well as new short
selling, the former has much greater potential to drive silver
prices. Merely to mean revert back to these bull-average levels,
speculators will have to buy 50.9k silver-futures long contracts.
To proportionally overshoot, they’d have to buy 101.8k. That’s the
equivalent of 254.5m to 508.9m ounces of silver buying via silver
futures likely in coming months!
These super-low silver-futures longs are reason enough to be really
bullish on silver here. Such a serious anomalous lack of upside
bets has wound up silver like a coiled spring. The faster these
elite traders buy back in to restore normal positioning, the higher
silver prices will shoot. But silver futures aren’t the reason I
wrote this essay. Strong and relentless post-stock-panic silver
investment demand is way more important!
Unfortunately silver investment is really opaque. Silver is bought
and sold in countless small venues all over the world, making it
exceedingly challenging to gather comprehensive data. The analysts
at the Silver Institute are the best at this, but they only publish
their findings once per year in their must-read World Silver
Surveys. The latest 2020 edition covering 2019 should be released
any week now, I can’t wait.
But
that annual resolution is far too coarse and rearview-mirrored for
real-time market analysis. Ideally we need silver-investment data
daily, or weekly at worst like the silver-futures data. Thankfully
there is a great proxy for silver investment demand with daily
data. The leading and dominant silver exchange-traded fund, the SLV
iShares Silver Trust, publishes its physical-silver-bullion holdings
every trading day.
Launched way back in April 2006, SLV’s first-mover advantage has
grown into an insurmountable lead. As of this week, SLV held a
whopping 415.4m ounces in vaults on behalf of its shareholders.
That is the equivalent of about half of 2018’s global mine output,
again the latest-available comprehensive data. At the end of that
year, SLV’s holdings commanded fully 48.8% of all the silver owned
by all the world’s silver ETFs!
So
SLV is a silver juggernaut, a direct conduit for the vast pools of
American stock-market capital to slosh into and out of silver. The
trends in SLV’s holdings reveal whether investors are buying or
selling silver, a great proxy for global investment demand as a
whole. Understanding the simple mechanics behind this
silver-tracking ETF is essential to realizing how valuable SLV’s
holdings trends are for gaming silver moves.
SLV’s mission of course is to mirror the silver price. But this
requires active management, since the supply and demand of SLV
shares are independent from silver’s own. When American
stock investors are buying SLV shares faster than silver is being
bought, SLV share prices threaten to decouple from silver to the
upside. SLV’s managers avert this failure by issuing enough new SLV
shares to offset any excess demand.
They
then use the money raised from those SLV-share sales to buy more
physical silver bullion, which effectively shunts differential
SLV-share buying pressure into the world silver market. So when
SLV’s holdings are rising, American stock-market capital is
flowing in. The opposite is true when they are falling,
requiring SLV’s managers to sell silver bullion to buy back enough
SLV shares to sop up any excess supply.
For
several weeks now in our subscription newsletters, I’ve been
marveling at the serious buying in SLV shares. Regardless of what
the silver-futures speculators are doing, there’s nothing more
bullish for silver prices than sustained investment buying.
And the amount of that happening since silver’s brutal stock-panic
lows last month has been remarkable according to SLV’s holdings!
That’s why I wrote this essay.
This
chart superimposes SLV’s physical-silver-bullion holdings in
millions of ounces over the silver price. While the latter remains
relatively low, the capital inflows into silver via
differential-SLV-share buying have been epic. American stock
investors are flocking back into silver in a massive way,
portending far-bigger gains to come. Silver skyrocketed after the
last stock panic in late 2008 also deeply changed psychology.
A
little over a year ago in February 2019, American stock investors
didn’t want anything to do with silver. With the metal languishing
in the $14s and $15s, they sold enough SLV shares to force its
holdings to a deep 6.8-year low of 306.9m ounces. But once silver
started running last summer on that major gold breakout to new
bull-market highs, capital deluged into SLV as investors
chased silver’s sharp gains.
From
mid-June to late August alone, SLV’s holdings rocketed 22.5% or
71.4m ounces higher in just 2.5 months! That finally eclipsed
October 2016’s previous all-time-record high of 366.4m ounces, with
SLV’s holdings climbing to 388.2m just before silver peaked in early
September. From there SLV’s holdings slumped rather dramatically as
silver corrected, falling as far as 8.8% or 34.3m ounces by late
January.
Super-volatile and highly-speculative, silver is a usually a
hardcore momentum play. When it is running investors love it and
pile in to chase its gains. But when silver stalls or retreats for
a significant stretch, they hate it and flee. Yet stock panics
change everything, shaking investors’ faith in stock markets so
profoundly that silver becomes way more attractive than normal. Big
SLV buying started before silver V-bounced!
Silver selling peaked on March 16th with an eye-popping 12.8%
collapse, actually right in line with the leading S&P 500 stock
index’s unreal 12.0% plummeting that day. Silver price action often
blends that seen in the stock markets and gold, as stock-market
fortunes heavily influence speculators’ perceptions of risks. But
while silver lost another 1.0% the next day, SLV’s holdings surged
mightily with a colossal 3.4% build!
That
was the 20th-largest daily holdings build in percentage terms in
SLV’s history, but more like the 5th-largest since 15 of the top 20
came in SLV’s maiden months when its holdings were still small.
That day marked the start of American stock market capital returning
to silver, even before silver bottomed. That came the next day when
silver plunged 5.1% to $11.96, which proved a miserably-brutal
10.9-year secular low.
At
that extreme stock-panic-fueled nadir, it took 124.1 ounces of
silver to equal the value of a single ounce of gold. That was a
crazy new record-high Silver/Gold Ratio, the white metal had
never been more undervalued relative to the yellow one! To
put that into
perspective, from 2009 to 2012 which were the last
post-stock-panic years the SGR averaged 56.9x. Silver needed to
mean revert far higher relative to gold.
That’s a third reason silver looks so exceptionally-bullish today.
This week when gold powered back up to $1728, the SGR had merely
recovered to 110.6x. To return to 56.9x at these prevailing gold
prices, silver would have to rocket back up over $30! Including an
SGR chart and analysis would’ve made this essay way too long, but
realize silver’s mean reversion higher relative to gold is
another major bullish driver for it.
That
day silver bottomed, SLV’s holdings saw another big 1.5% build. So
American stock investors were either buying or not selling as fast
as silver was being sold. Then as silver started V-bouncing out of
those incredibly-extreme stock-panic lows, the
differential-SLV-share buying persisted. Day after day the SLV
builds continued with no significant relent, as American stock
investors’ silver demand seemed insatiable.
Initially they were terrified of the stock panic, which bludgeoned
the S&P 500 an excruciating 33.9% lower in less than 5 weeks. This
COVID-19 pandemic wasn’t the main fear, but the dire economic
consequences and terrible stock-market impact of governments’
draconian overreactions to the outbreak. They were shutting down
economies worldwide, insanely quarantining entire populations
instead of just the sick!
But
the strong and persistent differential-SLV-share demand continued
after the stock-panic proper. Over the next several weeks the S&P
500 rocketed 27.2% higher in a monster bear-market rally or new bull
depending on your perspective. That erased over half the extreme
stock-panic losses, dissipating much fear and leading investors to
believe there’s light at the end of governments’ dire
economic-shutdown tunnels.
Yet
out of those 15 trading days where the stock markets were surging on
balance, SLV enjoyed builds on fully 11 as silver investment demand
continued mounting! As of this Wednesday’s data cutoff for this
essay, there have been 21 trading days including SLV’s initial huge
mid-panic build. An amazing 16 of these saw SLV builds averaging a
hefty 1.0%! The other 5 days were mostly flat, averaging trivial
0.1% draws.
In
this mere single-month span, SLV’s holdings have skyrocketed an
incredible 17.6% or 62.2m ounces higher! That catapulted them
above 400m ounces for the first time ever last Tuesday. And those
new record-high SLV-holdings levels kept coming since, hitting
415.4m this Wednesday. Silver investment demand is enormous
according to this leading daily proxy for it, which is
wildly-bullish for silver going forward.
The
more capital investors throw at the tiny global silver market, the
faster silver prices rally. The higher silver gets, the more
investors want to buy it to ride its powerful momentum. As traders
love chasing winners, buying begets buying. And with silver
investment demand strong and relentless, speculators’ upside
silver-futures bets super-low, and silver radically undervalued
relative to gold, silver’s new bull will be big!
Stock panics, technically defined as the S&P 500 plunging 20%+ in 2
weeks or less, deeply scar investors for years after. These shatter
their
central-bank-money-printing-fueled faith that stock markets
simply rally on balance indefinitely. They prove that market
cycles still exist, and highlight the folly of having portfolios
all-in stocks. Panics rekindle the oft-forgotten wisdom of prudent
diversification of stock-heavy portfolios.
And
silver is really attractive for that. It mirrors and amplifies
gold, which tends to power higher in strong bulls when stock markets
are weakening or expected to. Since silver is such a small market,
there’s far less silver available in monetary-value terms than gold,
its upside tends to dwarf gold’s. Silver’s lower price also makes
it much more palatable to accumulate than gold for the legions of
investors who like to own more.
Silver’s outperformance after stock panics is legendary. During the
previous one back in late 2008, silver was obliterated plummeting
32.6% in the single month where the S&P 500 collapsed 30.0%. But
once that fear superstorm passed and traders could start thinking
rationally again, silver caught a strong bid that lasted for years.
Over the next 2.4 years into April 2011, silver skyrocketed
442.9% higher nearing $50!
That
was largely if not overwhelmingly fueled by big investment demand.
During that same post-stock-panic span, SLV’s holdings soared 65.3%
or 140.4m ounces higher. Towards the end of that mighty bull run,
momentum buying took over as euphoria mounted. But the lion’s share
of that last post-stock-panic bull was driven by investment
capital inflows. That’s why this past month’s strong ones are
so exciting.
Silver will almost certainly double or triple, and potentially
quadruple or quintuple again, from last month’s deep 10.9-year
secular low! There’s no better time to be heavily long silver, and
the stocks of its better miners, than after a stock panic crushes
silver lower. So in recent weeks we’ve been adding new trades in
fundamentally-superior
major silver
miners in our newsletters, as their stocks will really amplify
silver’s bull run.
At
Zeal we started aggressively redeploying in fundamentally-superior
gold stocks back in mid-March just after that sector bottomed.
We’ve long done the hard fundamental work of winnowing down the
gold-stock field to uncover the likely big winners. These are
recommended in our popular
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To
profitably trade high-potential gold and silver stocks, you need to
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The
bottom line is it looks like a big new silver bull is running!
Silver got hammered to deep secular lows by extreme silver-futures
selling during last month’s stock panic. That left these
speculators with vast room to flood back into silver to amplify its
rebound higher. And in the month since, silver investment demand
per its leading daily proxy of SLV’s holdings has been strong and
persistent, a super-bullish omen.
The
catastrophic psychological damage wreaked by stock panics makes
silver look way more attractive for diversifying stock-heavy
portfolios for years after. And silver investment drives prices
higher creating a powerful virtuous circle, with buying begetting
more buying. After its last extreme stock-panic lows, silver more
than quintupled over the next couple years. A massive bull run is
likely again after last month’s panic. |