Silver has been dead money over the past year or so, relentlessly
grinding sideways to lower. That weak price action has naturally
left this classic alternative investment deeply out of favor.
Silver is extremely undervalued relative to gold, while speculators’
silver-futures positions are extraordinarily bearish. All this has
created the perfect breeding ground to birth a major new silver bull
market, which could erupt anytime.
Silver’s price behavior is unusual, making it a challenging
investment psychologically. Most of the time silver is maddeningly
boring, drifting listlessly for months or sometimes years on end.
So the vast majority of investors abandon it and move on, which is
exactly what’s happened since late 2016. There’s so little interest
in silver these days that even traditional primary silver miners are
actively
diversifying into gold!
But
just when silver is universally left for dead, one of its massive
uplegs or bull markets suddenly ignites. Some catalyst, typically a
major gold rally, convinces investors to return to silver. Their
big capital inflows easily overwhelm the tiny global silver market,
catapulting this metal sharply higher. Silver skyrockets to amazing
wealth-multiplying gains, dwarfing nearly everything else. This
reinvigorates silver’s cult-like following.
Silver’s dominant
primary driver has long been gold, which controls all
precious-metals sentiment. When gold isn’t doing anything exciting,
silver languishes neglected. But once gold rallies high enough for
long enough to convince investors a major upleg is underway, capital
starts returning to silver. Thus silver is effectively a
leveraged play on gold, amplifying its price action. Silver
never soars unless gold is strong.
This
psychological relationship is so ironclad it may as well be
fundamental. The global silver and gold supply-and-demand profiles
are technically independent, with little direct linkage physically.
But when investment demand flares to drive gold higher, parallel
silver investment demand soon materializes. So silver and gold
often move in lockstep, especially when gold’s price action is
interesting enough to catch attention.
All
this makes the Silver/Gold Ratio the most-important
fundamental measure for silver prices. The lower silver prices
happen to be compared to prevailing gold ones, the greater the odds
a major silver mean-reversion rally is imminent. And today silver
is almost as low relative to gold as it’s ever been in the past
century! This first chart looks at the SGR, or more precisely the
inverted GSR, over the past 13 years or so.
The
SGR calculation results in tiny hard-to-parse decimals, like this
week’s 0.012x. So I prefer to use the gold/silver ratio instead,
which yielded a cleaner 81.9x as of this Wednesday. Charting this
GSR with its axis scaled upside down produces the same SGR line, but
with far-more-brain-friendly numbers. This shows that silver is
extremely undervalued relative to gold today, which is
super-bullish for this neglected asset.
Again this week the SGR was running at just 81.9x, meaning it took
almost 82 ounces of silver to equal the value of a single ounce of
gold. So far in 2018, the SGR has averaged 79.6x. As you can see
in this chart, that’s extremely low. There have only been two other
times in modern history where silver looked worse relative to gold,
late 2008’s first-in-a-century stock panic and early 2016’s
secular-bear-market lows.
Because of silver’s tiny market size, it’s an incredibly-speculative
asset. When investment capital flows really shift, silver can soar
or plunge with shocking violence. Silver’s speculative nature makes
it far more susceptible to general market psychology than gold.
Silver acts like a small fishing boat battered around in the choppy
waves of sentiment, while gold is more like a supertanker punching
through them.
That
2008 stock panic was the first since 1907, one of the most-extreme
fear events of our lifetimes. Technically a stock panic is a 20%+
plummet in the major stock-market indexes in less than two weeks.
The flagship S&P 500 stock index indeed collapsed 25.9% in exactly
two weeks in early October 2008, which terrified everyone. If felt
like the world was ending, so investors and speculators sold
everything to flee to cash.
Gold
weathered that storm well, only sliding 3.3% in that wild
stock-panic span. But the overpowering fear scared traders into
hammering silver 23.7% lower. On exceptional stock-market down
days, silver tends to split the difference between the S&P 500 and
gold. We’ve seen that recently as well, during this
new stock-market
correction since early February. Silver is particularly
sensitive to prevailing herd sentiment.
Between September and December 2008 straddling that stock panic, the
SGR averaged just 75.8x. Silver was radically undervalued relative
to gold, an anomalous state that has never been sustainable
for long. The resulting mean reversion and overshoot higher was
enormous, yielding stupendous gains for silver investors. Silver
ultimately bottomed at $8.92 per ounce in late-November 2008, at a
super-low 83.5x SGR.
Over
the next 12.4 months silver rocketed 115.4% higher out of those
extreme stock-panic lows, which restored the SGR to 63.2x. But that
was still low. In the years leading into that stock panic, the SGR
averaged 54.9x. For decades a mid-50s SGR has been normal,
with silver generally oscillating around those levels compared to
gold. Miners had long used 55x as a proxy for calculating
silver-equivalent ounces.
Once
silver falls to extreme lows relative to its primary driver gold,
the inevitable resulting mean reversion rarely stops near the
average. Instead it tends to overshoot proportionally to the
upside, fueling massive gains. Silver started returning to favor in
late 2010 and early 2011 as gold powered to major new highs. That
ultimately climaxed with silver enjoying popular-mania-like
popularity in late April 2011, at $48.43 per ounce.
That
made for a total bull market out of those extreme stock-panic lows
of 442.9% over 2.4 years! At its peak, the SGR had soared to
31.7x. Silver can’t sustain anomalously-high prices relative to
gold either, so that bull soon rolled over as I
warned the month
before that peak. The key takeaway today is silver’s extreme
stock-panic lows birthed a major new bull market. Silver
can’t stay crazy-low relative to gold for long.
Unbelievably silver in 2018 is even more extremely undervalued than
during those 4 months surrounding that stock panic! Again the SGR
is averaging just 79.6x year-to-date. That’s considerably worse
than during the stock panic which saw 75.8x over a similar time
span. Such incredibly-low silver prices are no more sustainable now
than they were then. That’s why a major new silver bull is likely
coming very soon.
Interestingly the SGR popped right back up to its traditional
mid-50s average after 2008’s stock panic as well. Between 2009 and
2012, the SGR averaged 56.9x. Those were the last quasi-normal
years for the markets before the Fed’s unprecedented open-ended
third quantitative-easing campaign started to
wildly distort
everything in 2013. Everything since then is literally a
central-bank-conjured illusion that will shatter.
If
silver merely mean reverts out of today’s worse-than-stock-panic
extreme lows, regaining a 55x SGR would catapult it near $24.25 at
this week’s $1333 gold levels. That’s almost 50% higher than
today’s deep lows! From this week’s wild 81.9x SGR low, a
proportional overshoot back up to a 28.1x SGR would blast silver
back near $47.50. That’s 191% higher from here, nearly a triple,
making for big gains.
All
it will take to get silver mean reverting is a convincing gold
upleg. Investors will return to silver once gold rallies high
enough for long enough for them to believe its climb is
sustainable. Then silver will take off and amplify gold’s gains.
Gold powered 106.2% higher during that post-stock-panic silver bull
where it soared 442.9%, making for 4.2x leverage. Gold also fueled
silver’s last reversion rally out of extreme lows.
From
2013 to 2015, the stock markets surged relentlessly as the Fed’s
vast QE money creation
directly
levitated them. Gold is an alternative investment thriving when
stock markets weaken, so it was largely abandoned in those weird
years. Gold ultimately slumped to a 6.1-year secular low in
December 2015 leading into the Fed’s first rate hike
of this cycle.
That pummeled silver to its own parallel 6.4-year secular low.
In
late 2015 silver felt a lot like it does today. No one wanted
anything to do with it, everyone believed it was dead. Investors
and speculators alike wouldn’t touch silver with a ten-foot pole
near those lows, convinced it was doomed to spiral lower
indefinitely. Yet out of that very despair a new silver bull was
born. Over the next 7.6 months into August 2016, silver powered
50.2% higher on gold’s new 28.2% upleg.
Unfortunately that new mean-reversion silver bull ended prematurely
as gold’s own young bull suffered a temporary truncation. The
extreme stock-market rally erupting after Trump’s surprise election
victory on euphoric hopes for big tax cuts soon sapped the wind from
gold’s sails. So it dragged silver lower during much of the time
since. But the new stock-market correction proves that
stocks-strong-gold-weak trend is ending.
That’s super-bullish for silver, especially with it trading at
stock-panic-like extreme lows compared to where gold is today. As
these
wildly-overvalued stock markets continue sliding lower on
balance, gold
will return to favor. The resulting capital inflows driving it
higher will get investors and speculators alike interested in silver
again. And just like after past extreme lows, their buying will
catapult silver sharply higher.
Today’s extreme undervaluation in silver relative to gold is reason
enough to expect a major new silver bull to ignite soon and start
powering higher. But silver’s bullish outlook gets even better.
The silver-futures situation today is nearly as extreme, with
speculators making exceedingly-bearish bets on silver. These will
have to be reversed as gold rallies, unleashing massive
silver buying that will quickly drive it higher.
Short-term silver-price action is dominated by speculators’
silver-futures trading. The extreme leverage inherent in silver
futures lets these guys punch way above their weight in terms of
silver-price impact. Each silver-futures contract controls 5000
troy ounces of silver, worth $81,400 even at this week’s
very-depressed prices. Yet the maintenance margin required to hold
a contract was only $3,600 this week!
That
means silver-futures speculators can run extreme leverage up to
22.6x, which is outrageous. Most investors run no leverage at all
of course, and the legal limit in the stock markets has been pegged
at 2x for decades now. Compared to an investor owning silver
outright, each dollar silver-futures speculators are trading can
have over 20x the price impact on silver! This gives futures
traders wildly-outsized influence.
Every week their collective silver-futures positions are detailed in
the CFTC’s famous Commitments of Traders reports. The recent reads
are every bit as bullish for silver over the coming months as the
SGR is over the coming years! All it will take to get silver
surging higher again is for these universally-bearish traders to
start buying again. And with the extreme leverage they run, the
markets will force them to buy.
This
chart shows speculators’ collective long and short positions in
silver futures in green and red. They are now barely long silver
while heavily short, making for exceedingly-bearish collective
bets. Those will have to be unwound relatively rapidly once gold’s
stock-market-selloff-fueled rally inevitably starts pulling silver
higher again. This is the most-bullish silver-futures situation
seen since just before silver’s last bull was born!
Let’s start on the short side, since that’s where speculators’ big
silver-futures buying will begin. In the latest CoT week before
this essay was published, current to Tuesday March 27th, speculators
had total silver-futures shorts of 87.6k contracts. That’s truly
extreme. Out of the 1004 CoT weeks since back in early 1999, that’s
the 5th-highest spec shorting levels ever seen! Past
extremes were never sustainable.
Note
above that every single time the red spec-shorts line surged to
highs, silver was bottoming ahead of a major rally ignited by
short covering. That was true in late 2015 when silver’s latest
bull was born, in mid-2017 during gold’s and silver’s
summer-doldrums
lows, and in late 2017 which saw extreme silver-futures short
selling leading into another Fed rate hike. Silver rallied sharply
after each shorting spike.
Silver-futures speculators are always wrong at extremes,
because their very collective trading is what spawns those extremes
in the first place. Once these guys have expended all their capital
firepower to throw heavily short silver, there’s no one left to
short sell it. Soon some get nervous and start to buy to cover
their existing shorts. The only way to exit futures shorts is to
buy offsetting long contracts to close positions.
And
once short-covering buying starts on the periphery, the whole herd
of speculators soon has to join in or risk truly-catastrophic
losses. At today’s 22.6x max leverage available in silver futures,
a mere 4.4% silver rally would wipe out 100% of the capital risked
shorting it! So as soon as silver starts rallying when speculators
are extremely short, they are forced to rush to buy to cover which
catapults its price sharply higher.
No
matter where the SGR happened to be, the 5th-highest spec shorts in
silver-futures history would be wildly bullish for the near-term.
But that’s not the whole silver-futures picture. It’s not just the
speculators on the short side of the trade that are too bearish on
silver, so are the long-side guys. In this latest CoT week, total
spec silver-futures longs were only running 95.0k contracts. That’s
just over a 26.2-month low!
Speculators’ collective bullish bets on silver via futures are
slightly above their lowest levels since early 2016 when silver’s
last bull market erupted! Unlike short-side traders who are legally
obligated to buy to cover once silver starts rallying, new long-side
buying is discretionary. But that very short covering drives silver
higher fast enough to make the bearish long-side traders want to buy
back in too, amplifying silver’s rally.
There’s nothing more bullish for silver over coming months than the
rare combination of extremely-high shorts and very-low longs! This
hasn’t been seen since late 2015 around silver’s 6.4-year secular
low. Once silver started climbing on a parallel gold rally driven
by short covering in its own futures, silver was off to the races on
big futures buying. Speculators rushed to cover their excessive
shorts and rebuild meager longs.
The
resulting 30.0k contracts of silver-futures short-covering buying
and another 55.6k of long buying catapulted silver 50.2% higher over
the next 7.6 months. That adds up to 85.6k contracts of spec
silver-futures buying. Today’s situation is even more bullish.
If total spec shorts and longs return to their past year’s low and
high, we’re looking at 54.5k contacts of short covering and another
59.5k of long buying!
That
adds up to colossal silver-futures buying potential of 114.0k
contracts over the next half-year or so. That’s the equivalent of a
staggering 570m ounces of silver, or nearly 2/3rds of the latest
read on annual world silver mine production! The potential silver
upside that would be fueled by silver-futures buying of this
magnitude is enormous. I suspect the resulting silver bull will
dwarf the last +50.2% one in 2016’s first half.
Once
silver starts rallying decisively on silver-futures buying,
investors with their vastly-larger pools of capital will also start
returning. Bullish analyses will explode, highlighting silver’s
deep undervaluation relative to gold per the Silver/Gold Ratio.
That will fuel bullish sentiment driving even more buying. Bull
markets’ virtuous circle is buying begetting more buying. The more
silver rallies, the more people want to buy it.
I’d
be very bullish on silver with only a stock-panic-level SGR, only
extreme spec silver-futures shorts, or only very-low spec
silver-futures longs. But seeing all three at once, at a
time when gold is rallying as the stock markets finally roll over
out of their fake
central-bank-spawned levitation, is truly extraordinary! This
is literally the most-bullish setup for silver seen in years, so
smart contrarian traders should be really long.
History proves that once silver starts moving, it will likely rally
fast. As always the biggest gains will be won by the fearless
contrarians who bought in early before everyone else figures this
out. Investors and speculators alike can play silver’s big coming
upside in physical bullion itself, the leading SLV iShares Silver
Trust silver ETF, and the silver miners’ stocks. But only the
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even today’s low silver prices. So all of silver’s new-bull-market
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During 6.9 months roughly coinciding with early 2016’s silver bull,
SIL rocketed 247.8% higher! That’s about 4.9x upside leverage
to silver’s own gains. And given how absurdly low silver-stock
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The
bottom line is a new silver bull is coming. Silver’s long and
vexing sideways-to-lower grind has left it as undervalued relative
to gold as during 2008’s stock panic. That anomaly was resolved by
silver more than quintupling over the subsequent years in a mighty
mean-reversion-overshoot bull. On top of that, silver-futures
speculators’ short positions are at extreme highs while their
opposing longs are at bull-birthing lows.
These wildly-bearish traders will be forced and motivated to
aggressively buy silver futures once silver starts rallying
decisively. That will be driven by gold strength like usual.
Stock-market weakness ignites gold investment demand, driving both
precious metals higher. Today’s silver setup is the most bullish in
years. Everything is perfectly aligned for a massive new silver
bull market to get underway any day now. |