Silver is scraping
major support again, after a rough couple months where speculators
left it for dead. But today?s brutal lows and extreme universal
bearishness are the perfect breeding ground for silver?s next big
rally. Investors are very underexposed, while speculators have big
short positions that will have to be covered. So as gold reverses
decisively and paves the way, capital is going to flood back into
silver.
Silver?s great
allure today when it is down and out is hard for most to
understand. That?s because most traders mistakenly make linear
assumptions in a nonlinear world. They expect today?s market
conditions to persist indefinitely. But that?s not the way markets
work, they are forever cyclical. The best times to buy low before
later selling high are when assets are universally despised and
trading at super-low prices.
And once silver
inevitably reverts back to bull mode, the gains to be won by brave
contrarians are vast. Between November 2001 and April 2011 in its
last secular bull, silver skyrocketed 1105% higher! Over that same
9.4-year span, the benchmark S&P 500 stock index merely gained 20%.
Ever since, silver has been trapped in a brutal bear that saw it
collapse over 68% at worst. So it?s obviously deeply out of favor.
As a small market,
silver prices are utterly dominated by investment and speculative
capital flows. When traders return, their buying catapults silver
higher. These characteristic sharp gains attract in even more
traders, and their aggressive buying becomes self-feeding. The
spark that ignites these wildly-lucrative silver surges is the
price of gold.
Gold prices drive
silver prices, since traders look to it for their silver-trading
cues.
And gold itself is
due for an imminent major new upleg. As the euphoric
overvalued
and overextended
US stock markets inevitably roll over, alternative investments that
move counter to stocks will return to favor. And this coming gold
buying will really be amplified by the overdue correction in the
parabolic US
dollar. Once gold?s rallying convinces traders it?s righteous
and sustainable, they are going to rush into silver.
While there is
always a fraction of contrarian investors eager to buy physical
silver bullion, that is just a secondary driver of silver prices
since that process unfolds slowly. Silver price action is largely
fueled by inflows and outflows from two great pools of capital, the
American stock markets and American futures markets. And one of the
main reasons silver looks so bullish today is because both have
great room to buy.
Stock-market
capital flows into and out of physical silver bullion via the
flagship iShares Silver Trust
silver ETF,
which trades under the symbol SLV. Its mission is to track the
price of silver, and that is only possible if differential buying
and selling pressure on SLV shares can be quickly equalized into the
underlying metal itself. SLV effectively acts as a conduit
between stock-market capital and silver bullion.
When stock traders
buy SLV shares faster than silver itself is being bought, this ETF?s
price threatens to decouple to the upside. To prevent it from
failing to mirror the metal, SLV?s custodians have to shunt this
excess demand into silver itself. So they issue enough new SLV
shares to meet demand and keep SLV?s price in line with silver?s,
and then they plow all this new cash raised directly into physical
silver bullion.
Conversely when
stock traders dump SLV shares faster than silver is getting sold,
SLV?s price will soon break to the downside. This differential
selling has to be funneled into silver itself. SLV?s custodians do
this by buying back enough SLV shares to sop up their excess
supply. They raise the funds necessary to do this by selling some
of SLV?s silver bullion held in trust for its shareholders. This
ETF is merely a passage.
SLV?s custodians
have always been very transparent about these capital flows by
publishing SLV?s total silver holdings every day. When they rise,
stock-market capital is flowing into physical silver bullion. When
they fall, stock traders are exiting silver. And not surprisingly
today given the dire silver sentiment out there, SLV?s holdings
reveal that American stock traders are quite underexposed to this
white metal.
Here SLV?s price,
which perfectly mirrors silver?s, is superimposed over its
silver-bullion holdings. Note that despite silver?s sharp downtrend
of the past few years, SLV?s holdings have actually been growing
on balance! That implies contrarian stock traders have been wisely
increasing their capital allocated to silver while it languishes
near deep lows. I call this
stealth buying,
and it is a very bullish omen for silver.
While investors
and speculators give lip service to buying low, the great majority
are loath to practice what they preach. They buy and sell only when
it makes them feel good, and that?s when they are in step with
popular consensus. That usually leads to buying high in euphoric
markets when prices are topping, then later selling low in
despairing markets when prices are bottoming. Obviously that?s a
fools? game.
And after silver
prices plummeted 35.6% in 2013 before dropping another 19.7% last
year, there sure aren?t any psychological incentives to buy this
white metal. Buying low always feels terrible, since it can
only happen at a time when conventional wisdom argues that
particular asset is doomed to keep spiraling lower indefinitely.
Yet despite those extreme fear headwinds, stock traders still upped
their SLV allocations!
And right now they
happen to be relatively low, as evidenced by SLV?s holdings drifting
just under the major support of their strong multi-year uptrend.
This week, SLV held 327m ounces of physical silver in trust for its
shareholders. That same uptrend?s resistance is now way up around
352m, and climbing with each passing day. These low SLV-holdings
levels leave lots of room for stock capital to slosh back into
silver.
Just to drive
SLV?s holdings back up to their uptrend?s resistance, stock traders
would have to purchase enough SLV shares to force this ETF?s
custodians to add about 25m ounces. That?s not trivial by any
means. According to the venerable Silver Institute, the world?s
leading authority on silver supply-and-demand fundamentals, global
silver investment demand ran 247m ounces in 2013 (the latest
data available).
So as American
stock traders start pouring back into silver as gold powers higher
again, their easy 25m ounces of buying adds on the order of 10%
additional global investment demand. And that process of SLV?s
holdings surging from support to resistance can happen quite fast.
This isn?t academic. In less than 8 weeks between early
August and late September 2014, SLV?s holdings soared by 28m ounces!
But during that
last big SLV-holdings build from uptrend support to resistance,
which was 8.8%, silver?s price still dropped 13.8%. So if SLV
differential buying from stock traders is so bullish for silver
going forward here, why didn?t silver rally during the last big
influx of stock-market capital? The answer is the dominant primary
driver of silver prices, the silver-futures trading action by
American futures speculators.
While stock
traders bought silver aggressively via SLV shares in the late summer
of 2014, futures traders sold it at extraordinary rates. Such an
odd divergence where two major silver-trading constituencies totally
disagreed on silver?s price direction was very rare. And the
futures traders? selling happened to be great enough to far
overpower stock traders? buying. But this anomalous scenario is
very unlikely to repeat.
This next chart
looks at the silver-futures contracts held by American speculators.
The red line is their total short contracts, or bearish downside
bets on the silver price. The green line is their total longs, the
bullish upside bets. The higher the shorts and lower the longs, the
more bearish speculators happen to be on silver. And these traders?
silver-futures selling late last summer mushroomed to record
proportions.
Unlike SLV?s
holdings which are reported daily by their private custodians,
speculators? total positions in silver futures are only published
once a week by the US government. This is in the CFTC?s famous
Commitments of Traders reports. And during that same early-August
to late-September span where SLV?s holdings surged, American
speculators shorted an astounding 37.0k silver-futures contracts!
Any futures short
sale effectively adds silver supply to the marketplace. Traders
effectively borrow silver they don?t own, sell it immediately, and
then hope to buy it back later at lower prices to repay their debt.
And with each silver-futures contract controlling 5000 ounces of
silver, that 37k-contract shorting binge flooded the market with an
epic 185m ounces of silver in just 8 weeks! That sure
explains everything.
The only reason
silver dropped 13.8% over that last big build in SLV?s holdings was
that the 28m ounces of silver American stock traders bought was
overwhelmingly dwarfed by the 185m ounces of silver that American
futures speculators sold! That extreme short selling catapulted
speculators? total shorts to a mind-boggling 69.9k contracts. That
was their highest level since at least 1999, and most likely ever.
But futures
shorting is the best kind of selling any market can face,
because these highly-leveraged positions must soon be unwound. And
then all that selling reverses into new buying. While shorts
have to be legally covered to pay back those debts, the markets
would force those repurchases anyway. This week a single 5000-ounce
silver futures contract only requires traders to keep $7700 in their
account.
But even at
dirt-cheap $16 silver prices, that mere $7700 controls silver worth
$80,000. That equates to 10.4x leverage, far beyond the decades-old
legal limit in the stock markets of 2x. So if the silver-futures
short sellers are only wrong by about 10%, if silver rallies that
much, they will face total losses on their capital risked if
operating at the minimum margin. Practically, traders exit those
shorts well before total losses.
So even a small
rally by silver?s standards, a few percent, forces the leveraged
futures shorts to run for the exits. They can only close those
short contracts by buying offsetting long ones, which drives up the
silver price. And this short-covering process quickly becomes
self-feeding, with higher silver prices forcing more speculators to
cover which pushes silver even higher. Short covering is
powerfully bullish.
After every big
shorting spike of the past couple years, speculators soon bought to
cover enough of their contracts to quickly hammer their total shorts
back down near support around 27k contracts. As of the latest CoT
week ending Tuesday March 10th, American speculators? total
silver-futures shorts were way up at a whopping 46.5k! These levels
would have been extreme by all standards but the past couple years?.
As we saw again
this week on that Federal Reserve meeting, when gold surges futures
speculators are forced to cover their silver shorts which drives big
gains. And as gold starts moving decisively higher soon as the
wildly-overcrowded long trades in the US stock markets and US dollar
roll over, the silver-futures speculators short will rush to buy.
And once short covering starts, it reinforces itself and unfolds
rapidly.
Note above that
all past short-covering episodes in recent years happened very
quickly. We are talking about a matter of weeks, a couple months on
the outside. And these short-covering frenzies all stopped near
that 27k-contract major support line. There?s no reason not to
expect similar frantic short covering this next time gold rallies
decisively to spark big silver buying. That would put tremendous
pressure on shorts.
Even though
American speculators? futures shorts aren?t near last year?s epic
record extremes, they would still have to buy to cover 19.5k
contracts to cut their downside silver exposure back to support.
And that equates to a staggering 98m ounces of silver! That is
nearly 4/10ths of 2013?s total worldwide silver investment demand
coming from just one group of traders in a couple months or less,
incredibly bullish!
As the late great
legendary pitchman Billy Mays said, but wait there?s more. There?s
a whole other group of American speculators who are long
silver futures. And like stock traders, these contrarians have been
stealth buying cheap silver for the past couple years. This is
evidenced by the green uptrend of silver-futures speculators? total
long contracts. And today that happens to be down near support as
well.
When their
opposing traders rush to cover their shorts, there?s no doubt the
long-side speculators will flood in as well to both chase silver?s
gains and squeeze the fleeing shorts. And if their buying is merely
big enough to push speculators? total silver-futures longs to
resistance of their uptrend channel, we are talking about another
7k contracts of short-term buying. That?s another 35m ounces of
silver from that group alone!
Just adding up
these three ready sources of big silver buying illustrates this
metal?s big near-term upside potential. American stock traders
could buy 25m ounces just to push SLV?s holdings back up to their
multi-year uptrend?s resistance line. American futures speculators
could buy another 100m or so just to cover enough shorts to
force their total downside bets back to major support. That?s 125m
ounces.
And on top of that
is the 35m ounces of buying from long-side speculators to bounce
their bullish bets back up to their multi-year uptrend?s resistance
as well. This equals 160m ounces of potential silver buying
that is very likely to unfold within a couple months once
silver starts running! These 3 groups of American traders alone
could buy the equivalent of 2/3rds of 2013?s world investment demand
in weeks!
And these
near-term silver-buying projections are pretty conservative. Over
centuries silver has rightly earned a reputation as an
exceedingly-volatile asset. While it often slumbers for long
periods of time, when it finally awakens it tends to just rocket
higher. The bigger and faster silver?s next upleg, the more buying
there will be from American stock traders and futures speculators
alike. It could easily break out of trends.
And obviously
American stock traders deploying in silver via SLV and American
futures speculators are just a portion of the traders worldwide
interested in silver. The buying from the other silent majority
during silver?s next major upleg should easily exceed these
particular American traders?. Silver is truly poised to surge, and
its upside potential is vast coming out of such extreme lows. So
what?s the likely catalyst?
Gold, silver is
always about gold. Once again gold is likely to soon surge
dramatically as the euphoric US stock markets and parabolic US
dollar inevitably roll over. And contrary to the popular myth, rate
hikes are no
threat to gold. During the Fed?s last rate-hike cycle between
June 2004 to June 2006, it more than quintupled its Federal Funds
Rate from 1.00% to 5.25%. Gold soared 50% higher in that
exact span!
Gold, and
therefore silver, thrive when conventional asset classes like stocks
and bonds are weak. And rate hikes hammer them. While gold climbed
50% in that last rate-hike cycle, silver soared by 80%! So don?t
make the common mistake of fearing Fed rate hikes, as the investment
capital just floods into gold and silver in those environments. The
entire 1970s precious-metals mega-bull was in rising and
super-high rates.
Investors and
speculators can certainly play silver?s coming rally in physical
bullion itself or SLV shares. But just like silver will leverage
gold?s coming gains, silver stocks will really amplify silver?s
gains. With silver prices so low, this entire sector has been
abandoned and left for dead. With investors gone and capital hard
to come by, most silver miners and explorers are barely limping by.
The situation is dire.
But there are
still some elite well-managed silver companies that remain in good
shape operationally as well as financially. Their stock prices have
been beaten to a pulp, reflecting a bleak future where silver prices
never rally significantly again. So once silver starts running,
these radically-underpriced stocks are going to fly. I suspect we
will see them leverage silver prices in a range from 3x to 10x,
enormous upside.
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The bottom line is
silver is poised to surge big. It is carving a major bottom after a
brutal bear market, and investors and speculators have already
started to return despite the incredibly-bearish sentiment that?s
still plaguing this alternative investment. But both American stock
traders and futures speculators still have a lot of silver buying
left to do to return their exposure to recent norms. And it will
likely unfold fast.
As gold soon
starts powering higher on the US stock markets and US dollar
reversing, the leveraged futures speculators will rush to cover
their silver shorts. That self-feeding process will catapult this
beleaguered metal higher, attracting in much more capital. And as
silver surges, the left-for-dead silver stocks are going to
dramatically leverage its gains. They truly are an extraordinary
trading opportunity today.
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