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 weekly and monthly newsletters when gold-upleg odds look good. Last year’s trades had big realized gains running up to 110%!
To profitably trade high-potential gold and silver stocks, you need to stay informed about broader market cycles driving gold. Our newsletters are a great way, easy to read and affordable. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off sale! Get onboard so you can mirror our great new trades still being layered in for gold stocks’ mounting upleg.
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.
Adam Hamilton, CPA
April 17, 2020
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