The silver miners’ stocks are looking interesting. While they really lagged silver’s surge on gold’s bull-market-breakout rally last summer, their upleg since remains intact. Gold stocks’ own upleg peaked in early September. And silver itself remains wildly undervalued relative to gold, overdue to mean revert dramatically higher. When that happens during gold’s next upleg, the silver stocks have big potential to soar.
Like the global silver market is vastly smaller than gold’s, silver stocks are a proportionally-little fraction of the precious-metals miners. As a small subset of a usually-ignored contrarian sector, the silver stocks often languish in obscurity. For decades there wasn’t even a silver-stock index, making sector analysis difficult. Thankfully that changed in April 2010, when the first silver-stock exchange-traded fund launched.
The SIL Global X Silver Miners ETF has maintained a first-mover advantage ever since, functioning as a silver-stock index despite its flaws. This week SIL’s net assets ran $525.4m, 3.6x bigger than its next-largest competitor’s. All 3 silver-miner ETFs trading in the US only have $763.6m of capital. Compare that to the 11 US-traded gold-miner ETFs, which command net assets a massive 27.3x bigger at $20,849.1m!
Every few months I analyze the latest quarterly results of the major silver miners included in SIL. That’s where this sector benchmark’s limitations really become apparent. With Q4’19 results still coming out over the next month or so, Q3’19 remains the latest reported quarter. And that continued to show major silver miners increasingly diversifying into gold production. Recent years’ low silver prices necessitated this.
SIL’s top 17 silver miners dominating this small ETF at 93.9% of its total weighting averaged just 40.4% of their Q3’19 revenues from silver! The majority of their sales came from gold, with some base metals mixed in. Gold’s far-superior cashflows have greatly helped traditional silver miners weather their metal’s long slog deeply out of favor. But lower silver exposure also retards these miners’ sensitivity to silver-price moves.
The more gold the major silver miners produce, the more they trade like gold stocks amplifying that metal’s trends. The secular yellowing of this sector definitely casts a pall over silver stocks’ potential. But most investors and speculators still remember these companies as primary silver miners. And since there aren’t many major silver miners left anyway, capital will pour into them again as silver’s next upleg powers higher.
I’ve written much about major gold stocks in recent months, and despite remaining really undervalued relative to gold they are wavering technically. The leading and dominant GDX gold-stock ETF peaked in early September, and hasn’t been able to regain those highs since. That’s despite gold surging to new secular highs of its own on geopolitical fears, the US-Iran conflict flaring and China’s coronavirus outbreak.
Usually the silver stocks mostly follow the gold stocks for several reasons. Again the majority of the big silver miners’ revenues now come from gold. And silver’s primary driver is gold, silver only powers higher when gold itself is. Finally the traders interested in silver stocks are a subset of the contrarians interested in gold stocks. So for the most part, silver and thus its miners’ stock prices are effectively slaved to gold.
Thus I don’t write about this small realm often, since silver’s fortunes are directly dependent on gold’s. Generally as goes gold, so goes silver and its miners’ stocks. But SIL’s recent performance has really diverged from silver’s, gold’s, and GDX’s! I’ve been watching this chart superimposing SIL over silver with growing interest recently. The silver stocks are faring much better than they ought to in this situation.
Back on September 4th, a silver-stock upleg peaked in concert with silver, gold, and the gold stocks as measured by GDX. SIL crested at $32.22 that day, driven by silver hitting $19.59. While the major silver stocks had blasted far enough to catapult SIL 46.6% higher in 3.3 months, that was a disappointing silver-stock upleg. In that same short span silver itself soared 36.6% higher, so silver stocks’ leverage was terrible.
Naturally silver stocks are far riskier than silver itself, bearing all kinds of operational and geopolitical risks in addition to silver-price risk. Thus silver stocks are only worth trading if their gains amplify silver’s when it enjoys bull-market uplegs. A case in point is this silver-stock bull’s maiden upleg mostly in the first half of 2016. SIL skyrocketed 247.8% higher in 6.9 months, leveraging silver’s advance in that span by 6.1x!
Given the risks inherent in highly-volatile silver and its miners, I need to expect leverage running at least 3x to deploy capital in this sector. Silver stocks were so disappointing when the precious-metals sector peaked in early September because SIL had merely amplified silver’s own gains by 1.3x. That’s nowhere near enough to compensate traders for the miners’ serious additional risks beyond their underlying metal’s.
Silver crested then because gold did, which in turn peaked because speculators’ gold-futures positioning had grown excessively bullish. After studying and trading silver for decades, I’ve found it mostly acts like a gold sentiment gauge. When gold is consistently rallying, traders increasingly flock to silver forcing its price higher. But these capital inflows wane when gold tops out, and reverse to selling as gold retreats.
Since those normal precious-metals upleg toppings in early September, silver has ground sideways to lower. While silver surged with gold starting with the latter’s late-December downtrend breakout, silver didn’t follow gold to new upleg highs. Silver’s rallies on that flaring US-Iran conflict in early January and the Chinese coronavirus outbreak in late January proved very muted compared to gold’s major new highs.
Silver was right back to lagging gold again, a vexing trend that has endlessly frustrated the silver-stock traders in recent years. With the white metal really underperforming the yellow one, silver-stock prices should’ve mirrored silver’s disappointment. But they didn’t. As this chart shows, the major silver stocks as measured by their leading SIL benchmark are continuing to gradually climb in an extended upleg!
Unlike the GDX major gold stocks which failed to eclipse early-September’s original peak, the SIL major silver stocks hit new upleg highs in late December. As silver surged on gold’s downtrend-breakout rally starting on Christmas Eve, SIL blasted up to a new upleg high of $33.32. That extended silver stocks’ upleg to 51.6% gains over 7.0 months, making for greatly-improving 2.1x upside leverage to their metal!
Silver stocks’ upleg remains intact, with SIL meandering higher mostly within trend since last summer. So from a current-technicals standpoint, the silver stocks are looking better than the gold stocks these days! That’s really unusual, and suggests enthusiasm for and capital inflows into the traditional major silver miners’ stocks are stealthily mounting. That portends a flood of buying as silver’s next bull-market upleg begins.
Arguably silver stocks deserve to keep advancing relative to the metal they mine, because their original upleg was prematurely killed by gold at such anemic gains. They still haven’t reasonably reflected silver’s full advance between late May’s deep lows and today’s levels. So a continuing catch-up rally is certainly warranted. And silver’s bull itself is likely to grow massively bigger in coming years for similar reasons.
Again technically silver is a leveraged play on gold. Capital floods into silver when gold gets consistently bought. Higher gold prices considered sustainable motivate investors and speculators alike to buy silver and its miners’ stocks. Silver’s tight technical relationship with gold over the decades is both indisputable and ironclad. And today’s silver prices are wildly undervalued compared to current prevailing gold levels!
This next chart quantities silver’s relationship with gold through the Silver/Gold Ratio. As dividing silver’s daily closes by gold’s yields tiny hard-to-parse decimals, I prefer to consider this SGR in inverted-Gold/Silver-Ratio terms which is identical. Ever since this silver bull’s maiden upleg peaked in early August 2016, silver has been losing ground relative to gold on balance. Silver psychology has been miserably weak.
In that first chart above you may have noticed SIL plunged in Q2’19, hitting a deep 3.3-year low. That temporarily interrupted a longer upleg. The reason the major silver miners plumbed such ugly depths is silver itself was collapsing while gold remained fairly stable. Late last spring before gold’s breakout to its first new bull-market highs in several years, traders were wholesale abandoning the precious-metals realm.
Silver plunged so fast relative to gold that the SGR hit an unbelievable 93.5x in early July! That meant it took 93.5 ounces of silver to equal the value of a single ounce of gold. That was an apocalyptic 26.8-year secular low! Silver was languishing at its worst price levels compared to its primary driver in well over a quarter century. Such monumental extremes are exceedingly rare, resulting from unsustainable psychology.
With silver stuck in the $14s and virtually everyone assuming it would keep spiraling lower, naturally the silver miners’ stocks were shunned. The major silver miners of SIL were still technically profitable, averaging all-in sustaining costs of $11.51 per ounce in Q2’19 while silver itself averaged $14.88 that quarter. But margins were squeezed and these companies weren’t earning enough to compensate for their big risks.
Yet history has proven that extreme silver levels relative to gold never last long. The extreme fear and apathy plaguing silver was maxed out, everyone interested in selling soon was already gone. With selling exhausted, buying soon had to return. And it did as gold’s late-June bull-market breakout fueled enough momentum to sustain a major upleg. Silver rocketed higher at double gold’s speed in the next 2.5 months.
Silver’s relative outperformance blasted the SGR back up to 79.3x on that early-September day when the precious metals peaked. Powerful mean reversions higher are normal for silver after it has been beaten too low relative to gold. Had gold’s own upleg ran a few more weeks before speculators expended their capital firepower and stopped buying gold futures, silver’s outsized gains would’ve continued blasting the SGR higher.
Since mid-December 2015 when today’s secular gold and silver bulls were born, the SGR has averaged 78.8x. So silver price levels didn’t even return to bull averages relative to gold before it prematurely killed silver’s still-young upleg! All silver’s lost upside potential remains, as it didn’t climb far enough relative to gold. And since silver’s upleg peaked, the SGR has again fallen off a cliff as silver lagged gold’s upside.
Because silver sentiment stayed bearish, silver certainly didn’t proportionally mirror gold’s latest new highs on China’s coronavirus breakout. So by late January, the SGR had collapsed all the way back down to 90.0x. That’s not far above last summer’s extreme quarter-century-plus lows. And remember they helped unleash silver’s last upleg. Silver still needs to mean revert far higher relative to today’s gold prices!
So far in Q1’20, gold has averaged $1561. If silver merely returned to that low SGR-gold-bull average at 78.8x, that implies silver at $19.81. That would be a new secular high exceeding late September’s peak levels. And with silver approaching the psychologically-heavy $20 level, there’s no doubt traders would flock back to silver stocks. SIL would explode higher, hitting major new highs in this extended upleg.
If silver regained that 65.9x SGR seen in the summer of 2016 when this bull’s maiden upleg peaked, that would yield $23.69 silver at this quarter’s prevailing gold prices! That would be a major new silver-bull high well above August 2016’s $20.56 bull-to-date peak. The capital that would deluge into this tiny silver-stock sector at such silver prices would be massive, catapulting these stocks to amazingly-huge gains.
And even at such an SGR mean-reversion overshoot relative to this silver bull, this metal would still remain very undervalued relative to gold historically. For many years the SGR meandered around 55.0x, so recent years’ low levels were a serious anomaly. That implies $28.38 silver even at today’s gold levels, let alone where gold goes in its next major upleg. The SGR is likely to overshoot that historical mean too.
Because the world silver market is so small, this metal is the quintessential speculation. Rarely silver enthusiasm morphs into such extreme greed and bullishness that its price rockets parabolic. Much like the insane Tesla stock run this year, traders rush to buy high as they foolishly extrapolate such extreme gains into the indefinite future. Silver last shot parabolic in a near-popular-mania in late 2010 into early 2011.
The higher and faster silver soared, the more investors and speculators wanted to buy it. That forced the SGR as high as 31.7x! At this quarter’s average prevailing gold price of $1561, such bullish-extreme SGR levels would yield a silver peak of $49.24. If silver powers back up to $30, $40, or higher later in this gold bull, the ultimate gains in the handful of major-silver-miners’ stocks will likely prove life-changingly huge!
Contrarian traders who buy in low and are fully deployed during silver’s rare parabolic ascents can multiply their capital many times over in less than a year! These epic gains are why traders put up with silver’s long dull years between such parabolic surges. Silver stocks’ upside potential is big, if not enormous, as silver inevitably mean reverts higher relative to gold. That’s almost certain to happen in coming years.
That being said, don’t jump the gun on deploying. Silver is effectively slaved to gold, and the situation in gold futures since late December has been even more extreme than it was in early September! These hyper-leveraged traders are effectively all-in, with their long upside bets pretty much maxed based on precedent and their short downside bets as low as they get. If gold rolls over into a correction, silver will follow.
A 10% gold retreat would likely force silver around 20% lower. Considered from its upleg peak in early September, that would hammer silver back to the mid-$15s. So if a gold correction is still coming, investors and speculators will enjoy far-better prices to deploy capital into the major silver stocks. They and thus SIL could easily fall 20% to 30% from current levels. So it’s prudent to be patient and wait for now.
While silver remains wildly undervalued relative to gold, and the silver stocks are still cheap compared to even recent silver prices, silver is never immune to material gold selloffs. But given this setup, silver will almost certainly well-outperform gold in its bull’s next upleg. And the resulting gains in the major silver miners should trounce those seen in the major gold miners. SIL’s upside potential greatly trumps GDX’s.
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The bottom line is silver stocks have big upside potential. While their upleg last summer was truncated prematurely when gold initially peaked, that uptrend subsequently resumed. SIL defied silver relapsing into again underperforming gold, making new upleg highs in late December. So unlike major gold stocks, major silver stocks’ upleg remains intact. That implies traders’ silver-stock demand is stealthily mounting.
Greatly boosting this sector’s upside potential, silver is still wildly undervalued relative to prevailing gold levels. Not far above last summer’s quarter-century-plus lows, silver has rarely been cheaper relative to gold. This extreme anomaly can’t last, meaning silver has to far outperform gold in its bull uplegs to mean revert way higher. Silver stocks will soar on that! But gold likely still faces a correction before its next upleg starts.
Adam Hamilton, CPA
February 7, 2020
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