Silver has suffered a series of sharp selloffs since mid-June, serious collateral damage from gold-futures speculators’ fears of Fed tightening. Naturally silver bearishness has steadily mounted in recent months as this precious metal cascaded lower on balance. But interestingly this chronic silver weakness hasn’t seemed to faze investors. They’ve apparently largely held on to their silver, undaunted by the relentless selling.
Unfortunately the best-available global fundamental silver data including investment-capital flows is only published once a year. The Silver Institute releases its outstanding World Silver Survey around May, which covers the preceding calendar year. That comprehensive report includes extensive data on silver supply and demand worldwide. It is must-read for any speculators or investors interested in trading silver.
According to the latest WSS, in 2020 total global physical-silver investment demand ran 200.5m ounces. That accounted for 22.4% of overall total demand of 896.1m. Over half of world silver demand continues to be industrial. The Silver Institute breaks out silver demand through exchange-traded funds into its own separate category. ETFs are increasingly-popular vehicles for stock investors to gain silver portfolio exposure.
Last year’s silver demand via ETFs quadrupled, skyrocketing 297.5% year-over-year to an epic new all-time-record high of 331.1m ounces! That dwarfed the tiny 8.0% YoY growth in traditional physical silver investment to that considerably-smaller 200.5m ounces. So love or hate physical-bullion-backed silver ETFs, they are increasingly dominating silver investment flows. Thus the Silver Institute closely tracks them.
One massive silver ETF towers above all others, commanding fully 52.4% of all the silver held by all the world’s physically-backed silver ETFs at the end of 2020. That’s the mighty American SLV iShares Silver Trust. Launched way back in April 2006, its first-mover advantage has grown into an insurmountable lead in the global silver-ETF space. As 2021 dawned, SLV held 558.7m ounces of silver in trust for its shareholders.
During 2020 SLV’s holdings soared 54.1% or 196.1m ounces! Thus differential SLV-share buying from American investors fueled fully 59.2% of all the capital inflows into all the world’s physically-backed silver ETFs last year! That enormous 196.1m-ounce SLV-holdings build alone rivaled that 200.5m ounces of traditional physical silver investment last year. SLV has slowly grown into a price-driving silver juggernaut.
That makes its holdings a great daily proxy for global silver investment demand. Since they are reported daily, they offer a high-resolution read vastly better than the once-a-year World Silver Survey. And like most investments, the faster silver prices are surging the more capital rushes to chase the white metal to ride its gains. Virtually all the differential SLV-share buying in 2020 was concentrated in a huge silver upleg.
From mid-March 2020 in the dark heart of its pandemic-lockdown stock panic to mid-August 2020, silver skyrocketed 142.8% higher in just 4.8 months! Big-and-fast gains like that erupting periodically are why investors put up with silver’s extreme volatility. SLV’s holdings build during that upleg’s exact span was a colossal 53.6% or 198.7m ounces! That’s slightly above SLV’s full-year-2020 holdings build that ran 196.1m.
So the growing importance of SLV as the leading conduit for investment capital flows into and out of silver cannot be overstated. The builds and draws in SLV’s holdings both dominate and closely track broader global silver investment. And amazingly given the gold-futures-driven silver carnage in recent months, silver investors remain undaunted. SLV’s holdings representing overall silver investment have held strong.
That implies silver is increasingly owned by hardened contrarians, strong hands left after most of the weak ones have been shaken out. SLV’s holdings have proven resilient this year, despite silver’s recent multi-month swoon in lockstep with gold. After entering 2021 at 558.7m ounces before going on a wild ride, SLV is still holding 541.0m ounces for its shareholders this week. That’s a tiny 3.2% year-to-date draw!
That is nothing considering silver itself has lost 18.4% YTD. SLV’s holdings not falling proportionally in sympathy show strong continuing resolve among silver investors. They generally aren’t fleeing, and will almost certainly step up their buying as silver’s interrupted upleg resumes. This impressive resiliency is readily apparent when charted. Here SLV’s daily holdings in blue are superimposed over silver prices in red.
The centerpiece of this chart is silver’s gargantuan post-pandemic-lockdown-stock-panic upleg during mid-2020. Again silver skyrocketed 142.8% in just 4.8 months, hitting a 7.4-year high of $29.04. That vertical parabolic silver move was likely mostly driven by the vast torrents of American stock-market capital deluging into SLV shares. Again its holdings soared 53.6% or 198.7m ounces over that short span!
The mission of physically-backed silver ETFs including SLV is to track the silver price. But the supply and demand for SLV shares is independent from silver’s own, leaving SLV’s share price at constant risk of decoupling from silver’s price. The only way this inevitable failure can be averted is if SLV actively shunts any excess supply and demand for its shares directly into underlying physical silver, which is exactly what happens.
When SLV shares are being bought faster than silver itself, SLV’s share price threatens to decouple from silver’s to the upside. So SLV’s managers issue enough new shares to satisfy the excess demand. The proceeds from those sales are then immediately used to buy more silver bullion. Thus SLV acts like a conduit between the stock markets and physical silver, equalizing supply and demand across these two realms.
So the colossal SLV-holdings builds during silver’s huge mid-2020 upleg greatly helped accelerate silver prices higher. And even though extremely-overbought silver corrected 22.2% over the next 3.7 months into late November, SLV’s holdings merely retreated 4.4% or 25.2m ounces in sympathy. The legions of new silver investors via silver ETFs were mostly content to remain deployed in silver even as it fell sharply.
SLV’s holdings tended to meander between roughly 550m to 575m ounces during silver’s correction and into its subsequent upleg. But something extraordinary happened exiting January 2021. The horde of retail traders frequenting Reddit’s famous wallstreetbets forum that sent GameStop’s stock stratospheric were starting to discuss silver. Traders were wondering if their herd buying could force a silver short squeeze.
Silver took off like a rocket on those rumors, as I analyzed in depth in an early-February essay on silver’s Reddit surge. Silver climbed 1.3% on Friday January 29th before blasting another 5.5% higher to $28.42 on Monday February 1st. The lion’s share of that massive buying catapulting silver higher came from epic record differential SLV-share demand on American stock markets. SLV’s holdings builds hit records.
They soared 6.1% or 34.4m ounces on the 29th alone, shot up another 3.1% or 18.6m on the 1st, and skyrocketed an astounding 9.2% or 56.8m ounces on February 2nd! These were the biggest daily builds SLV has ever seen, catapulting its holdings to an all-time-record 677.3m ounces. A young silver upleg was underway, with silver surging 25.9% in 2.1 months fueled by a 14.0% or 76.3m-ounce SLV-holdings build.
Yet that supposed Reddit silver short squeeze proved a short-lived anomaly. While many traders piled into silver on the rumor, the wallstreetbets hive mind was really divided on silver. Only a small minority of redditors wanted to move into silver. The great majority of that forum wanted to stay in its wheelhouse with far-smaller meme stocks much easier to move. The pro-silver-squeeze posters were derided as infiltrators.
That wallstreetbets collective is a bunch of little traders banding together to take down apex-predator hedge funds, by harnessing crowdsourced buying to force short covering. Suspicions mounted that the small fraction of redditors beating the silver drum were actually hedge-fund plants! So as quickly as it had flared, that Reddit silver surge collapsed. By late March silver fell 15.8% to $23.94, lower than pre-Reddit levels.
That was driven by the total unwinding of SLV’s epic 19.4% or 109.8m-ounce three-trading-day build as that Reddit-short-squeeze talk peaked. Just 1.9 months later, SLV had suffered a huge symmetrical draw of 14.6% or 98.7m ounces. 9/10ths of that colossal wallstreetbets-inspired SLV build had been erased! This is important because both that SLV-holdings spike and collapse were anomalies that should be ignored.
SLV’s holdings had hit 567.5m ounces the day before that frenzied buying on rumors the redditors were coming, and were back down to 578.6m shortly after. I suspect most of that silver stampede came from other traders trying to front run the redditors, not wallstreetbets traders themselves. Once the former figured out the latter likely weren’t coming, they exited their silver positions with that exciting catalyst dying.
So that remarkable short-lived Reddit silver anomaly shouldn’t overly influence 2021’s broader silver-investment picture. The silver action since was largely driven by gold, like usual. From early March to early June gold rallied 13.5% in a young upleg. Silver enjoyed a parallel 17.7% surge inside that gold-rallying span. But skeptical investors sat that out, perhaps disappointed that Reddit short squeeze had failed.
Silver was looking great in mid-May and early June, trading at $28.17 and $28.15 which weren’t far from August 2020’s upleg-peak 7.4-year high of $29.04. But then gold-futures speculators’ seemingly-endless Fed-tightening fears flared, torpedoing silver’s young upleg. I analyzed those catalyzing events and the resulting gold-futures selling in depth a couple weeks ago in an essay on the gold-futures taper tantrum.
That outsized gold-futures selling started after the mid-June FOMC meeting. Though the Fed officially changed nothing, merely a third of top Fed officials expected to maybe see a couple quarter-point rate hikes way out into year-end 2023. That slightly-hawkish dot plot unleashed enough gold-futures selling to hammer gold 5.2% lower in three trading days straddling that FOMC meeting, pulling the rug out from silver.
The white metal plunged 6.7% in that short span, hitting $25.79. Silver started a slow-grind recovery out of that sharp selloff, but plunged another 5.2% over a few trading days in mid-July. Provocatively gold wasn’t responsible then, as it only slumped 1.0% in that span. Technically silver tends to act like a gold sentiment gauge, and the mid-summer bearishness was suffocating. So silver tumbled as traders capitulated.
Silver bounced just under $25 and generally started recovering again, until another extreme gold-futures selling episode in early August. A better-than-expected read on headline US jobs led traders to expect the Fed to start tapering its colossal $120b per month of quantitative-easing money printing sooner rather than later. That unleashed near-record gold-futures shorting, culminating in a rare gold-futures shorting attack.
Gold plummeted 4.1% in just two trading days, which silver amplified to an ugly 6.9% loss to $23.41. But with that extreme gold-futures shorting quickly exhausting, silver started grinding higher again into early September regaining $24.68. Silver started consolidating those gains, meandering between $24.00 to $24.50 or so. Then another bout of heavy gold-futures selling hit on better-than-expected US retail-sales data.
Gold plunged 2.2% on that single trading day in mid-September, pummeling silver 3.8% lower to $22.91. Even though gold stabilized the next day, silver kept on free-falling with another 2.3% loss to $22.38. Overall between mid-May to late September, silver had fallen a fairly-steep 23.6%. That trio of extreme gold-futures selling episodes, along with late July’s despairing silver capitulation, were mostly to blame.
Silver’s festering persistent weakness largely on gold-futures speculators’ irrational Fed-tightening fears certainly demoralized silver investors too. How couldn’t it? From early June before that initial hawkish-Fed-dots FOMC meeting to late September, SLV’s holdings fell 6.5% or 37.9m ounces. While that draw was sizable, it certainly wasn’t large considering silver’s increasingly-bearish psychology plaguing recent months.
SLV’s holdings did grind lower over this past summer, some investors did indeed throw in the towel and flee. But the downtrend in SLV’s holdings was far milder than silver’s plunge, revealing plenty of investor resolve in the face of vexing adverse price action. Those modest draws left SLV’s holdings at 541.0m ounces. That was roughly in line with their November-2020 correction low of 544.3m, which has become support.
Since late 2020, SLV’s holdings have essentially been bouncing along 550m ounces which is now a key support zone. Their colossal build during mid-2020’s massive silver upleg has held strong, despite silver effectively consolidating high in a wide trading range since. Last year’s legions of new silver investors are proving strong hands, mostly maintaining their larger portfolio allocations. That’s a bullish omen for silver.
2021 has been challenging psychologically due to all that heavy gold-futures selling, with silver down 18.4% year-to-date as of this week. Yet SLV’s holdings merely retreated 3.2% during that span, a small draw bordering on immaterial. This SLV-holdings proxy for global silver investment reveals silver investors remain undaunted by this year’s silver selloffs! There’s only one reason they’d stay through that.
Persistent price weakness turns the screws on investors, ratcheting up pressure to give up, sell, and exit that bleeding sector. Investors will only hold through vexing downtrends if they are convinced big gains are still coming on the other side. So SLV’s relatively-stable holdings this year imply bullishness among silver investors remains strong. They know silver is being forced down by unsustainable gold-futures selling.
While gold-futures speculators wield outsized influence on gold prices and thus silver due to their extreme leverage, their capital is very finite. They can only dump so many gold-futures contracts, both on the long and short sides, before they exhaust their selling firepower. Most of their likely selling on incessant Fed-tightening fears happened in recent months, a slow-motion taper tantrum before the Fed’s announcement.
When that gold-futures selling is expended, gold and thus silver will reverse sharply higher regardless of what the Fed is doing. Speculators only have room to buy to normalize their excessively-bearish bets. As they do that, the upside momentum builds in gold and silver attracting in more capital. Pretty soon that grows into entire new uplegs. Silver’s next one driven by gold’s should entice many investors back in.
A great example of this happened back in mid-December 2015. The Fed was on the verge of launching a new rate-hike cycle with its first hike after 7.0 years of zero rates. Gold-futures speculators just panicked leading into that, unleashing mind-boggling selling. That bludgeoned gold 11.5% lower from mid-October to mid-December, pummeling silver to a 15.2% loss. Yet the day after that maiden rate hike, gold bottomed.
Few believed it, but a new bull market was stealthily being born. Despite the Fed being in a young tightening cycle that would eventually extend to nine consecutive rate hikes, gold surged 29.9% by early July 2016. That fueled a parallel large 48.7% silver upleg! Silver investors really contributed, doing big-enough differential SLV-share buying to drive a 13.0% or 40.2m-ounce holdings build from mid-February to early July.
Silver is poised for another investment-demand-fueled upleg once this latest bout of Fed-tightening-fear-driven heavy gold-futures selling burns itself out. Interestingly speculators’ silver-futures positioning also supports big silver gains coming. As of late September, their longs and shorts were running 8% and 100% up into their past-year ranges! That’s near silver’s most-bullish-possible setup of 0% longs and 100% shorts.
That implies selling exhaustion, that speculators have both sold all the silver-futures longs they are likely to as well as done all their probable short selling. That leaves room for nothing but buying, which propels silver sharply higher due to the big leverage inherent in silver futures. Investment demand should soar as investors see silver powering decisively higher again. That has real potential to fuel a big coming silver upleg.
The main beneficiary of higher silver prices are the purer silver-mining stocks. These companies are actually thriving according to their recently-reported Q2’21 results, which I analyzed in depth in late August. The fundamentally-superior silver miners, which we own in our newsletter trading books, should see big gains strongly amplifying silver’s next upleg. As silver often surges fast, the sooner you’re deployed the better.
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The bottom line is silver investors remain undaunted from silver’s sharp selloffs in recent months. The holdings of the leading and dominant silver ETF have stayed high despite the festering silver weakness. They are the best high-resolution proxy for overall silver investment, revealing strong hands still expecting to see much-higher silver prices ahead. These hardened contrarians understand silver’s bullish outlook.
Recent months’ bouts of heavy gold-futures selling that hammered silver lower aren’t sustainable. Driven by Fed-tightening fears, speculators have largely exhausted their selling firepower. That leaves room for only buying, which will catapult gold and thus silver sharply higher ahead no matter what the Fed does. A decisive new silver upleg will quickly feed on itself, attracting in more investment capital amplifying its gains.
Adam Hamilton, CPA
October 1, 2021
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