Silver’s Vexing Slumber

by Adam Hamilton, Zeal, LLC Silver has had a rough year, slumping to major new secular lows. After sliding on balance for years now, even the diehard silver bulls are losing faith in their metal. But despite its vexing slumber, silver’s price-appreciation potential from today’s levels remains enormous. Between radical underinvestment and very-high speculator silver-futures shorting, silver is poised to see massive buying as gold recovers. Silver has proven very disappointing in 2015. Late last year, it was battered down near $15.50 as gold plunged into the $1140s on extreme futures shorting. That looked to be a decisive low, as silver spent the next 8 months forming a strong technical base around $16. But unfortunately in early July, silver fell to new lows near $15 as gold was crushed by an epic futures-shorting attack. Silver was collateral damage. Despite silver’s unique and compelling investment merits, it has always been slaved to gold. Investment demand on the margin is the dominant driver of silver’s price, despite only being around 1/5th of total global demand. The 4/7ths of silver’s demand from industrial fabrication, and 1/5th from jewelry, is relatively stable year in and year out. The only demand category that shifts dramatically comes from investors. And their silver buying and selling is overwhelmingly driven by the fortunes of gold. Capital floods into silver when gold is strong, catapulting the white metal higher. And investors flee when gold is weak, pummeling silver lower. Thanks to this ironclad sentiment link, silver is simply a leveraged play on gold technically. The correlation between silver prices and gold prices has proven incredibly high historically. So with gold weak so far in 2015, silver had the deck stacked against it. By late August when silver hit a major 6.0-year secular low just above $14, it was down 9.9% year-to-date. Over that same span, gold had fallen 5.0%. That 2x ratio of silver’s price movement relative to gold’s is actually the dominant rule of thumb historically. Silver tends to double the gains and losses in gold, and gold hasn’t fared well this year. But interestingly, silver’s vexing slumber is par for the course for this volatile metal. Historically, silver’s price action has been characterized by long spans of sideways consolidations followed by explosive and massive moves higher. Investors and speculators with the mental toughness to ride out silver’s long periods of inactivity are richly rewarded with huge wealth-multiplying rallies. And the next one is overdue. The last time silver was this down in the dumps and universally despised was during 2008’s epic stock panic, when silver was pummeled under $9. You couldn’t give silver away back then, just like today traders were totally convinced silver was doomed to spiral lower indefinitely. Yet out of that very despair, a monster bull was stealthily being born. Over the next 2.4 years, silver would skyrocket 442.9% higher! Over that span, the benchmark S&P 500 stock index merely gained 80.8%. Silver was one of the best investments on the planet after the inexorable market cycles finally turned favorable again. And since the financial markets are forever cyclical, I strongly suspect silver is on the verge of another one of its mighty uplegs. After plunging 70.8% in 4.3 years between April 2011 and August 2015, a trend change is coming. It will be fueled by the overdue mean reversion higher in gold, which is starting to recover from the most extreme speculator gold-futures-shorting episode ever witnessed. Gold’s coming upleg will get both investors and speculators interested in silver again. And once they start buying back in, they have a long ways to go to return to normal levels of capital deployed. That’s super-bullish for silver’s outlook. While much silver investment demand is small physical purchases, investors and speculators each have one dominant venue for tracking their silver positions. For investors it is BlackRock’s iShares Silver Trust, which trades under the symbol SLV. SLV acts as a conduit for the vast pools of stock-market capital to flow into and out of physical silver bullion, and is the leading proxy of silver investment demand. This first chart looks at SLV’s silver-bullion holdings held in trust for its shareholders and the silver price over the past several years or so. Since SLV is very transparent and publishes its silver holdings daily, it offers an excellent window into investors’ silver exposure. And it is super-low now, which means there is much room for capital to return as silver inevitably returns to favor again. Investors’ buying potential is immense. Continue Reading>>>

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