Silver Demand Exploding! / Commodities / Gold & Silver 2020

Silver investmentdemand is exploding in recent months, skyrocketing higher inwildly-unprecedented fashion!  That has catapultedsilver sharply higher since mid-March’s COVID-19-lockdown stock panic.  Accelerating even in this usually-weak summerseason, the massive capital inflows deluging into silver show no signs ofabating.  This is very bullish for silver,yet most traders remain unaware it is happening.

While silver prices arefairly-widely followed, the data revealing the underlying fundamentals drivingthis metal is sparse.  The best silverglobal supply-and-demand data is only published once a year by the venerableSilver Institute in its outstanding World Silver Surveys.  The latest covering 2019 was released inApril, and is essential reading for all traders interested in silver.  One key trend is very relevant to today.

Last year global silverdemand edged up an ever-so-slight 0.4% to 991.8m ounces worldwide.  Every demand category fell except for two,net physical investment and net investment in exchange-traded funds.  The former rose a respectable 12.3% to 186.1mounces.  It makes sense investors’interest in silver should grow with its price climbing 15.3% in 2019.  That translated into far faster growth insilver ETFs.

Global demand for physicalsilver bullion held in trust for the shareholders of these trading vehiclesshot up from -22.3m ounces in 2018 to +81.7m in 2019!  That was an all-time-record high.  Stock investors are increasingly getting silverexposure through ETFs, which are quick, easy, and cheap to both trade and own.  The Silver Institute tracks the world’ssilver ETFs, and one behemoth utterly dominates that space.

As 2020 dawned, theAmerican SLV iShares Silver Trust held 362.6m ounces of silver on behalf of itsshareholders.  That commanded an enormous 49.8% of all the silver owned by all the world’s silver ETFs!  Launched way back in April 2006, SLV pioneeredsilver ETFs and has maintained an insurmountable lead since.  SLV is in a league of its own, with its next-biggestcompetitor trading in Switzerland running just 11.4%.

Following SLV is exceedinglyimportant for speculators and investors alike, since it acts as a directconduit for the vast pools of American stock-market capital to slosh into andout of silver.  That happening in a bigway really moves silver prices.  SLV’smanagers publish its physical-silver-bullion holdings daily, offering a high-resolutionnear-real-time read on silver investment demand!  And they’ve been skyrocketing.

In an opaque silverworld where comprehensive investment data is only available once a year inthose World Silver Surveys, SLV’s daily holdings as a proxy for investmentdemand are invaluable.  Watching how theyare trending gives great insights into why silver prices are moving and whichdirection they are likely heading.  Yet onlya small fraction of traders interested in silver seem to regularly watch SLV’sholdings.

Before we delve into silver’sexploding investment demand they reveal, realize how unusually-strong silver’sprice action has been.  This chartupdated from my summer-doldrumsessay a couple weeks ago compares silver’s current performance to how it hasfared in past market summers in modern gold-bull years.  Gold dominates silver psychology, making gold’sfortunes silver’s primary driver most of the time.

These lines areindividual summers’ silver price action indexed to its final May closes ofthose particular years.  The red lineaverages together silver’s performances from the summers of 2001 to 2012 and2016 to 2019.  Note that silver’s seasonaltendency is to drift sideways during market summers, which tend to be devoidof recurring investment-demand spikes. The blue line is summer 2020’s indexed silver price action.

During the first halfof June, silver was largely drifting lower tracking its normal summertrend.  But in the second half of Juneand especially July, silver has surged dramatically decoupling from itsusual weak seasonals this time of year.  What’sfueling silver’s outsized counter-seasonal gains over the past month or so, andis it sustainable?  The answer to the firstquestion is definitely exploding silver investment demand!

SLV’s skyrocketingholdings since mid-March’s stock panic have been mind-blowing.  Given SLV’s size and dominance of thesilver-ETF world, they are the best daily proxy for global silver investment demand.  Understanding why is important.  The iShares Silver Trust’s mission is to mirrorthe silver price, to give American stock traders easy portfolio exposure tosilver.  Tracking ETFs only succeedacting as capital conduits.

The supply and demandfor SLV shares is independent from silver’s own.  So if stock traders are buying SLV sharesfaster than silver itself is being bought, SLV’s share price risks decoupling fromsilver’s to the upside.  The only way toprevent this ETF from failing its tracking mission is to shunt excess SLV-sharedemand directly into physical silver. That equalizes the demand differential between this ETF and the metal.

Mechanically this isaccomplished by SLV’s managers issuing sufficient new shares to absorb all excessSLV demand.  Then the capital raised fromthose share sales is immediately used to buy physical silver bullion thatsame day.  SLV acts like a channel forAmerican stock-market capital to flow into the global silver market.  Differential SLV-share buying forcing holdingsbuilds reveals rising silver investment demand.

SLV’s capital pipelinebetween the stock markets and silver naturally works the other way too.  When American stock traders sell SLV sharesfaster than silver is being sold, this ETF’s price will disconnect from silver’sto the downside.  SLV’s managers have toavert this by buying back enough SLV shares to absorb the excess supply.  They raise the capital to do this by selling someof SLV’s silver-bullion holdings.

So if SLV’s holdingsare rising, stock-market capital is flowing into the world silvermarket.  If they are falling, it is flowingback out.  With that in mind, thefollowing chart is one of the most stunning in the wake of mid-March’s stockpanic.  American stock traders, bothspeculators and investors, have been flooding into silver via SLV shares at areally-unprecedented pace!  Thus silverhas bucked its summer doldrums.

Here SLV’s dailyholdings are superimposed over silver’s daily prices during its secular bullwhich started marching in mid-December 2015. While silver has technically shifted from bull to bear within this span,its secular moves are usually defined by gold’s.  Since silver sentiment heavily depends onwhat gold is doing, silver often acts like a leveraged play on gold.  Silver’s volatility comes from its very-smallmarket.

Again that World SilverSurvey reported total global silver demand in 2019 ran 991.8m ounces.  At silver’s average price of $16.18 lastyear, that was worth $16.0b.  That’s a roundingerror compared to the stock markets and even gold.  According to the World Gold Council, globalgold demand clocked in at 4,368.3 metric tons in 2019.  At gold’s $1394 average price last year, thatimplies a vastly-larger market size of $195.8b.

So with the worldsilver market being about 1/12th the size of gold’s, any given amount ofcapital flowing into silver should yield about 12x the silver-price impact asit would have in gold!  Traders generallyget far more bang for their buck in SLV than they would in the major gold ETFsdominated by the GLD SPDR Gold Shares. While I closely follow SLV’s holdings every trading day, what they’ve justdone still amazes me.

As of the middle of thisweek, SLV held a stupendous 516.1m ounces of physical silver bullion intrust for its shareholders!  That is byfar an all-time-record high, dwarfing everything ever seen prior to this pastmonth or so.  Since mid-June alone, the drearyheart of silver’s summer doldrums, SLV’s holdings have soared 9.1% or 43.2m ounces.  American stock traders are pouring into silverlike never before in SLV’s history.

And that’s saying alot.  Back in spring 2011, silver soaredparabolic in one of the violent crazy-lucrative manias this metal is famousfor.  In just 6.2 months into late April,silver skyrocketed 109.1% to $48.43 per ounce! Days before that euphoric peak, SLV’s holdings blasted to a then-record366.2m ounces.  They didn’t edge abovethat towering record again until 5.5 years later in October 2016 early in today’sbull.

Then silver fell backout of favor over the next few years as gold’s own young secular bull stalledout and consolidated high.  By February2019, SLV’s holdings had slumped to a deep 6.8-year secular low of306.9m ounces.  American stock investorsjust weren’t interested in silver.  Notonly was it languishing in the $15s, but it hadn’t made any new bull-market progresssince August 2016.  Silver was deadmoney, forgotten.

But investors quickly returnedlast summer when goldfinally broke above years-old resistance to carve major new bull-markethighs.  American stock traders flockedback to SLV shares to ride silver’s strong upside momentum, buying them muchfaster than silver was being bought.  SoSLV’s holdings surged as high as 388.2m ounces in late August 2019, a newrecord.  But in context it was merely amarginal one.

SLV’s holdings had onlyrisen 6.0% over the 8.4 years since silver went parabolic challenging$50, fueling great popular interest in this metal.  And once silver’s upside momentum flagged lastautumn, so too did traders’ interest in owning SLV shares.  They were sold faster than silver on balanceinto mid-March’s COVID-19-lockdown-spawned stock panic, forcing SLV’s managersto sell silver bullion to sop up excess supply.

That stock panic was brutalfor silver.  After trading as high as$18.62 in late February, silver was crushed to a 35.8% loss over the next fewweeks.  Collapsing to $11.96 at itsstock-panic nadir, that was a near-crash.  Silver’s worst two-trading-day loss leadinginto that abysmal low was 18.9%, a little shy of the formal crash threshold of20%+ in 2 trading days or less.  SLV’sholdings slumped as low as 353.2m ounces.

But interestinglycontrarian bargain hunters jumped in just a day before silver bottomed.  One day after silver’s worst day of thepanic, March 16th which saw silver plummet 12.8%, SLV’s holdings blasted up3.4% to 365.2m ounces!  With Americanstock traders starting to aggressively buy SLV again, that implied silver’s terriblestock-panic selloff was ending.  And indeedsilver soon started V-bouncing violently higher.

Over the next 6 tradingdays into late March, silver soared 20.6%. That was fueled by a massive 5.7% or 21.1m-ounce SLV-holdings build inthat initial post-panic span.  That catapultedSLV’s holdings to their first new record high after the panic, 391.9mounces.  Later by mid-April, silver wouldmean revert 30.6% higher.  Stock tradersbuying SLV shares was the major driver, SLV’s holdings soared 10.6% or 39.4mounces!

Silver stalled out forthe next several weeks after that, and SLV’s holdings drifted sideways.  But as silver started rallying again intomid-May, stock-market capital resumed pouring into silver via that SLVconduit.  During May alone, SLV’sholdings blasted 12.2% or 50.4m ounces higher to hit 9 new record highs out of20 trading days!  I was surprised whenthey first crossed 400m in early April, so late May’s 463.3m was astounding.

Silver investmentdemand typically dries up in June, the summer doldrums when traders pull backfrom the markets to enjoy vacations.  ButAmerican stock traders continued flocking to silver this year, driving SLV’sholdings up another 7.5% or 34.7m ounces last month.  That was really impressive since silver onlyclimbed 2.1%, rather pathetic compared to May’s huge 19.2% surge.  Investors kept buying without silverrallying!

That unusual counter-seasonalstrong investment demand continued into July. The trading day before the US Independence Day holiday, which usuallymakes for the lightest-volume trading week of the year for broader markets, SLV’sholdings crested 500m ounces for the first time ever!  And that sizable July 2nd 0.8% build to502.0m ounces happened on a day silver slumped 0.4%.  Investors still wanted silver.

That was even moreremarkable because silver had had little fanfare to that point.  While it did V-bounce to mean revert out ofthat stock panic, silver had yet to regain pre-panic highs.  As late as July 7th, silver had yet to closeover late February’s peak.  Silver still languished1.9% lower, despite gold already being 8.3% over its own.  Silver was greatly underperforming gold,which its price usually amplifies by 2x to 3x.

But investors stillkept flooding in.  As of this Wednesday’sdata cutoff for this essay, SLV’s holdings had surged another 3.6% or 18.1mounces month-to-date in July.  During thispast month, SLV’s holdings hit new all-time-record highs on half of all tradingdays!  I’ve been intensely watching,analyzing, and trading silver and its miners’ stocks for over a couple decades,and I’ve never seen anything like that. It’s amazing.

Overall since itsstock-panic nadir, silver has soared 62.6% in 3.9 months as of the middle ofthis week.  That is actually 2.8x gold’s22.0% post-panic upleg in that same span, on the high side of silver’s normaloutperformance band.  Driving silver’sbig gains was the massive investment demand as evident in SLV’sholdings.  They skyrocketed 39.2% or 145.2mounces higher in that span, an unprecedented vertical blast!

As I’ve marveled at thesecolossal capital inflows into silver in recent months, I’ve wondered who is doingthat buying.  I’ve been worried it wasthe Robinhooders.  Robinhood is a phoneapp that millennials use for stock trading. Funded by selling order-flow data to high-frequency-trading firms thatcan front run what Robinhood users are doing, Robinhood’s stock trading is commission-free.  So millennials totally love it.

Plenty of surveys have shownthey are plowing their government stimulus money from the CARES Act into tradingspeculative stocks.  A big fractionof the one-time helicopter-money payments, the employment checks financed by PPPloans, and the $600-per-week federal unemployment bonuses have been shiftedinto Robinhood for stock trading.  Robinhoodersmove as a herd, quickly bidding up then crashing stocks.

If they are behind themassive SLV-share buying, it probably isn’t sustainable.  These speculators have a euphoricget-rich-quick mindset, and rapidly move on to the next big momentum play onceupside flags.  Interestingly Robinhoodpublishes data on how many of its users hold specific stocks.  Before the stock panic, only about 8k ownedSLV.  While that has soared since, it onlyjust crossed above 15k this week.

7k more Robinhooders wouldn’tmove the needle in SLV.  The averagetrading-account balance there is reported to run between $1k to $5k, which isnothing even compared to silver.  So with15k Robinhooders now holding SLV, the amount of capital they have deployed init likely remains trivial.  Forcomparison, their 10th-largest holding this week is Tesla with 484k usersowning it.  942k now own Ford on its newBronco.

The huge SLV buying isn’tcoming from millennials chasing shiny new things, but from normalinvestors.  While there’s no way to tellyet, I suspect institutional investors have led the charge into SLVrather than individuals.  The reason isthe differential SLV-share demand forcing that near-vertical holdings build hasbeen highly consistent and disciplined. It has happened whether silver is rising, falling, or grinding sideways.

Individual traders tendto rush into silver only when it is surging to new highs to captureattention.  Out of the 34 trading dayssince the stock panic where SLV’s holdings hit new record highs, silver only climbedto new post-panic bests on 11 of them. Whoever is migrating into silver is doing so strategically, slowlyamassing big positions while ignoring sentiment swings driven by silver’s volatileprice action.  This has to be funds!

There’s anecdotalevidence supporting that.  In my line ofwork, I have CNBC and Bloomberg on all day everyday in my office.  I can unmute and listen to the interviews offund managers when I’m working on spreadsheets and charts.  Even before SLV holdings’ vertical explosionbecame this apparent, I heard a surprisingly number of fund managers say theywere bullish on silver due to the Fed’s epic money printing.

They also cited silver’s rampant undervaluation relativeto gold.  My last essay on that came inearly May, and I need to update that thread. In a nutshell for today, mid-week silver at $19.45 traded at just 1/93rdthe price of gold.  It took 93.1 ouncesof silver to equal the value of a single ounce of gold.  That hit an apocalyptic all-time-record lowfor silver of 124.1x during the stock panic, and averaged 81.1x in this silverbull.

If fund managers arewaiting for silver to mean revert higher and overshoot relative to gold, they aren’tgoing away anytime soon.  The historical averageSilver/Gold Ratio is closer to 55x.  At$1800 gold, that implies silver challenging $33!  The funds aggressively adding silverpositions will likely stay in and ride them for some time to come.  And their buying forcing silver higher will attract in more traders in a virtuous circle.

The biggest beneficiaryof higher silver prices is the stocks of its miners.  The more of their quarterly sales derived from silver, andthe better their fundamentals, the greater their upside leverage to silver.  As an example, the purest silver miner withthe highest percentage of revenues from silver in Q1’20 has seen its stockskyrocket 186.7% higher since mid-March! We recommended it low in our newsletters back in early April.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows.  We’ve been layering into new positions eversince, with unrealized gains already growing as big as +138%!  Our trading books are full of these fundamentally-thrivinggold and silver miners that aren’t done running.

To profitably trade high-potentialgold and silver stocks, you need to stay informed about what’s driving gold andsilver.  Our newsletters are a great way,easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Analyzinglittle-followed-but-essential indicators like SLV’s holdings can greatlyimprove trading success.

The bottomline is silver investment demand is exploding. American stock traders have flooded into SLV shares in recent months,vastly upping their silver portfolio exposure via the world’s dominant silverETF.  This silver buying has provenincredibly persistent, continuing even when silver weakens.  That implies it is funds strategicallybuilding silver positions, on expectations for much-higher silver prices comingahead.

Theresulting enormous SLV-holdings builds are unprecedented, forcing them verticalto smash through many new record highs. That is unleashing a powerful virtuous circle for silver, with investmentbuying driving silver higher attracting in even more investors.  Silver still has a long runway higher to meanrevert back up to historic norms relative to gold.  And the Fed’s epic monetary inflation shouldkeep demand high.

Adam Hamilton, CPA

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