Silver Outperforming Gold Price / Commodities / Gold & Silver 2019

Silver has blastedhigher in the last couple weeks, far outperforming gold.  This is certainly noteworthy, as silver hasstunk up the precious-metals joint for years. This deeply-out-of-favor metal may be embarking on a sea-change sentimentshift, finally returning to amplifying gold’s upside.  Silver is not only radically undervaluedrelative to gold, but investors are aggressively buying.  Silver’s upside potential is massive.

Silver’s performance inrecent years has been brutally bad, repelling all but the most fanaticalcontrarians.  Historically silver prices havebeen mostly driven by gold,with the white metal amplifying moves in the yellow metal.  Silver has generally leveraged gold by atleast 2x in the past.  And rarelysilver skyrockets as higher prices and bullish sentiment feed on themselves inpowerful virtuous circles fueling huge gains.

Silver’s legendaryupside is largely the result of it being such a tiny market.  Silver’s leading fundamental authority is theSilver Institute.  In its latest WorldSilver Survey covering 2018, it reported that total world demand ran 1033.5mounces last year.  That was worth a mere$16.2b at 2018’s average silver prices, a rounding error in markets terms.  That was just 1/11th the size of lastyear’s world gold demand worth $179.4b!

So when investors growinterested in silver again and start deploying capital, relatively-small inflowsin absolute terms catapult silver far higher. This classic dynamic last worked in 2016.  In roughly the first half of that year,silver rocketed 50.2% on the parallel 29.9% maiden upleg of this current gold bull.  That made for 1.7x upside leverage to gold, remainingon the weaker side historically but still well worth riding.

Through gold suffered asevere correction in the second half of 2016, it still ended that year 8.5% higher.  Silver’s 15.1% gain amplified that by1.8x.  The secret to gaming silver is it tendsto act like a sentiment gauge for gold. When gold is relatively high and has been rallying, traders startassuming that will persist.  And that’swhen they want to buy silver.  The whitemetal thrives mostly only when gold psychology is bullish.

In 2017 and 2018 goldfell deeper out of favor.  The yellowmetal wasn’t performing poorly, but it couldn’t break out to new bull-markethighs.  And contrarian investing wasdying, with stock markets levitating to endless new record highs on hopes forbig tax cuts soon and extreme Fed dovishness. With gold apathy stellar, silver didn’t stand a chance.  Silver sentiment and thus price performanceis totally controlled by gold.

Even though gold rallieda strong 13.2% in 2017, silver lagged at mere 6.4% gains.  That 0.5x leverage to gold was terrible.  The longer silver underperformed, the moretraders capitulated on it and walked away. 2018 was even worse.  Though goldonly drifted 1.6% lower, silver plunged 8.6% making for horrendous 5.5xdownside leverage.  Silver wasn’t worththe big additional risk of its serious volatility compared to gold.

Thankfully silver’sdire fortunes started to change in early 2019, when I wrote my original essayon Silver Outperforming Gold.  But unfortunately that was short-lived, assilver is slaved to gold.  Inmid-February the young gold upleg stalled out and reversed lower, after failingto break out to new bull-market highs.  Thatkneecapped silver’s budding outperformance streak, casting it back to the underperformancewasteland.

By June 19th, silverwas back to its recent miserable form. It was down 2.1% year-to-date despite gold enjoying a respectable 6.1%YTD rally.  While we were takingadvantage of the hellish sentiment to buy and recommend fundamentally-superiorsilver-mining stocks at crazy-low prices in our newsletters, it was hard towrite about silver.  Virtually no one wasthe least bit interested, with suffocating apathy universal.

But silver started awakeningfrom its bearish haze on June 20th, kicked in the butt by an extraordinary watershedevent.  That day gold finally surged to itsfirst new bull-market high since way back in early July 2016, when this bull’s maiden upleg peaked!  Gold’s $1389 close was also its highest in 5.8years, starting to unleash powerful new-high psychology.  In the 5 weeks since, that has increasinglyinfected silver.

Silver didn’t respondimmediately to gold’s decisivebull-market breakout.  On breakoutday it stuck to its languid ways, only rallying 1.8% on a major 2.1% gold upday.  The silver price action actuallystayed relatively weak for the next several weeks.  By July 11th gold was 3.4% higher from theday before that major breakout, while silver slumped 0.3% lower.  But something interesting was brewing behindthe scenes.

Silver investmentdemand is notoriously difficult to monitor. The best fundamental data available for this white metal is again fromthe Silver Institute’s World Silver Survey. But as awesome as that is, it is only published once per year.  There is a high-resolution proxy for silverinvestment demand available daily though, the physical-silver-bullion holdingsof the world’s largest and dominant silver exchange-traded fund.

That is the AmericanSLV iShares Silver Trust, which has a huge first-mover advantage after launchingway back in April 2006.  As of the end of2018, the Silver Institute’s data showed SLV commanded fully 49% of allthe silver held by all the world’s silver ETFs! SLV’s holdings are published daily, and when they climb it revealsAmerican stock-market capital flowing into silver.  This dynamic is important to understand.

SLV’s mission is to trackthe silver price, giving stock traders full silver exposure.  But the SLV-share supply and demand is independentof silver’s own.  If stock traders arebuying SLV shares faster than silver itself is being bought, SLV’s price willdecouple from silver’s to the upside. SLV’s managers prevent this by shunting that excess share demand backinto physical silver itself.  Themechanics are simple in concept.

When SLV prices are beingbid up faster than silver, new SLV shares are issued to absorb that differentialdemand.  The capital raised from sellingthose shares is then used to buy more physical silver bullion.  This enables SLV to act as a conduit forstock-market capital to flow into and out of silver itself.  When SLV shares are sold faster than silver, thisprocess reverses.  SLV holdings reveal silver investment trends!

While silver wasdrifting sideways to lower in the first half of July and looking unimpressive,American stock investors were starting to buy SLV.  Between July 2nd and 9th, SLV enjoyed dailyholdings builds averaging 0.7% in 4 out of 5 trading days!  At the same time the leading gold ETF’s holdings,which is of course the GLD SPDR Gold Shares, were mostly draws.  Silver was attracting investors while goldwasn’t.

With gold consolidatinghigh and largely holding over $1400, precious-metals sentiment was improving.  After long ignoring gold and silver,investors were starting to take another look. Silver had not only really lagged gold’s breakout rally since mid-June,but it was radically undervalued compared to its dominant primary drivergold.  We’ll explore that shortly.  So smart contrarians were starting to shiftback into silver.

This didn’t firstbecome evident in silver’s price action until July 15th, just a couple weeksago.  That day silver rallied 1.2% despitegold only edging 0.1% higher.  That was peculiarand out of character for silver in recent years, so it could’ve been ananomaly.  But it proved otherwise.  As of this Wednesday’s data cutoff for thisessay, silver has outperformed gold in a major way for 8 trading days in a row!  That’s incredible.

On the 16th silverclimbed 0.9% while gold fell 0.9%.  Onthe 17th and 18th silver surged 2.6% and 2.3% on 1.5% and 1.4% gold updays.  The 19th saw silver only retreat0.7% as gold dropped 1.4%.  Then on the 22ndand 23rd silver rallied 1.0% and 0.2% despite gold’s 0.1% and 0.5%declines.  This Wednesday the 24th sawsilver climb 1.1% outpacing gold’s 0.6%. Such a strong outperformance streak is important.

Thus in the past coupleweeks or so, silver has blasted 9.7% higher despite a mere 1.3% gold rally!  That makes for epic 7.4x upside leverage, thekind silver enthusiasts dream about.  Thisoutperformance stretch is even more impressive because it was driven by bigcapital inflows into SLV by American stock investors returning to silver.  As of this Wednesday SLV saw strong holdingsbuilds for 6 trading days in a row.

That started with amonster 2.6% SLV build on the 17th, which proved the biggest seen by far sinceway back in January 2013!  Gold largelyholding over $1400 rekindled American stock investors’ interest in silver in away not seen in 6.5 years.  Over the next5 trading days ending Wednesday, SLV’s holdings grew another 0.8%, 1.0%, 2.6%,0.5%, and 0.5%.  This silver-investment-buyingstreak is pretty amazing.

While silver’s outperformanceof gold has exploded only in the last couple weeks, it has totally changed howsilver looks since gold’s decisive bull-market breakout on June 20th.  As of Wednesday, silver has now rallied 9.3%over that 24-trading-day span compared to gold’s 4.8% gain.  That’s right back up to that historical 2.0x-upside-leveragenorm.  SLV’s holdings enjoyed 13 builddays, 11 flat days, and 0 draw days.

They have catapultedSLV’s holdings 12.6% higher since the day before gold’s breakout.  Via this leading ETF, American stock investorsare now holding 1/8th more silver in absolute-ounces terms in just 5weeks.  Over this same span GLD’sholdings only climbed 7.6%.  And it onlysaw 8 holdings-build days, 5 flat days, and a whopping 11 draw days.  Something special, major, and likely pivotal is underway in silver!

Nevertheless, silverremains in an ugly place compared to gold. YTD as of this Wednesday, silver was just up 7.1% compared to gold’s11.1%.  Gold’s $1445 upleg-to-date high achievedon July 18th was its best level seen in 6.2 years.  Silver’s own upleg-to-date high of $16.55this Wednesday was merely a 1.1-year one. So though silver has started to outperform gold again, it has a long wayto go to look impressive.

There’s no sugarcoatingit, the carnage in silver in recent years has been catastrophic.  Thanos himself couldn’t have done worse witha fully-stoned Infinity Gauntlet!  While therewere a half-dozen silver charts I considered sharing this week, this one is themost telling.  It shows the Silver/Gold Ratioover the past decade-and-a-half or so.  ThisSGR is the best measure of whether silver prices are relatively high or low.

The SGR simply dividesthe daily silver close by the daily gold close, but yields hard-to-parse decimalslike 0.0116 this Wednesday.  So I preferto use an inverted-axis Gold/Silver Ratio instead, which is the same thing butoffers easier-to-understand numbers like 86.1 mid-week.  Silver prices had almost never been lower relative to gold in modern history before recent weeks!  Silver is climbing out of a stygian abyss.

Back in mid-June justbefore gold’s decisive bull-market breakout changed everything, the SGR hadfallen to an absurd 90.4x.  In otherwords it took 90.4 ounces of silver to equal the value of a single ounce ofgold.  That was wildly out of whack withhistorical precedent.  From 2005 to justbefore 2008’s first stock panic in a century, the SGR averaged 54.9x.  From 2009 to 2012 after that panic, it averageda similar 56.9x.

The SGR had generallymeandered in the mid-50s for decades, so miners had long used 55.0x asthe leading proxy for calculating silver-equivalent or gold-equivalentounces.  The SGR also experienced great cycles,long secular periods of silver outperformance where the SGR generally fell followedby multi-year spans of silver underperformance where the SGR rose on balance.  SGR extremes were short-lived.

As gold surged over thispast month, the SGR spiraled higher still to a mind-boggling 93.5x on July 5th.  That was an apocalyptic 26.8-year low,the worst silver levels relative to gold since October 1992.  That is longer than the average investinglifespan of today’s traders, over a quarter century!  And 93.5x isn’t much better than the worstSGR since 1970, 100.3x seen briefly in February 1991.  Silver has just been slaughtered.

For an incredible 8.2years the SGR had been rising on balance, showing chronic underperformancerelative to gold.  This secular cycle is far-overdueto turn, and after extreme lows historically silver has spent years meanreverting higher relative to gold. 2008’s extraordinary stock panic offers a fantastic recent example ofhow greatly silver can soar after being battered down to extreme lows relativeto gold.

Back in November 2008in that most-extreme market-fear event seen in our lifetimes, the SGR was crushedto 84.1x.  Silver was radically undervaluedrelative to gold, investors wanted nothing to do with it.  Such a great disconnect between silver andgold wasn’t sustainable given their relative market sizes and the ratio atwhich they are mined.  So over the next2.4 years into April 2011, silver skyrocketed 442.9% higher!

After SGR extremessilver doesn’t just revert to the mean, but overshoots proportionally towardsthe opposite extreme.  The SGR fell aslow as 31.7x when that silver bull peaked over $48 per ounce.  Odds are the SGR will again overshoot and atleast return to the 40s before silver’s next bull fully runs it course.  With silver not far off its lowest levelscompared to gold in modern times in early July, it has vast room to soar.

Gold’s current bullmarket was born in mid-December 2015, and is what has driven silver higherduring gold-bull uplegs.  Since then, theSGR has averaged just 77.8x.  That isactually higher than during that wild stock-panic span in late 2008, incrediblyextreme!  Over the past several weeks orso, the SGR has already started mean reverting falling as low as 86.1x thisweek.  Silver’s upside potential fromhere is epic.

At $1400 gold and thismiserable gold-bull-average 77.8x SGR, silver would need to trade at$18.00.  That’s another 9% higher fromthis week’s levels.  But again mean reversionsoff extremes don’t just stop at the averages, but keep going like a pendulum.  That yields an SGR target of 62.1x, implying$22.56 silver at $1400 gold.  Silver wouldhave to power another 36% higher to regain those still-pathetic SGR levels.

If gold’s young secularbull persists for years to come as it ought to based on historic precedent,silver is going to climb far higher greatly lowering the SGR.  If it just mean reverts back to thatlongstanding 55.0x average with no overshoot, that means $25.45 silver at $1400gold.  These SGR-mean-reversion-and-overshootsilver-price targets grow far bigger at higher prevailing gold prices andproportional-overshoot SGR lows.

The point of all thisis silver is so radically undervalued compared to its primary drivergold that it needs to soar vastly higher to reestablish normal relationships.  While silver’s outperformance over the pastcouple weeks is impressive, it hardly even registers coming off such extremelows.  Digging out of such a deep holerelative to gold, silver needs to rally higher on balance for many months oreven years to come!

While investment buyingincluding via silver ETFs like SLV will be the primary driver, silver futures will also play a big role.  A couple weeksago I wrote about gold’s highshort-term selloff risk due to how the gold-futures speculators are now positioned,with excessively-bullish bets that are actually very bearish over the nearterm.  A healthy gold pullback or correctionwould certainly drag silver down with it for a spell.

The most-bullishsituation possible for gold- and silver-futures is for speculators to beall-out long upside bets and all-in short downside bets.  That leaves them nothing to do but buy.  That is 0% longs and 100% shorts.  In the latest weekly Commitments of Tradersreport, specs’ gold-futures bets were running 75% on the long side and 10% onthe short side up into their entire bull-market trading ranges.  That’s really bearish.

By bull-to-dateprecedent, gold-futures speculators had room to sell 347.4k contracts but onlyroom to buy 80.5k.  That made for anominous 4.3x ratio of potential selling outweighing potential buying.  I bring this up because speculators’ silver-futurespositioning was nowhere near as menacing. They are running 66% on the long side and 44% on the short side up intotheir gold-bull-market trading ranges, much less bearish.

Speculators had room tosell 97.4k silver-futures contracts and buy 65.8k in the latest CoT report, fora way-more-moderate 1.5x ratio of potential selling to potential buying.  The takeaway here is silver has a lot morenear-term futures-buying-driven upside potential than gold does.  Together silver investment buying andsilver-futures buying are powerful forces to catapult silver higher.  But it all depends on gold.

If gold continues toconsolidate high above or near $1400, that will foster the bullish sentimentnecessary for silver buying to persist. New-high psychology driving gold investment buying could make this happen.  But if something spooks the gold-futuresspeculators, they have massive room to sell which would quickly cascade andhammer gold lower.  That would suck insilver, driving both into healthy short-term corrections.

But once speculators’ excessively-bullishgold-futures bets normalize, gold and silver should be off to the races againwith silver really outperforming. So any material weakness should be used to aggressively accumulatephysical silver bullion, SLV shares, and stocks of fundamentally-superiorsilver miners.  Their upside potential trouncessilver’s because their profits growth really amplifies higher prevailing silverprices.

Again silver soared 50.2%higher in largely the first half of 2016. The leading SIL Global X Silver Miners ETF rocketed a colossal 247.8% higherin essentially that same span!  That madefor huge 4.9x leverage to silver’s gains. Every quarter I analyze the fundamentals of the major silver miners ofSIL, with the latest essay coveringQ1’19 results.  Now is the time to doyour homework before silver really starts running again.

To multiply yourcapital in the markets, you have to trade like a contrarian.  That means buying low when few others arewilling, so you can later sell high when few others can.  In recent months well before gold’s breakout,we recommended buying many fundamentally-superior gold and silver miners in ourpopular weekly and monthly newsletters.  Mid-week our unrealized silver-stock gains already ran as high as 113.8%!

To profitably trade high-potentialgold and silver stocks, you need to stay informed about broader market cyclesthat drive them.  Our newsletters are agreat way, easy to read and affordable. They draw on my vast experience, knowledge, wisdom, and ongoing researchto explain what’s going on in the markets, why, and how to trade them with specificstocks.  Subscribe today and take advantageof our 20%-off summer-doldrums sale!  Thebiggest gains are won by traders diligently staying abreast, always learning.

Thebottom line is silver really started outperforming gold again in the last coupleweeks.  Silver surged dramatically on heavyinvestment buying, as evidenced by big differential SLV-share demand.  This looks like a sea-change sentiment shift gettingunderway in silver, especially after it was crushed to its lowest levels relativeto gold in well over a quarter century. Silver is long overdue to mean revert vastly higher.

Silvereffectively acts like a gold sentiment gauge, with investment demand dependenton gold’s fortunes.  The longer goldconsolidates high or grinds higher, the more silver will be bought.  Coming out of such radically-undervalued levels,silver’s future bull-market upside should greatly exceed gold’s.  But silver will also get sucked into periodicgold corrections, which can be used as lower entry points to add silver positions.

Adam Hamilton, CPA

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