The Silver Investors' Resoluteness Is Very Bullish

Silver has certainly had a wild ride this year, more than living up to its super-speculative reputation. It got sucked into the overwhelming...

by Adam Hamilton of Zeal LLC

Silver soared last summer on skyrocketing demand from stock traders stampeding into silver-ETF shares. These huge positions that sure looked speculative initially have largely stayed deployed since, even riding out a silver correction. That implies these holdings are now being viewed as long-term investments. The silver investors' resoluteness is very bullish for this metal, keeping silver high which fuels growing interest.

Silver has certainly had a wild ride this year, more than living up to its super-speculative reputation. It got sucked into the overwhelming maelstrom of fear from mid-March's stock panic on governments' COVID-19 lockdowns, plummeting 35.8% in under a month! The resulting $11.96 nadir was brutal, well below the world's silver miners' all-in sustaining costs of production. Silver had been left for dead at that 10.9-year low.

But like a phoenix rising from the ashes, silver's rebound out of those extreme lows was incredibly violent. Over the next 4.8 months into early August, silver skyrocketed 142.8% higher to $29.04! That proved its best level in 7.4 years. If such high silver prices can be sustained, that would be a game changer for the long-struggling major silver miners. And so far these way-better silver prices have largely held since.

In the 4.4 months since its latest upleg peaked, silver has averaged an impressive $25.00 on close. That is 54.5% higher than 2019's average price! These far-higher prevailing silver levels are resulting from silver investors' resolve. They haven't unwound most of their massive new positions added during this past summer. That suggests they believe silver's secular bull will keep powering even higher on balance.

Unfortunately world silver supply-and-demand fundamentals are really opaque. Despite its enthusiast following, silver is a tiny global market with a dearth of reliable data. Silver's definitive fundamental read is only published once a year by the venerable Silver Institute in its World Silver Survey. The last one was released in late April, covering 2019. Thankfully silver investment has a far-higher-resolution proxy.

That is the physical-silver-bullion holdings of the leading and dominant SLV iShares Silver Trust. They are published daily, vastly superior to the annual peek provided by the WSS. Launched way back in April 2006, SLV has grown into a silver juggernaut. Last year SLV's holdings grew 45.4m ounces to hit 362.6m. According to that latest WSS, that growth represented 55.6% of the global silver-ETF-demand total.

And the 81.7m ounces of silver that exchange-traded funds bought in 2019 weighed in at nearly a third of overall investment demand. Last spring when they were preparing their latest WSS, its analysts forecast major growth in silver demand through ETFs this year. They projected this silver demand soaring 46.9% YoY to 120.0m ounces in 2020. But even that optimistic view fell way short of what recently transpired.

With this crazy year winding to a close, SLV's holdings alone have skyrocketed 194.8m ounces year-to-date! Among all kinds of excellent data in the WSS reports is the silver-bullion totals held in physically-backed ETFs around the world. At the end of last year, SLV's holdings commanded 49.8% of the world total! So this American silver ETF dominates its space, and silver ETFs are increasingly silver's main driver.

Silver ETFs' mission is to track and mirror the underlying silver price. But the supply and demand for silver-ETF shares is independent from silver's own. So the only way ETFs can maintain price parity with silver is to shunt excess silver-ETF-share supply and demand directly into silver itself. That requires making these ETFs actual conduits for stock-market capital to flow into and out of real physical silver bullion.

When SLV-share demand exceeds silver's, those share prices will decouple from silver's to the upside. SLV's managers prevent this by issuing enough new shares to offset this differential demand in real-time. Then they immediately plow the proceeds from those new-share sales into buying more physical silver bullion for their vaults. So when SLV's holdings are rising, stock-market capital is flowing into silver.

And when SLV-share supply runs higher than silver's, those share prices threaten to disconnect from silver's to the downside. SLV's managers avert this by buying back enough shares to absorb the differential supply in real-time. They raise the money to finance those purchases by selling some of their silver-bullion hoards. So when SLV's holdings are falling, stock-market capital is shifting back out of silver.

In a year full of remarkable and unprecedented market action, what happened in SLV's holdings is near the top of the most-amazing list. This silver-bull chart superimposes SLV's physical-silver-bullion holdings held in trust for its shareholders over silver's price and technicals. I marveled at this chart last summer as silver soared, and marvel at the incredible resolve silver investors have shown since. They are hanging tight!

Silver's current secular bull was born in mid-December 2015 with gold's, and all its uplegs and corrections since are carved out on this chart. Note that strategically silver price trends usually follow those in SLV's holdings. Silver uplegs mostly coincided with SLV builds, while SLV draws helped drive silver corrections. Before 2020, this bull's biggest SLV build fueling a silver upleg was 19.3% or 62.7m ounces in mid-2019.

And silver investment had generally been out of favor for a decade or so, since silver shot parabolic and then collapsed back in early 2011. Near silver's late-April peak of $48.43 after skyrocketing up 169.5% in just 8.3 months, SLV's holdings hit an all-time-record high of 366.2m ounces. Over the next 8.9 years into March 2020, those holdings never went higher than 388.2m. Silver couldn't win significant popularity.

That previous-record 388.2m peak came in August 2019, as silver's upleg that year crested surging to $19.59. Prior to that month the highest SLV holdings ever reported was 366.4m ounces in October 2016, which was actually dead-flat over 5.5 years since April 2011. So there was virtually no excitement in silver for many long years, and investors generally wanted little to do with it. All that suddenly changed in 2020.

For the decades I've been studying silver and trading its miners' stocks, gold has been its primary driver. Silver generally mirrors and amplifies gold's trends, acting like a leveraged play on gold somewhat like a mining stock. So after March 2020's stock panic, some of the earlier trades we added after those super-anomalous lows were major silver stocks. These were recommended in our newsletters in early April.

After writing about the epic opportunities in gold and gold stocks in that panic's immediate wake, I finally found time for silver in mid-April. In my essay "Big Silver Bull Running!" published when silver was still in the low $15s, I concluded "Silver will almost certainly double or triple, and potentially quadruple or quintuple again, from last month's deep 10.9-year secular low!" Its "outperformance after stock panics is legendary."

I discussed the incredible differential SLV-share demand following that panic, with its holdings soaring 12.0% or 44.6m ounces higher in less than a month! That was finally a major upside breakout to new record SLV holdings after those long years of no meaningful capital inflows. The reason silver's price was able to blast 2.4x higher by early August was astoundingly-strong SLV demand from American stock traders.

It was like these guys finally rediscovered silver after nearly a decade of it flying way under their radars. The faster and higher silver rallied, the more SLV shares they bought. The more of those positions they amassed, the more physical silver bullion SLV's managers had to buy accelerating silver's rally. It was a glorious virtuous circle of buying, catapulting silver that enormous 142.8% higher in that quick 4.8 months.

During that fast silver upleg's exact span, SLV's holdings skyrocketed a phenomenal 53.6% or 198.7m ounces higher. They literally exploded vertically as this chart reveals, which was easily the biggest inflow of stock-market capital into silver ever witnessed! Even back in late 2010 and early 2011 as silver blasted parabolic generating vastly-greater excitement and greed, SLV's holdings only climbed 20.8% or 61.2m ounces.

It was really fun riding that blistering post-panic silver upleg this year, and some of our biggest realized gains came in silver-stock trades running as high as +199.1%! But stock traders are notorious for being momentum players. They love piling in when something is soaring, but once it peaks and starts selling off they are quick to exit and move on to the next exciting thing. So I feared heavy SLV selling was looming.

All bull-market uplegs are followed by healthy corrections to rebalance sentiment and technicals. And the magnitude of those selloffs tends to be similar to their preceding uplegs. The first three uplegs of this silver bull were fairly modest, averaging just 35.9% gains. Yet the subsequent corrections following them still averaged major 28.9% losses! Excluding that anomalous stock-panic one, the other two averaged 23.9%.

If silver's corrections snowballed that big after smaller uplegs, what was likely after it rocketed up 142.8% in its latest one? And if silver plunged 25% to 30% in its inevitable correction, would the legions of new silver investors via SLV shares aggressively flee as their capital shrunk? Some fraction of these new SLV shareholders were inexperienced millennials trading their stimulus money with that free Robinhood app.

I discussed these Robinhooders in more depth in a mid-July essay on the exploding silver demand. I sure thought once silver's upleg exhausted itself and rolled over into a correction, SLV shares would have to suffer a serious mass exodus. That differential SLV-share selling would exacerbate silver's downside, fueling a vicious circle of losses. And with SLV's holdings just soaring, there was lots of potential selling to do.

Silver did indeed soon start correcting with gold right on cue like usual. At worst so far, the white metal has lost 22.2% over 3.7 months since its early-August peak. But even though this latest correction was nearing this bull's previous average excluding March's stock-panic anomaly, SLV's holdings merely shed 25.2m ounces or 4.4%! Such resilience was astonishing with so much new capital stuffed into SLV shares.

The highly-speculative momentum-chasing SLV positions that mushroomed last summer have morphed into apparent long-term investments! That doesn't necessarily mean the same stock traders kept their capital deployed in silver. The hot-money millennials could've fled, while institutional investors started to amass silver portfolio allocations after its huge upleg finally put silver back on their radars for the first time in years.

It doesn't matter who owns SLV, its silver-bullion holdings have been able to hold near highs after they rocketed parabolic last summer! Vertical ascents plateauing instead of symmetrically collapsing are very rare in the markets. After many years of neglect, silver has won over a large contingent of new capital from the stock markets. And these investors must believe silver's bull market still has lots of room to run higher.

They only unwound about 1/8th of their massive capital inflows into SLV during this latest upleg. Back in early August I would have bet on at least a half one, a silver-correction draw on the order of 100m ounces instead of just 25m. But these new silver investors via SLV shares are certainly right that the outlook for silver remains very bullish. Silver is a small speculative asset in a world awash in new central-bank money.

Almost all financial assets have enjoyed soaring prices since the stock panic as central banks spun up their printing presses to radically-unprecedented speeds. Leading the way to monetize everything was the Fed, which ballooned its balance sheet by an absurd $2,857b or 66.3% in just the first 3.0 months after mid-March's panic! Other major central banks added the equivalent of trillions of new dollars of their own.

If even a tiny fraction of that liquidity deluge parks in silver, it is in for a speculative mania exceeding what is going on in bitcoin today. Compared to that leading cryptocurrency and gold, the silver market is just vanishingly-small. So any given capital inflows move silver higher faster. One way to visualize silver's tiny market is looking at its annual demand multiplied by average prices compared to those seen in gold.

That latest World Silver Survey covering 2019 pegged total global silver demand at 991.8m ounces last year. That happened at $16.18 average silver prices, implying the silver market was worth a trivial $16.0b in 2019. Using this same metric for gold derived from the latest fundamental data from the World Gold Council, its market was worth $196.6b last year. Thus silver's market is running about 1/12th the size of gold's!

So any capital migrating into silver has about 12x the potential to drive silver-price upside than the same amount flowing into gold. And using SLV's holdings as a proxy for overall silver investment, silver has won massive capital inflows this year. At the end of 2019, SLV's holdings were worth about $6.5b. This week with both much-higher silver prices and SLV holdings, they are worth $14.0b which has soared 116.9%!

As long as gold's own secular bull market continues powering higher on balance, so will silver's. Central banks' vast flood of quantitative-easing money printing certainly supports the precious metals. Since their total aboveground supplies only grow slightly each year on new mining, there is relatively far more money available to compete for roughly the same amounts of gold and silver. That should bid their prices way higher.

Silver prices rebounding after correcting parallel to gold's own rebalancing selloff, and the persistent high SLV holdings, argue that a new silver upleg is likely getting underway. The same is true for gold, which has led us to aggressively redeploy in fundamentally-superior gold and silver stocks in our newsletters since late November. So far we've added 10 and 4 new stock trades in our weekly and monthly since then.

They include one of the world's purest major primary silver miners, and the world's newest primary silver producer just spinning up its first mine. The fundamentally-superior silver stocks amplify silver's upside in bull-market uplegs. And with SLV's persistently-high holdings implying silver investors' resolve to stay deployed is strong, that ups the odds silver's correction is over. So its next upleg could already be marching.

At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That's why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!

To multiply your wealth trading high-potential gold and silver stocks, you need to stay informed about what's going on in this sector. Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what's going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off sale! There's no better time than around a correction-bottoming buying opportunity.

The bottom line is silver investors have proven remarkably resolute since this metal's parabolic peak in early August. The dominant SLV silver ETF's bullion holdings, which are the best daily proxy for global silver investment demand, have held near highs in recent months. That was despite a silver correction following an unprecedented vertical soaring in SLV's holdings, driven by record capital inflows from stock traders.

The fact silver investors haven't unwound the great majority of their huge summer buying implies they still expect this silver bull to keep running higher. That makes sense with silver being a tiny global market in a vast deluge of new central-bank liquidity. With lots more capital competing for roughly the same amounts of aboveground silver, great upside potential remains. The better silver miners' stocks will amplify silver's gains.

Adam Hamilton, CPA