Silver Bullion: Should We Be Worried About Silver?

– Bloomberg’s Mike McGlone silver “set to test the $18 an ounce resistance level”

– LBMA report: volume of silver ounces transferred in February fell by 24%

– Standard Chartered: gold-silver ratio and supply/demand fundamentals favour silver

– Gold/silver ratio at near two-year high on silver’s underperformance

– Silver COT reports remain more bullish than at any time in history

– Silver expected to outperform gold as macro and industrial factors begin to drive price



The silver price has perhaps disappointed many investors of late. Two key institutional metrics released in the last fortnight may have made things worse, however not all is at it seems.

The latest silver COT reports have shown that Managed Money positions are net bearish, the most recent is for the seventh week in a row. Meanwhile an LBMA report this week shows that the volume of silver transferred in February fell by 24%.

Whilst both of these suggest that the silver price might continue to resist further climbs, the contrarian perspective suggests otherwise. Analysis of past COT reports, previous gold/silver ratios and a close look at macro fundamentals should give investors (and those considering buying silver) reassurance that the silver price could be set to make some key moves.

COT report 

Last week’s COT data showed Managed Money positions hold are net bearish for the 7th week in a row. This is the longest net negative stretch in over three years (since late 2014).

The March 20 COT report ‘showed an all-time record high Large Speculator NET short position and an all-time record low Commercial NET short position with the Small Specs as the only category still showing a small NET long position.’

As we explained last week, COT data shows that ‘we are close to bottoming and suggests that both gold and silver should make gains in the coming weeks and months. The data showed that the hedge funds and “Managed Money traders,” the “dumb money” speculators now have record short positions in silver.’

At the same time, the large commercials and including large bullion banks such as JP Morgan, the “smart money” and the “inside money” have reduced their shorts dramatically and are now long.

The COT report shows ‘Managed money’ silver specs have their largest short position in at least 28 years and maybe ever. From a contrarian perspective this is very bullish.


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Usually we would expect gold and silver to behave similarly when it comes to the futures market as generally the same factors affect both metals. Whilst recent silver COT reports showing large speculators giving up on and even shorting silver is (from a contrarian perspective) extremely bullish, there is a paradox with the gold COTs which are arguably bearish. Many analysts believe this is a positive sign that the silver price is set to climb, but not before falling.

In recent weeks we have commented on the divergence occurring between both gold and silver.

‘What does this mean? One possible explanation is that silver has gotten too cheap relative to gold and needs to be revalued. That could happen in several ways, with both metals rising but silver rising more, or both falling but silver falling less. Or with gold dropping while silver rises, as improbable as that seems.’

In order for the silver price to climb it likely requires a retreat in the gold price before recovering alongside it. In short, the current silver indicators show a short-term weakness followed by a strong rebound.

Bloomberg Intelligence’s Mike McGlone wrote in a recent report “Silver’s 52-week range is the most compressed in 15 years and appears unsustainable…Silver’s extreme compression projects a revisit of 2016’s high. Sustaining below the December low would indicate failure.”

Why should we expect a recovery in the silver price? “Because of the gold price” is clearly not a reasonable enough answer. Standard Chartered said in a recent report that they expect fortunes to turn for silver this year as the weaker dollar and rising inflation expectations will see investors seek out safe havens alongside gold.  Many of the factors driving gold will begin to affect silver as well. Additionally silver is both a monetary and industrial metal which means it listens to two tunes when performing.

Gold/silver ratio

This week the gold/silver price ratio has so far remained above 81. This is gold at its most expensive in relation to silver, since the early 1990s. Since the start of the millennium the ratio has been trading in a range of 80 and 47. Silver is extremely undervalued in both the short and long-term.

ICBC’s Marcus Garvey said in a report last week, “Inevitably, given the historical precedent, [the ratio level] has raised the question of whether bullion investors are being presented with a contrarian opportunity to position for a reversal…In the very short-term, we think the answer is yes.”

As in any market and with any asset the ratio could yet head higher, but how much higher must be considered in respect of the key fundamentals. For example, the current breakeven price for the primary silver mining industry is about $15-$16. The current price point is not sustainable.

The gold/silver ratio has never remained at 80 (or above) for very long before decreasing. This suggests that the window of opportunity to stock up on silver is small. According to silver seek there have been three occasions sine 1995 where the ratio registered at or above 80. The average of those days is 47. We have just exceeded the historical average in this latest range.

John Rubino recently explained how investors can use this unusual occurrence to their advantage:

‘gold has recently been rising relative to silver (or silver has been falling relative to gold) with the gold/silver ratio now close to 80, meaning that it takes 80 ounces of silver to buy one ounce of gold. It’s been there two other times in the past decade and both times gold subsequently rose while silver rose a lot more.

Based on this (admittedly short) bit of recent history, an interesting trade might be to short gold and go long silver on the assumption that silver bullion will outperform gold bullion going forward. Or just stack more silver than usual for a while.

With the world’s mines producing only about 10 times as much silver as gold while silver stockpiles are dwarfed by those of gold because so much silver is used and then lost in industrial applications, this might be a trade that works for years rather than months.

Silver: the hardworking metal

Silver’s role as an industrial metal has always been impressive but no more so than since this fourth industrial revolution. It’s importance in both communication and sustainable technologies is worth noting, especially given both industries are set to expand.

In the last five years more than half of all the silver sold worldwide has been bought by industry. Less than 10% of gold is bought by the same sector.

Import figures demonstrate growing demand for silver: China’s silver imports are up 36% year-on-year so far in 2018, while India’s silver imports are up 63%. This is in large part thanks to industrial demand where mobile phone and solar cell use are mopping up supply.

“To go green, to do all the things we want to do as the human race gets off oil and gas, we need a ton of silver,” Keith Neumeyer, CEO of First Majestic Silver Corp

Silver has enormous potential in the field of technology. It is the most electrically conductive known material other than gold. Unsurprisingly gold is far too expensive to use in the majority of areas where silver makes for a viable alternative. As we find more solutions to solve energy and technology issues we will inevitably require more and more silver. Right now there is no obvious substitute for it.

Wider macro factors will drive silver

As John Rubino wrote recently, we should be careful not to look at recent institutional date in a vacuum as there are other factors that will support stronger silver prices:

‘Silver is a whole different story, with speculators going aggressively net short, something very seldom seen, and commercials almost in balance, which is also unusual. Looked at in a vacuum, this is hyper-bullish…between trade wars, massive ongoing government deficits and spiking stock market volatility, the reasons for owning safe haven assets like gold and silver are both multiplying and gaining urgency.’

The latest COT report should not be seen as a bearish sign. This is a strong indicator to accumulate silver before it breaks through this current resistance level and begins to catch up with gold. Gold has outperformed silver in the last year or so most likely thanks to safe-haven demand.

Gold is considered to be a safe play in times such as these, hence silver isn’t keeping pace with it. This is also not helped by the fact that the market perceives silver to be exposed to economic weakness. But this won’t be forever. Inflation will begin to show itself in a less covert manner. As it does so more of the public will realize silver’s second role as a store of value and inflation hedge.

Final note from Mark O’Byrne:

Silver remains very undervalued in the short term and on a long term historical basis. It is also undervalued against gold as seen in the gold silver ratio at over 80:1.

Gold is beginning to receive some interest again from a small minority of retail investors but silver remains the preserve of relatively few contrarian investors. The media and financial press rarely, if ever, covers silver and almost never in a positive manner despite its strong fundamentals.

Yet silver is quite likely in the early stages of a new bull market that will rival or surpass that of the 1970s and thus merits an allocation in investment and pension portfolios.


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Related reading

Silver bullion will likely outperform gold bullion going forward

Silver Futures Report and JP Morgan Record Silver Bullion Holding Is Extremely Bullish

Silver’s Positive Fundamentals Due To Strong Demand In Key Growth Industries

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Silver Prices (LBMA)

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29 Mar: USD 16.28, GBP 11.58 & EUR 13.21 per ounce

28 Mar: USD 16.46, GBP 11.63 & EUR 13.28 per ounce

27 Mar: USD 16.64, GBP 11.79 & EUR 13.41 per ounce

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23 Mar: USD 16.53, GBP 11.70 & EUR 13.39 per ounce

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