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Silver Futures and Prospects Look Better Today Than 1995

First Majestic Silver Corp
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EDITOR NOTE: The silver market has been trading sluggishly within a narrowing range since August of last year. A volatile yet, strangely enough, “quiet” market it has been. Are we seeing slow consolidation/accumulation--the kind that’s poised for a sudden upside shock? If you divert your attention away from its back-and-forth fluctuations and look only at its low points starting in April of 2020 when all markets crashed in response to the first Covid lockdown, you’ll notice a trend; one moving slowly but steadily upwards. That’s a strong enough technical indication of where silver is going--where buyers are jumping in and how sellers are unable to derail the bull trend. If you pay attention to the fundamentals--the monetary demand in light of inflation and the industrial demand in light of the global green energy trend, that would give you all the indication you need to make the prudent assumption that, yes, silver is positioned to launch toward much higher price levels in the intermediate- and long-term future. The decision you may be faced with is how much to allocate toward silver equities--as in silver mining stocks--versus non-CUSIP physical silver coins and bars. It’s a tough decision to make, but it depends on whether you want the primary benefits of holding “money,” or the secondary benefits of holding shares of companies that mine and produce that money. 

There is an old saying, never sell a quiet market. In 2020, silver traded in an $18.175 range from low to high. So far, in 2021, the trading band has been $6.61. In March and April, it narrowed to $3.25 on the continuous COMEX futures contract. In April, it shrunk to $2.46 per ounce. I view the price action in the silver futures arena as a rubber band that is being stretched further and further. When it snaps, watch out, the move could be extraordinary.

I learned a great deal about the silver market and liquidity over the past four decades. In the 1980s and 1990s, I worked for and eventually ran all sales and trading for one of the world’s leading bullion trading houses at Philipp Brothers, Salomon Brothers, and Phibro. From 1994-1996. I was one of four traders who structured and executed perhaps the most substantial proprietary long position in the silver market around the $5 per ounce level. At the height, the company owned over 250 million ounces of the metal. Around 80% of the investment position was held in warehouses in London, Brooklyn, New York. The balance was in over-the-counter unallocated silver in London and COMEX futures and futures options. Silver was trading below the $5.50 level in April 1995 going into the Easter and Passover weekend holiday. We exercised out-of-the-money $5.50 call options as the market closed before the holiday, setting off a frenzy of buying and short covering in the silver market. The Japanese central bank cut interest rates, causing us to pay $5.50 for silver when the price was twenty cents lower.

The foray into the silver market is a long story for another time. However, suffice to say, I learned a lot about silver liquidity, amassing a quarter of a billion-ounce position and liquidating it during that time. Silver can be a wild and volatile market when it decides to move. However, it is highly liquid during consolidation periods. Hundreds of millions of ounces can change hands without much price action. Silver has a lot more going for it in 2021 at over $25 per ounce than it did in 1995 at the $5 level.

Silver is consolidating and digesting the wild price action from 2020

Silver’s trading ranges from high to low have been narrowing over the past year.

Source: CQG

The weekly chart highlights the declining trading ranges, a sign of price consolidation after a highly volatile 2020.

Source: CQG

The daily chart shows that after reaching $23.74 per ounce on March 31, silver has been trending higher. Open interest, the total number of open long and short positions in the silver futures market increased from 151,403 contracts on March 31 to 172,974 contracts at the end of last week or 14.25%. Over the same period, silver rose to the $26.05 level, or 9.73% higher. Rising open interest when a futures price is moving higher is typically a technical validation of an emerging bullish trend.

Price momentum and relative strength indicators fell to oversold readings in late March, crossed higher, and were above neutral conditions as of April 23. Daily historical volatility at 22.91% fell sharply from over 67% in early February when silver made its latest high at over the $30 per ounce level. Silver is resting after retreating from a higher high in 2021.

A new high in 2021 and a retreat

The new peak on February 25 came in the aftermath of the action in GameStop (GME), where a herd of buying took advantage of massive short interest in the stock. The Reddit and Robinhood crowd turned to silver, as the metal has a long history of conspiracy theories about financial institutions holding down the price. On March 23, days before the most recent high at over $30, I wrote that silver is a sleeping giant, and it is time to load up on the metal and mining stocks. I continue to believe that silver offers incredible upside potential at the $26 level.

So far, in 2021, the price made a marginal new high, pulled back, and is resting. The price is around $1 below the midpoint of its 2021 range, which continues to narrow as it waits to break higher or lower. I think the odds favor that we will be looking down at the $30 level instead of up over the coming months and years.

In 1995, physical silver demand was sluggish. While the Hunt brother’s liquidation was in the market’s rearview mirror, digital photography had replaced silver demand from the business. Our appetite for physical silver was the primary source of buying twenty-six years ago. While it was a quarter-of-a-billion ounces worth around $1 billion, it was not enough to launch the silver market into the stratosphere. Today that level is worth between six and seven billion. Bitcoin’s market cap was recently over $1 trillion. Apple’s (NASDAQ:AAPL) value is north of $2 trillion. Today, a “hot commodity” or product is likely to attract lots of speculative activity.

In a recent report, The Silver Institute projected that after a 10% decline in physical silver demand in 2020 caused by the pandemic, it would substantially rise in 2021. The World Silver Survey forecasts a 15% rise in 2021 to over one billion ounces with a 26% increase in physical investment, to 1.03 billion ounces.

Three reasons why silver is heading for a new all-time high

Like most other markets, the sentiment is a critical factor that drives prices higher or lows. The path of least resistance or trend is a real-time indicator of sentiment. When silver gets going on the upside, it is likely to see waves of buyers descending on the market. The three most compelling reasons why silver at over $25 in 2021 is far more bullish than at $5 in 1995 are:

  • Inflation will become rampant. The tidal wave of central bank liquidity and tsunami of government stimulus carries the most inflationary price tags in generations. Inflation pushes the prices of all assets higher. Silver is one of the most speculative assets in the commodities asset class, and it is likely to experience one of the most dramatic appreciation periods.
  • The green revolution support silver as it is a critical metal for the solar panels that harness the sun’s energy. Silver demand could be a lot higher than forecasts over the coming years as the world addresses climate change.
  • A sudden demand for silver-related derivative products could cause a shortage of metal, leading to a squeeze. Derivative products representing silver may need to become the most influential buyers to keep pace with the price action. In early February, the GameStop crowd thought they would trigger a short squeeze in the silver market. In the coming months and years, they may look back at the first attempt as a staging ground for what could be inevitable.

Silver’s consolidation period and tightening price ranges could be the prelude to a new record high above the 1980 $50.36 peak in the COMEX futures market.

Silver Miners should outperform the metal on the upside

The only way to increase the global silver stock is to extract more from the earth’s crust. Silver mining companies tend to outperform silver when the price moves higher and underperform during downside corrections. Therefore, silver miners provide leverage without time decay, as the leading companies are likely to remain in business.

Silver production comes from two sources. The precious metal is a byproduct of many other metals including, gold, copper, lead, and zinc. Approximately 72% of annual silver production comes from byproduct mining. The remaining 28% comes from primary production.

Silver Futures

Source: The Silver Institute, 2018

The chart shows the breakdown. In 2019, Mexico was the world’s leading silver-producing country, followed by Peru, China, Russia, Poland, Australia, Chile, Bolivia, Argentina, and the United States.

Investing in a mining company involves idiosyncratic risks such as management, specific properties, and political considerations in countries and mining districts. A portfolio approach that includes a diverse group of leading silver mining companies mitigates some of these risks for investors.

SLVP - Another option for silver investors looking to ride a bullish wave in the metal

The Global Silver Miners iShares MSCI ETF product (SLVP) holds a portfolio of worldwide mining companies. The fund summary and top holdings include:

Silver Futures

Source: Yahoo Finance

SLVP has around $316.414 million in assets under management, trades an average of 182,755 shares each day, and charges a 0.39% management fee. Silver rose from $11.74 in March 2020 to a high of $29.915 in August 2020, or 154.8%.

Silver Futures

Source: Barchart

Over the same period, SLVP rose from $5.62 to $18.97 per share or 237.5%. SLVP outperformed the comparable SIL product that rose from $16 to $52.87 or 230.44% over the same timeframe. SIL charges a higher 0.66% management fee, but it has $1.236 billion in AUM and trades over 365,000 shares each day.

There is still time to ride the bullish wave in the silver market. Even though the price is over five times higher than when I bought a motherlode in 1995, I like the prospects even more in 2021.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from a top-ranked author in commodities, forex, and precious metals. My weekly report covers the market movements of over 20 different commodities and provides bullish, bearish, and neutral calls; directional trading recommendations, and actionable ideas for traders. 

Original post from SeekingAlpha

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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