EDITOR'S NOTE: SILVER PRICES ARE DOWN, BUT FOR HOW MUCH LONGER? If you’re a precious metals investor who prefers to approach buys and sells with a little more nuance, then it’s critical that you understand how the CFTC Commitments of Traders (COT) report works. It gives you a rare glimpse into the mind of the market, breaking it down to what retail traders, institutional fund managers, and commercial hedgers are doing. While most retailers and fund managers are looking to profit off the direction of the market, commercial hedgers are looking to protect their current or future inventory. Hedgers occupy a unique position in the market. Their decisions can impact the cost of production significantly. And most of their decisions are based on business policy. Any miscalculation can be disastrous for a manufacturer or producer. Hence, they’re often called the “smart money” of the bunch. Well, right now there’s something big going on in the silver market. True, silver has taken a serious beating over the last two years. But this also makes it a potentially strong bargain buy. And what’s going on among silver hedgers right now may be that consequential trigger investors have been waiting for.
The beleaguered silver market could soon get a big break, based on a recent series of statistics. The data paint a sanguine picture for the industrial metal and suggest higher prices are ahead, suggests Clif Droke, editor of Cabot SX Gold & Metals Advisor.
Although silver prices are down over 20% from a year ago, recent CFTC Commitments of Traders (COT) reports reveal that commercial hedgers (the so-called "smart money" in the silver market) are at one of their lowest levels of holding short positions in years.
Moreover, the Silver Institute's World Silver Survey 2022 report states that higher mine production (due to project ramp-ups gains in established mines' output), plus higher industrial recycling are expected this year, resulting in a projected 3% increase in global silver supply.
However, the higher supply will be insufficient to meet the 5% increase in global demand the Silver Institute is forecasting for 2022 (due to improvements in industrial fabrication along with higher post-pandemic jewelry demand).
Specifically, the report predicts total silver supply this year will exceed 32,000 tons, not enough to match the more than 34,000 tons of silver demanded projected, leaving a market deficit of around 2,220 tons.
As an aside, the Silver Institute notes that the accelerating demand for electronic vehicles (EVs) and autonomous vehicles should serve as a long-term boost for silver demand. The 2022 survey said the shift to EVs has resulted in "growing demand for silver-coated or silver-alloy wires, that provide high-frequency transmission of big data" used in today's high-tech automobiles.
On the supply side, London Bullion Market Association (LBMA) vaults now hold less than a billion ounces, which amounts to a 15% loss from a year ago and the lowest since December 2016 (and immediately prior to the launch of a 17% rally in silver prices in the four months that followed).
Putting all the pieces together, silver's outlook is as positive as it has been in recent memory. Accordingly, I'm moving to add a new position in our favorite silver-tracking ETF.
My favorite silver-tracking fund, the iShares Silver ETF (SLV), has shown some notable technical improvement in the last several days. SLV is back above its 25-day line after spending the better part of the last four months under it.
The fund is still under the more psychologically significant 50-day line, but with short interest factors in silver's favor, the odds favor SLV eventually getting back above this key trend line. Accordingly, investors who don't mind the volatility risk associated with buying near a major low can purchase a conservative position in SLV.
Originally published on Money Show.