Silver demand exploding

Last year global silver demand edged up an ever-so-slight 0.4% to 991.8m ounces worldwide. Every demand category fell except for two, net physical investment and net investment in exchange-traded funds. The former rose a respectable 12.3% to 186.1m ounces. It makes sense investors’ interest in silver should grow with its price climbing 15.3% in 2019. That translated into far faster growth in silver ETFs.

Global demand for physical silver bullion held in trust for the shareholders of these trading vehicles shot up from -22.3m ounces in 2018 to +81.7m in 2019! That was an all-time-record high. Stock investors are increasingly getting silver exposure through ETFs, which are quick, easy, and cheap to both trade and own. The Silver Institute tracks the world’s silver ETFs, and one behemoth utterly dominates that space.

As 2020 dawned, the American SLV iShares Silver Trust held 362.6m ounces of silver on behalf of its shareholders. That commanded an enormous 49.8% of all the silver owned by all the world’s silver ETFs! Launched way back in April 2006, SLV pioneered silver ETFs and has maintained an insurmountable lead since. SLV is in a league of its own, with its next-biggest competitor trading in Switzerland running just 11.4%.

Following SLV is exceedingly important for speculators and investors alike, since it acts as a direct conduit for the vast pools of American stock-market capital to slosh into and out of silver. That happening in a big way really moves silver prices. SLV’s managers publish its physical-silver-bullion holdings daily, offering a high-resolution near-real-time read on silver investment demand! And they’ve been skyrocketing.

In an opaque silver world where comprehensive investment data is only available once a year in those World Silver Surveys, SLV’s daily holdings as a proxy for investment demand are invaluable. Watching how they are trending gives great insights into why silver prices are moving and which direction they are likely heading. Yet only a small fraction of traders interested in silver seem to regularly watch SLV’s holdings.

Before we delve into silver’s exploding investment demand they reveal, realize how unusually-strong silver’s price action has been. This chart updated from my summer-doldrums essay a couple weeks ago compares silver’s current performance to how it has fared in past market summers in modern gold-bull years. Gold dominates silver psychology, making gold’s fortunes silver’s primary driver most of the time.

These lines are individual summers’ silver price action indexed to its final May closes of those particular years. The red line averages together silver’s performances from the summers of 2001 to 2012 and 2016 to 2019. Note that silver’s seasonal tendency is to drift sideways during market summers, which tend to be devoid of recurring investment-demand spikes. The blue line is summer 2020’s indexed silver price action.

During the first half of June, silver was largely drifting lower tracking its normal summer trend. But in the second half of June and especially July, silver has surged dramatically decoupling from its usual weak seasonals this time of year. What’s fueling silver’s outsized counter-seasonal gains over the past month or so, and is it sustainable? The answer to the first question is definitely exploding silver investment demand!

SLV’s skyrocketing holdings since mid-March’s stock panic have been mind-blowing. Given SLV’s size and dominance of the silver-ETF world, they are the best daily proxy for global silver investment demand. Understanding why is important. The iShares Silver Trust’s mission is to mirror the silver price, to give American stock traders easy portfolio exposure to silver. Tracking ETFs only succeed acting as capital conduits.

The supply and demand for SLV shares is independent from silver’s own. So if stock traders are buying SLV shares faster than silver itself is being bought, SLV’s share price risks decoupling from silver’s to the upside. The only way to prevent this ETF from failing its tracking mission is to shunt excess SLV-share demand directly into physical silver. That equalizes the demand differential between this ETF and the metal.

Mechanically this is accomplished by SLV’s managers issuing sufficient new shares to absorb all excess SLV demand. Then the capital raised from those share sales is immediately used to buy physical silver bullion that same day. SLV acts like a channel for American stock-market capital to flow into the global silver market. Differential SLV-share buying forcing holdings builds reveals rising silver investment demand.

SLV’s capital pipeline between the stock markets and silver naturally works the other way too. When American stock traders sell SLV shares faster than silver is being sold, this ETF’s price will disconnect from silver’s to the downside. SLV’s managers have to avert this by buying back enough SLV shares to absorb the excess supply. They raise the capital to do this by selling some of SLV’s silver-bullion holdings.

So if SLV’s holdings are rising, stock-market capital is flowing into the world silver market. If they are falling, it is flowing back out. With that in mind, the following chart is one of the most stunning in the wake of mid-March’s stock panic. American stock traders, both speculators and investors, have been flooding into silver via SLV shares at a really-unprecedented pace! Thus silver has bucked its summer doldrums.

Here SLV’s daily holdings are superimposed over silver’s daily prices during its secular bull which started marching in mid-December 2015. While silver has technically shifted from bull to bear within this span, its secular moves are usually defined by gold’s. Since silver sentiment heavily depends on what gold is doing, silver often acts like a leveraged play on gold. Silver’s volatility comes from its very-small market.

Again that World Silver Survey reported total global silver demand in 2019 ran 991.8m ounces. At silver’s average price of $16.18 last year, that was worth $16.0b. That’s a rounding error compared to the stock markets and even gold. According to the World Gold Council, global gold demand clocked in at 4,368.3 metric tons in 2019. At gold’s $1394 average price last year, that implies a vastly-larger market size of $195.8b.

So with the world silver market being about 1/12th the size of gold’s, any given amount of capital flowing into silver should yield about 12x the silver-price impact as it would have in gold! Traders generally get far more bang for their buck in SLV than they would in the major gold ETFs dominated by the GLD SPDR Gold Shares. While I closely follow SLV’s holdings every trading day, what they’ve just done still amazes me.

As of the middle of this week, SLV held a stupendous 516.1m ounces of physical silver bullion in trust for its shareholders! That is by far an all-time-record high, dwarfing everything ever seen prior to this past month or so. Since mid-June alone, the dreary heart of silver’s summer doldrums, SLV’s holdings have soared 9.1% or 43.2m ounces. American stock traders are pouring into silver like never before in SLV’s history.

And that’s saying a lot. Back in spring 2011, silver soared parabolic in one of the violent crazy-lucrative manias this metal is famous for. In just 6.2 months into late April, silver skyrocketed 109.1% to $48.43 per ounce! Days before that euphoric peak, SLV’s holdings blasted to a then-record 366.2m ounces. They didn’t edge above that towering record again until 5.5 years later in October 2016 early in today’s bull.

Then silver fell back out of favor over the next few years as gold’s own young secular bull stalled out and consolidated high. By February 2019, SLV’s holdings had slumped to a deep 6.8-year secular low of 306.9m ounces. American stock investors just weren’t interested in silver. Not only was it languishing in the $15s, but it hadn’t made any new bull-market progress since August 2016. Silver was dead money, forgotten.

But investors quickly returned last summer when gold finally broke above years-old resistance to carve major new bull-market highs. American stock traders flocked back to SLV shares to ride silver’s strong upside momentum, buying them much faster than silver was being bought. So SLV’s holdings surged as high as 388.2m ounces in late August 2019, a new record. But in context it was merely a marginal one.

SLV’s holdings had only risen 6.0% over the 8.4 years since silver went parabolic challenging $50, fueling great popular interest in this metal. And once silver’s upside momentum flagged last autumn, so too did traders’ interest in owning SLV shares. They were sold faster than silver on balance into mid-March’s COVID-19-lockdown-spawned stock panic, forcing SLV’s managers to sell silver bullion to sop up excess supply.

That stock panic was brutal for silver. After trading as high as $18.62 in late February, silver was crushed to a 35.8% loss over the next few weeks. Collapsing to $11.96 at its stock-panic nadir, that was a near-crash. Silver’s worst two-trading-day loss leading into that abysmal low was 18.9%, a little shy of the formal crash threshold of 20%+ in 2 trading days or less. SLV’s holdings slumped as low as 353.2m ounces.

But interestingly contrarian bargain hunters jumped in just a day before silver bottomed. One day after silver’s worst day of the panic, March 16th which saw silver plummet 12.8%, SLV’s holdings blasted up 3.4% to 365.2m ounces! With American stock traders starting to aggressively buy SLV again, that implied silver’s terrible stock-panic selloff was ending. And indeed silver soon started V-bouncing violently higher.

Over the next 6 trading days into late March, silver soared 20.6%. That was fueled by a massive 5.7% or 21.1m-ounce SLV-holdings build in that initial post-panic span. That catapulted SLV’s holdings to their first new record high after the panic, 391.9m ounces. Later by mid-April, silver would mean revert 30.6% higher. Stock traders buying SLV shares was the major driver, SLV’s holdings soared 10.6% or 39.4m ounces!

Silver stalled out for the next several weeks after that, and SLV’s holdings drifted sideways. But as silver started rallying again into mid-May, stock-market capital resumed pouring into silver via that SLV conduit. During May alone, SLV’s holdings blasted 12.2% or 50.4m ounces higher to hit 9 new record highs out of 20 trading days! I was surprised when they first crossed 400m in early April, so late May’s 463.3m was astounding.

Silver investment demand typically dries up in June, the summer doldrums when traders pull back from the markets to enjoy vacations. But American stock traders continued flocking to silver this year, driving SLV’s holdings up another 7.5% or 34.7m ounces last month. That was really impressive since silver only climbed 2.1%, rather pathetic compared to May’s huge 19.2% surge. Investors kept buying without silver rallying!

That unusual counter-seasonal strong investment demand continued into July. The trading day before the US Independence Day holiday, which usually makes for the lightest-volume trading week of the year for broader markets, SLV’s holdings crested 500m ounces for the first time ever! And that sizable July 2nd 0.8% build to 502.0m ounces happened on a day silver slumped 0.4%. Investors still wanted silver.

That was even more remarkable because silver had had little fanfare to that point. While it did V-bounce to mean revert out of that stock panic, silver had yet to regain pre-panic highs. As late as July 7th, silver had yet to close over late February’s peak. Silver still languished 1.9% lower, despite gold already being 8.3% over its own. Silver was greatly underperforming gold, which its price usually amplifies by 2x to 3x.

But investors still kept flooding in. As of this Wednesday’s data cutoff for this essay, SLV’s holdings had surged another 3.6% or 18.1m ounces month-to-date in July. During this past month, SLV’s holdings hit new all-time-record highs on half of all trading days! I’ve been intensely watching, analyzing, and trading silver and its miners’ stocks for over a couple decades, and I’ve never seen anything like that. It’s amazing.

Overall since its stock-panic nadir, silver has soared 62.6% in 3.9 months as of the middle of this week. That is actually 2.8x gold’s 22.0% post-panic upleg in that same span, on the high side of silver’s normal outperformance band. Driving silver’s big gains was the massive investment demand as evident in SLV’s holdings. They skyrocketed 39.2% or 145.2m ounces higher in that span, an unprecedented vertical blast!

As I’ve marveled at these colossal capital inflows into silver in recent months, I’ve wondered who is doing that buying. I’ve been worried it was the Robinhooders. Robinhood is a phone app that millennials use for stock trading. Funded by selling order-flow data to high-frequency-trading firms that can front run what Robinhood users are doing, Robinhood’s stock trading is commission-free. So millennials totally love it.

Plenty of surveys have shown they are plowing their government stimulus money from the CARES Act into trading speculative stocks. A big fraction of the one-time helicopter-money payments, the employment checks financed by PPP loans, and the $600-per-week federal unemployment bonuses have been shifted into Robinhood for stock trading. Robinhooders move as a herd, quickly bidding up then crashing stocks.

If they are behind the massive SLV-share buying, it probably isn’t sustainable. These speculators have a euphoric get-rich-quick mindset, and rapidly move on to the next big momentum play once upside flags. Interestingly Robinhood publishes data on how many of its users hold specific stocks. Before the stock panic, only about 8k owned SLV. While that has soared since, it only just crossed above 15k this week.

7k more Robinhooders wouldn’t move the needle in SLV. The average trading-account balance there is reported to run between $1k to $5k, which is nothing even compared to silver. So with 15k Robinhooders now holding SLV, the amount of capital they have deployed in it likely remains trivial. For comparison, their 10th-largest holding this week is Tesla with 484k users owning it. 942k now own Ford on its new Bronco.

The huge SLV buying isn’t coming from millennials chasing shiny new things, but from normal investors. While there’s no way to tell yet, I suspect institutional investors have led the charge into SLV rather than individuals. The reason is the differential SLV-share demand forcing that near-vertical holdings build has been highly consistent and disciplined. It has happened whether silver is rising, falling, or grinding sideways.

Individual traders tend to rush into silver only when it is surging to new highs to capture attention. Out of the 34 trading days since the stock panic where SLV’s holdings hit new record highs, silver only climbed to new post-panic bests on 11 of them. Whoever is migrating into silver is doing so strategically, slowly amassing big positions while ignoring sentiment swings driven by silver’s volatile price action. This has to be funds!

There’s anecdotal evidence supporting that. In my line of work, I have CNBC and Bloomberg on all day everyday in my office. I can unmute and listen to the interviews of fund managers when I’m working on spreadsheets and charts. Even before SLV holdings’ vertical explosion became this apparent, I heard a surprisingly number of fund managers say they were bullish on silver due to the Fed’s epic money printing.

They also cited silver’s rampant undervaluation relative to gold. My last essay on that came in early May, and I need to update that thread. In a nutshell for today, mid-week silver at $19.45 traded at just 1/93rd the price of gold. It took 93.1 ounces of silver to equal the value of a single ounce of gold. That hit an apocalyptic all-time-record low for silver of 124.1x during the stock panic, and averaged 81.1x in this silver bull.

If fund managers are waiting for silver to mean revert higher and overshoot relative to gold, they aren’t going away anytime soon. The historical average Silver/Gold Ratio is closer to 55x. At $1800 gold, that implies silver challenging $33! The funds aggressively adding silver positions will likely stay in and ride them for some time to come. And their buying forcing silver higher will attract in more traders in a virtuous circle.

The biggest beneficiary of higher silver prices is the stocks of its miners. The more of their quarterly sales derived from silver, and the better their fundamentals, the greater their upside leverage to silver. As an example, the purest silver miner with the highest percentage of revenues from silver in Q1’20 has seen its stock skyrocket 186.7% higher since mid-March! We recommended it low in our newsletters back in early April.

At Zeal we started aggressively buying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows. We’ve been layering into new positions ever since, with unrealized gains already growing as big as +138%! Our trading books are full of these fundamentally-thriving gold and silver miners that aren’t done running.

To profitably trade high-potential gold and silver stocks, you need to stay informed about what’s driving gold and silver. Our newsletters are a great way, easy to read and affordable. 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! Analyzing little-followed-but-essential indicators like SLV’s holdings can greatly improve trading success.

The bottom line is silver investment demand is exploding. American stock traders have flooded into SLV shares in recent months, vastly upping their silver portfolio exposure via the world’s dominant silver ETF. This silver buying has proven incredibly persistent, continuing even when silver weakens. That implies it is funds strategically building silver positions, on expectations for much-higher silver prices coming ahead.

The resulting enormous SLV-holdings builds are unprecedented, forcing them vertical to smash through many new record highs. That is unleashing a powerful virtuous circle for silver, with investment buying driving silver higher attracting in even more investors. Silver still has a long runway higher to mean revert back up to historic norms relative to gold. And the Fed’s epic monetary inflation should keep demand high.

(By Adam Hamilton)