At this stage, it’s clear that investors have come to realize precious metals trades are surging and these bullish trends have sent the iShares Silver Trust (NYSEARCA: SLV) to gains of over 90% after hitting its 2020 lows. However, it was not always the case that markets were expected to reach these types of lofty achievements. In recent months, bullish investors have benefited from global trade tensions, generalized economic uncertainties, and widespread risk-off sentiment as valuations in SLV continue moving higher. But as investors begin to cope with the true economic aftermath of the COVID-19 pandemic, it’s also becoming clear that markets might be in the early stages of historic price moves that could redefine ways investors view the precious metals complex for years to come. As long as broader trends in the market’s gold/silver ratio continue to revert to the mean, investors should consider buying SLV if expectations for negative performances in corporate earnings cause disruptive changes in market volatility this earnings season.
In all of the buying activity, investors seem to have forgotten SLV as a safe haven contender because most of the focus has been placed on its high-liquidity counterpart in the SPDR Gold Trust (NYSEARCA: GLD). However, the savviest investors in the precious metals market have been aware of the fact that SLV was due for its “time in the sun” for quite some time and it now looks as though long-term trends are ready to align valuations in a more reasonable fashion.
On March 25th, I published an article which argued that silver was on the verge of making its most important price move of my lifetime. This bullish outlook was based largely on the market’s clear need to find safe-haven value in precious metals assets when investors were faced with unprecedented levels of volatility in virtually every other asset class. Of course, all of the predictions in the world fail to matter much if investors don’t actually make the decision to enter the market and begin to change the dominant trends that have been in place for decades. For these reasons, investors must sift more deeply through this changing paradigm and make an attempt to understand what has already started to occur in the market over extended time horizons.
Over the last six months, the trends visible in the market data suggest that dramatic underlying changes have already started taking place. During this time, the iShares Silver Trust has benefited from inflows of more than $3.4 billion, which is far greater than the fund’s long-term averages. Obviously, these are substantial inflow numbers but we should also remember that this $3.4 billion figure even includes the massive outflows that were recorded during the initial COVID-19 collapse. At this stage, bullish sentiment has clearly dwarfed any attempt by the bears to drive market prices lower and valuations in SLV have benefited greatly during this entire process.
For SLV, the bullish activity has remained consistent for most of the trading periods recorded during the last six months. But we can also compare trends from this time frame to those seen over the last 10 years as a way to more fully understand the magnitude of these moves. Over the last 10 years, the iShares Silver Trust has seen inflows of nearly $4.6 billion and this tells us that the recent buying activity in SLV is far above the instrument’s long-term averages.
Source: International Monetary Fund
In large part, these trends have actually been propelled by central banks around the world. At current levels, we can see that global central banks have started buying precious metals assets at rates that have not been seen in more than 50 years. As long as these broader trends continue, we can reasonably expect precious metals assets to hold their elevated valuations and this suggests that instruments like GLD and SLV have not become overbought (even with the dramatic rallies that the market has seen recently). One factor that could generate continued demand for precious metals assets in central banks around the world could be the rising public debt levels that have emerged as a result of the COVID-19 pandemic. Global public debt (as a percentage of GDP) is now expected to surpass the levels that were seen during the 2008 financial crisis. If these trends have a negative effect on the market valuation of the U.S. dollar and other fiat currencies, safe-haven instruments like the iShares Silver Trust (which is priced in dollars) should continue moving higher.
Source: Author via Tradingview
We should also note that there are strong reversals that are currently emerging within the market’s gold/silver ratio. Since the end of March 2020, the gold/silver ratio has fallen by more than 35% and this sharp reversal appears to be characterized by rising momentum. If these trends continue, the bullish trading implications for the iShares Silver Trust could swamp anything that is currently seen in instruments that are more directly connected to the gold markets. For these reasons, the SPDR Gold Trust is much more likely to underperform relative to SLV for the remainder of this year.
However, we should also note that the longer-term trends in the market’s gold/silver ratio remain elevated and this shows that there is still plenty of room to fall during the remainder of this year. As long as we can reasonably expect market trends to revert to the mean, the implications are highly bullish for silver markets and this creates an even more favorable outlook going forward for anyone considering SLV long trades.
Given the strength of the momentum in recent moves, we expect to see a higher base going forward. Specifically, we could see a base develop just below $19 per ounce longer-term. As a trading instrument with lower liquidity levels, the iShares Silver Trust tends to see supply become engulfed rather quickly once strong waves of bullish trading activity enter into the market. With that in mind, we expect the $18.90 level to begin working as resistance turned support in the event that price declines become visible going forward.
When considering a potential trading strategy in SLV, it is critically important to understand the instrument’s price history. For most of the last decade, we can see that SLV tends to be caught in heavily constricted ranges and this is precisely the reason which explains why recent breakout moves are historic in nature. While most of the world struggles in its efforts to generate a sustainable economic recovery in the face of an unprecedented pandemic, market re-balancing in industrial supply/demand has enabled a scenario in which silver bulls are truly able to take prices higher in historic fashion. While it might be true that portions of the world economy might start to see improvements after the COVID-19 lockdowns, losses in global productivity related to the pandemic are now expected to reach $12.5 trillion. Ultimately, this is a macroeconomic scenario that should continue to stoke safe-haven buying activity in SLV and we recommend buying on dips in anticipation of further runs higher.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.