The silver miners’ stocks have mostly drifted sideways this year, looking vexingly comatose. Such dull price action repels speculators and investors, so they’ve largely abandoned this lackluster sector. That weak trader participation has led to silver stocks’ responsiveness to silver price moves decaying. What can shock silver stocks out of their zombified stupor? And how soon is such an awakening catalyst likely?
Silver stocks’ flatlined behavior so far in 2017 is surprising and odd. Silver-stock prices are ultimately driven by silver-mining profits, which are overwhelmingly driven by prevailing silver price levels. Silver in turn is slaved to gold’s fortunes, the yellow metal is the white metal’s dominant primary driver. With gold faring quite well this year despite the euphoric record stock markets, silver and its miners’ stocks should be shining.
Since silver is a tiny market compared to gold, silver’s moves tend to leverage gold’s. The best global silver and gold supply-and-demand fundamental data available comes from the Silver Institute and World Gold Council respectively. According to them, worldwide silver and gold demand last year ran 1027.8m ounces and 4337.4 metric tons. Along with average prices, these can be used to approximate market sizes.
Silver and gold averaged $17.12 and $1250 last year. Run these numbers, and 2016’s total global silver and gold markets were worth about $17.6b and $174.3b. This latest-available data shows silver’s market is literally an order of magnitude smaller than gold’s! With silver only enjoying 1/10th the capital flows of gold, silver tends to be far more responsive. Any dollar of buying or selling is 10x more impactful for silver.
The silver market’s small size is one of this metal’s greatest strengths. Compared to the vastly-larger broader markets, it doesn’t take much new buying to catapult silver dramatically higher. Speculators and investors alike usually get interested in shifting capital into silver when gold is already rallying. Silver then tends to rally much more than gold, leveraging its upside, because silver inflows are relatively larger.
Given gold’s good performance this year, silver and the stocks of its miners should’ve surged. Year-to-date gold is up 11.3%, well ahead of full-year 2016’s 8.5% gain. But instead of amplifying gold’s 2017 advance by 2x to 3x like usual, silver is only up 6.7% YTD as of this week. This makes for really poor leverage to gold of 0.6x. Last year silver rallied 15.1%, yielding still-weak-but-more-normal 1.8x upside leverage.
Silver’s serious underperformance relative to gold this year has greatly retarded traders’ interest in the silver miners’ stocks. The leading silver miners’ trading vehicle and sector-index proxy is the SIL Global X Silver Miners ETF. Because of the great profits leverage to silver inherent in the silver miners, their stocks usually amplify silver’s upside. But YTD SIL is only up 4.0%, for extremely-poor 0.6x leverage!
Gold stocks aren’t having a great year either, with their leading GDX ETF only up 11.5% YTD compared to gold’s 11.3% gains. Like silver stocks, their gains tend to multiply their underlying metal’s gains by 2x to 3x. But the gold stocks’ weak in-line performance so far in 2017 highlights just how bad silver stocks’ lagging performance is. They have been largely drifting comatose this year, hardly even responding to silver.
Silver stocks have serious problems, and they certainly aren’t fundamental. Every quarter I analyze the latest operating and financial results from the top silver miners of SIL. They will soon start reporting their new Q3’17 results, but the prior quarter’s are the latest now available. In Q2’17 SIL’s elite top silver miners reported average all-in sustaining costs of $11.66 per ounce, well below average silver prices of $17.18.
That implies hefty industrywide silver-mining profits of $5.52 per ounce. While the average silver price did slump 2.0% sequentially in Q3 to $16.84, that’s certainly no fundamental threat. Assuming flat mining costs, the silver miners still should’ve been able to earn $5.18 per ounce last quarter. That’s down 6.2% quarter-on-quarter, but is still very profitable. Fundamentals can’t explain silver stocks’ vexing malaise this year.
That narrows down the suspect list to technicals and sentiment. This first chart looks at the price action in SIL and silver over the past couple years or so. Silver miners’ responsiveness to silver moves was excellent last year, but is decaying dramatically this year. With speculators and investors abandoning this sector, it’s barely budging. That has spawned a vicious circle convincing other traders to avoid silver stocks.
Silver stocks’ troubling lethargy is new this year. Back in December 2015 two days before the Fed’s first rate hike of this cycle, silver slumped to a major 6.4-year secular low in concert with gold. Silver stocks bottomed just over a month later in January 2016 paralleling the gold stocks. SIL fell to an all-time low in split-adjusted terms that day. A couple months earlier, Global X had executed a 1-for-3 reverse split in SIL.
Silver stocks were so deeply out of favor in late 2015 that this leading ETF’s managers feared SIL’s price would collapse low enough to risk delisting! Out of that very despair, strong new bull markets in silver and its miners’ stocks were born. In just 6.9 months from mid-January to mid-August 2016, SIL rocketed 247.8% higher on a 40.6% silver rally! That made for outstanding 6.1x upside leverage to silver prices.
Naturally silver and its miners’ stocks were soon sucked into gold’s correction following its own new bull’s initial upleg. Those silver and SIL corrections ballooned to monstrous proportions, thanks to gold-futures stops being run then Trump’s surprise election victory unleashing stock-market euphoria. So over the next 4.2 months, silver and SIL plunged 20.1% and 42.5%. SIL’s downside leverage to silver of 2.1x was modest.
2016’s behavior is the way silver stocks normally react to silver-price moves. The blue SIL and red silver lines above were closely intertwined last year. Silver stocks generally rallied and fell sharply in lockstep with silver itself. This normal behavior carried over into the first couple months of 2017, when SIL surged 33.6% between late December 2016 and early February 2017 on a mere 12.5% parallel rally in silver itself.
Silver stocks were leveraging silver’s upside by 2.7x, near the high end of their usual 2x to 3x range. So back in late January the silver stocks’ 2017 prospects looked really bullish. Things started going awry in February and March. The silver stocks corrected hard, plunging 21.1% in a month on a relatively-small 4.5% silver pullback. That made for big 4.7x downside leverage that was quite excessive, scaring traders.
So they started to flee silver miners’ stocks, a trend that’s continued ever since. With each subsequent silver rally since March, silver stocks have become less and less responsive to silver upside. This year’s blue SIL line above is no longer mirroring and amplifying the underlying volatility in the red silver line. It’s as if silver stocks are flatlining relative to silver, which is very strange. I can’t recall seeing anything like this.
Thus silver stocks have been stuck in a descending-triangle consolidation pattern for much of this year. They finally enjoyed breakouts from this triangle’s upper resistance and SIL’s 200-day moving average in August, mirroring similar major breakouts in gold stocks. But silver stocks’ responsiveness to silver continued decaying. In a month leading into early September, SIL only climbed 11.3% on an 11.5% silver rally.
Technically it looks like silver stocks have largely disconnected from silver. They’ve lapsed into this super-weird zombified comatose state. Speculators and investors alike aren’t the least bit interested in silver miners today, because they’re performing so poorly. And the resulting lack of participation in this sector scares away other traders, exacerbating the problem. Silver stocks have effectively been left for dead.
After decades studying and actively trading silver stocks, I’ve pondered this strange anomaly quite a bit in recent months. It’s certainly not fundamentally-driven, as silver miners’ earnings are looking good. It’s likely not technical either. While silver stocks are really underperforming, they haven’t suffered a serious selloff. SIL’s triangle support around $33 has held rock solid all year long, so this is a consolidation not a correction.
That leaves sentiment as the culprit behind silver stocks’ vexing stupor this year. Traders’ psychology is important in all markets, but disproportionately so in silver. Silver is a tiny highly-speculative market, exceptionally sensitive to shifting winds of sentiment. While weak technicals breed bearish sentiment and that becomes self-reinforcing, there had to be some root causes poisoning silver psychology earlier this year.
I suspect multiple factors are to blame. Once again silver sentiment is heavily dependent on gold. In the wake of Trump’s election win almost a year ago, stock markets soared in Trumphoria on hopes for big tax cuts soon. That hammered gold, which is hostage to stock-market fortunes. Gold is an anti-stock trade that usually moves counter to stock markets, so gold investment demand collapsed after the election.
Gold’s own psychology was utterly miserable late last year, exceedingly bearish. When gold fell to $1128 right after the Fed’s second rate hike of this cycle last December, Wall Street forecasts calling for a plunge under $1000 exploded. Traders don’t get interested in silver until gold is already rallying, so the extreme gold gloom and doom late last year certainly tainted silver sentiment. It has yet to recover from that.
Though gold bounced sharply and has enjoyed a good 2017, silver oddly didn’t join in. Gold itself likely played a major role. Despite gold’s gains this year, gold sentiment has remained pretty bearish. With the stock markets magically levitating in Trumphoria on those fervent big-tax-cuts-soon hopes, gold was flying under traders’ radars. With virtually no enthusiasm for gold, silver psychology had nothing to feed on.
The speculative traders who flock to silver for its sharp rallies and big gains were finding greener pastures elsewhere. Throughout the year various mainstream stock-market sectors have surged, so traders could find strong gains outside the precious metals. I’m certain this year’s extraordinary bitcoin bubble diverted interest away from silver too. The stratospheric skyrocketing of bitcoin prices has captivated traders.
Bitcoin’s value is hyper-speculative, as bitcoins are a synthetic virtual construct given perceived worth by software creating artificial scarcity. Having been in the financial-newsletter business for almost a couple decades now, I hear and read endless market anecdotes. This year I’m seeing the same types of traders who are usually interested in speculative silver raving about bitcoin instead. Bitcoin is a speculative mania!
Both in my own private feedback from countless traders around the world, and on the Internet’s popular gold and silver forums, the usual gold and silver conversations have shifted to gold and bitcoin this year. There’s no doubt bitcoin has stolen some limelight from silver, and almost certainly sucked away some of the capital that would’ve flowed into silver in 2017 too. Bitcoin is this year’s alternative speculation of choice.
But bitcoin’s meteoric rise won’t eclipse silver forever. Silver investment has been around for millennia, but bitcoin was just introduced in January 2009. As of this week bitcoin is up an astounding 485% YTD in 2017 alone! Such extreme vertical gains are never sustainable, as history has abundantly proven. So bitcoin’s epic competition this year for mindshare and capital from traditional silver speculators won’t last.
While bitcoin is definitely a factor in the lack of interest in silver and silver stocks this year, these record-high Trumphoria-goosed stock markets are far more important. As long as gold psychology is bearish as stocks seemingly do nothing but rally forever, silver’s speculative appeal will languish. Once these lofty stock markets inevitably roll over, gold and therefore silver investment will return to favor just like in early 2016.
Gold and silver slumped to brutal 6.1-year and 6.4-year secular lows in December 2015, everyone hated the precious metals. But the US stock markets finally succumbed to their first corrections in 3.6 years, an extreme near-record span. As the S&P 500 fell 12.4% in 3.2 months in mid-2015 followed by another 13.3% in 3.3 months into early 2016, long-neglected gold and silver demand returned with a vengeance.
Gold and silver surged 29.9% and 50.2% higher over the next half-year or so, igniting their first new bull markets in years! The next correction-grade stock-market selloff, over 10% on the S&P 500, will spark another renaissance in gold and silver investment demand. After being miraculously delayed for so long, that next major stock-market selloff is overdue and imminent. The risk factors stacking against stocks are legion.
The US stock markets are literally trading in bubble territory, over 28x earnings on the traditional trailing-twelve-month basis. They’ve rallied so long and so high that euphoria is extreme, with all measures of sentiment showing dangerous bull-slaying levels. And the Fed just birthed quantitative tightening for the first time in history, which is exceedingly bearish for these quantitative-easing-inflated artificial stock markets.
The stock markets finally decisively rolling over is the most-likely catalyst to shock silver and the stocks of its miners out of their comatose malaise. The silver stocks are perfectly poised for a first-half-of-2016-like scenario, where SIL rocketed 247.8% higher in just 6.9 months. The driver will be silver’s next major bull-market upleg. Silver remains radically undervalued relative to gold, thus enjoying colossal upside potential.
This next chart looks at the Silver/Gold Ratio, which simply divides the daily silver close by the daily gold close. Technically that results in little decimals that are hard to parse mentally, so I prefer using a scale-inverted gold/silver ratio which is the same thing. It yields more-meaningful whole numbers like 75.5 where the SGR stands today. This is way too low based on historical precedent, an unsustainable anomaly.
This week it took over 75 ounces of silver to equal the value of one ounce of gold. That’s a really-high SGR historically, meaning silver prices are really low relative to gold. Silver’s extreme undervaluation is a key reason speculators and investors aren’t interested in silver stocks today. That will change dramatically as silver inevitably resumes mean reverting higher relative to gold. Silver will outperform for a long time.
Before 2008’s stock panic, the SGR averaged 54.9. After the stock panic between 2009 to 2012, the SGR averaged 56.9. So outside of the extreme SGR anomalies driven by the stock panic and later the Fed’s QE3-conjured stock-market levitation from 2013 on, a mid-50s SGR is normal. This has proved true all throughout modern history due to geological and relative silver-and-gold supply-and-demand reasons.
During late 2008’s stock panic, the SGR briefly averaged an extremely-low 75.8. That soon gave way to a sharp mean reversion higher to reestablish silver’s usual relationship with gold. That mean reversion overshot dramatically, as is often the case with silver after an SGR extreme. In April 2011 when silver was enjoying mania-like popularity the SGR briefly peaked at 31.7! Silver’s upside is extreme after low SGRs.
Incredibly since Q4’15, when silver and gold hit their major 6-year secular lows, the SGR has averaged just 73.6. That’s not much better than late 2008’s stock-panic levels! So silver is long overdue to mean revert relative to gold, rallying much faster than gold for months on end until this relationship is restored. We don’t need to assume a likely overshoot, as a simple mean reversion alone would drive huge silver gains.
Assuming a 56 normal SGR, at this week’s $1280 gold price silver should be trading over $22.75. That’s 35% above prevailing price levels. But with gold itself readying to rally, silver’s mean-reversion targets climb much higher with gold prices. Another 30% gold upleg like in early 2016, which is modest by gold’s historical standards, would take it to $1665. At a 56 SGR, silver would have to soar 75% to around $29.75!
Since silver prices remain so depressed relative to their primary driver gold’s, the silver upside potential from here is enormous. This overdue silver mean reversion higher is what will shock silver stocks back to life. Once speculators and investors see silver starting to run, they are going to flood back into beaten-down silver stocks with reckless abandon. That will catapult this small sector radically higher like in early 2016.
The trigger reigniting silver will be gold powering higher, and again that will likely result from these crazy stock markets rolling over. Once these bubble-valued stock markets start decisively weakening, traders will rush to return to gold, silver, and their miners’ stocks to prudently diversify their stock-heavy portfolios. The Fed’s QT juggernaut ramping up over the next year will likely set this chain of events in motion.
Recent months’ comatose silver stocks are largely the product of general-stock euphoria leaving silver radically undervalued relative to gold. Silver psychology is very bearish, so traders aren’t the least bit interested in owning its miners. Sprinkle in the extreme allure of the bitcoin mania for the speculative traders who crave silver’s normal volatility, and that explains 2017’s serious anomaly in silver and silver stocks.
When this all changes, silver will move fast. This restless and volatile metal has a long history of drifting sideways and doing little. But occasionally the winds of sentiment shift enough to ignite enormous bull markets and uplegs generating fortunes. Traders who have the discipline to wait out silver’s sometimes-vexing consolidations are greatly rewarded when capital really flows into silver again, catapulting it far higher.
The greatest gains in this next major silver upleg won’t be won in silver-stock ETFs like SIL. They are burdened with too many companies that aren’t primary silver miners, the majority of their revenues come from other metals. So they aren’t very responsive to silver’s upside. But the purer individual silver miners with superior fundamentals will enjoy massive gains trouncing the ETFs. They are the best way to play silver.
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The bottom line is silver stocks have largely drifted comatose this year, with decaying responsiveness to silver moves. The extreme stock-market euphoria has left gold psychology bearish, bleeding into silver sentiment. And the spectacular bitcoin bubble has diverted speculative traders’ interest and capital away from silver as well. All this has led traders to largely abandon silver miners, condemning their stocks to consolidate.
But the likely catalyst to shock silver stocks from their zombified stupor is nearing with each passing day. Once these QE-inflated stock markets inevitably succumb to QT, gold and silver investment demand will return. The tiny silver market will rapidly surge on major capital inflows, with lots of room to mean revert far higher relative to gold. Then speculators and investors alike will rush to buy the cheap silver miners’ stocks.
Adam Hamilton, CPA
October 20, 2017
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