Silver to the Moon?

We have taken inspiration for my title to this post from the now trending Reddit community; where the short squeeze of GameStop was brilliantly done from the #wallstreetbets Reddit crowd. They also have a #wallstreetsilver Reddit forum which could be the next to go on a trending mode as a short squeeze was on the way recently but it halted at the critical 30 dollars level.

This post will be touching more on the fundamentals of silver rather than just pure speculation and hoping for a parabolic surge based on a short squeeze. A comparison of a short squeeze on SLV (the largest silver ETF) as compared to GameStop seems not logical: SLV short interest is just around 8% versus over 100% when Reddit traders were squeezing the hell out of the short-sellers.

What is the attractiveness of silver as an investment then? The simple answer to this question will be supply and demand. Currently, the supply and demand numbers are at around 1 billion ounces per year and so there is not much excess supply to go around.

 

Industrial Use

Silver demand as compared to Gold is multi-faceted: there are lots of uses for silver in the industrial space and gold is mainly used as a store of value. More than half of the 1 billion ounces per year are set aside for industrial use. Silver is used in many sunrise sectors such as solar, electric vehicles, medical, dentistry and others. The demand for industrial use would only accelerate in the future based on the uprising sectors such as solar and electrical vehicles.

Half of the remaining supply (250 ounces) would be used for investment purposes such as ETFs and physical silver. The other half will be for jewellery and silverware.

 

Change in Prospectus

Recently, SLV has a change of their prospectus with this statement:

“The demand for silver may temporarily exceed available supply that is acceptable for delivery to the Trust, which may adversely affect an investment in the Shares.

To the extent that demand for silver exceeds the available supply at that time, Authorized Participants may not be able to readily acquire sufficient amounts of silver necessary for the creation of a Basket.

Baskets may be created only by Authorized Participants, and are only issued in exchange for an amount of silver determined by the Trustee that meets the specifications described below under “Description of the Shares and the Trust Agreement— Deposit of Silver; Issuance of Baskets” on each day that NYSE Arca is open for regular trading. Market speculation in silver could result in increased requests for the issuance of Baskets.

Authorized Participants may be unable to acquire sufficient silver that is acceptable for delivery to the Trust for the issuance of new Baskets due to a limited then-available supply coupled with a surge in demand for the Shares.

In such circumstances, the Trust may suspend or restrict the issuance of Baskets. Such occurrence may lead to further volatility in Share price and deviations, which may be significant, in the market price of the Shares relative to the NAV.”

 

A layman interpretation of this change in the prospectus would signify that there could be a shortage of physical silver if there are further buying strength in the ETF (i.e.: SLV is not able to buy physical silver to back up further issuance of shares).

 

Fiat Money

The main contributing factor for a promising silver price move would be the irresponsible money printing and accumulation of sovereign debt around the world with the US being the biggest culprit.

The first chart below would be the M2 supply showing the money printing prowess with a huge surge in 2020. The second chart shows the US Debt at 28 trillion at this juncture.

 

 

When confidence is eroded with the state of the monetary system, there would be huge inflationary pressure as the currency’s worth will be greatly undermined given the huge supply in the market.

This would lead to a demand for hard assets such as gold, silver, commodities, etc which could hold value in an inflationary spiral environment. Normal men on the street would be more inclined to buy silver as it is known as the poor man’s gold till to their affordability.

When there is an increase in demand on the investment side and it is a herd mentality, the supply and demand equation would go hey wire. The industrial commercial users would also scramble to get their physical silver and that could only lead to higher silver prices.

The industrial users could hedge using Comex futures but Comex is known to hold just 10% of their total contract values in physical form. Imagine if all the industrial players demand physical silver delivery, the exchanges have to also go about trying to find physical silver to meet their obligations. This would add fuel to the escalating demand for silver that would be beneficial to the silver prices.

This is what many would deem as the financial armageddon and reverting to currency backed by hard assets such as gold that could be on the cards. The Fiat money system since the abandonment of Bretton Woods in 1971 would cease to exist if this scenario unfolds.

After painting such a bleak picture, we don’t think this would be our base thesis as we are sure someone (A Paul Volcker figure-Fed Chair in 1980) would come in and go hard on to implement discipline once there are clear signs of the market going into a financial armageddon mode. However, before that is happening; there could already be panic and we are in crisis mode that could drive silver to a stratospheric level.

However, the tough and unpopular guy have to make sure things don’t go overboard: Government cost have to be cut, taxes have to be raised, budgets have to be balanced. This is to bring an end to a hot raving party that is on steroids. Till then, the party goes on and everyone will be in dreamland thinking the party will never end.

 

Is SLV backed by physical silver?

Given the recent prospectus change, it makes us wonder if SLV is 100% backed by physical silver and if not and it is proven, it could lead to a loss of confidence in paper silver.

Moreover, central banks do not store silver as a reserve so it is not possible to be lending from the central banks to stabilise the price if things go out of control.

It leads to many commentators advocating to diversify and hold physical silver bars. It is also good to have diversity in the ETFs and we just found out that another popular Silver ETF, SIVR, have a lower management fee of 0.3% as compared to the 0.5% of SLV.

We have recently brought some physical silver bars apart from my existing holdings in SLV. The premium for main bullion dealers such as BullionStar would be around 15%-20% above the spot price that I find kind of excessive.

 

However, I did link up to some dealers through the web and online marketplace: their premium is around the 8%-10% premium range that I am more comfortable with. They provide the PMV to authenticate the Genuity of the silver bar. Also, for those looking to sell the silver at the end of the day, the price is usually at the spot price.

 

JP Morgan Positioning

The big player in the Silver market will be JP Morgan and so following their lead would usually be a wise move. They were recently fined 920 million for their involvement in the rigging of the Comex Silver markets that have been a cash cow for them through the years. It is more through a manipulated futures market for netting them such juicy returns.

Currently, JP Morgan is holding a huge hoard of physical silver in the range of 900 million ounces (Not able to verify apart from this article). They are net flat on the futures front at this moment where they are known to be the biggest shorts for the past 9 years. Therefore, following the big player or smart money is usually a sound thing to do.

 

Chartist Point of View

The known reserve of silver to gold is estimated at around 17x. Currently, the gold-silver ratio is standing at 65. During the pandemic crash, the Gold-Silver ratio was at an all-time high of 125 whereby they have since come back to a more reasonable level. If you are looking at the range over the years, the low was around 30 and the high is at around 90. Thus, there could still be further upside for silver based on the gold-silver ratio.

 

Next, we will be looking at the price chart of silver, the level of 22-25 could be a good accumulation range. If you look at the peak during the Hunt brothers short squeeze in 1980 and the peak in 2011 of 50 dollars, silver is still 50 per cent off its peak given that the stock indexes and property markets have seen outstanding returns through the past 40 years.

 

 

Summing Up

Given all the factors highlighted, we think silver has a good secular uptrend ahead. Even if the short squeeze and fiat money collapsing theories do not come into play, the industrial demand and inflationary pressures should give silver bar holders a decent return in the mid to long term time frame.

The current price of 25 falls within the range of 22-25 which we think is a good accumulation level. For exposure: Silver ETFs (SLV and SIVR), Physical Silver Bars and Silver Mining Stocks (eg: First Majestic) would be good proxies to ride this potential Silver Rush. We might not go to the moon but good times seems to be ahead for silver investors.

 

Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.