Silver Shines, Gold Gains

Precious Metals Commentary

Wow, what a week. We have been talking about the need to own some precious metals to protect against the risk that government money printing to deal with the fallout from COVID gets out of hand.

Looks like people are starting to see the shiny light.

After popping and holding above $1,800, gold moved quickly into the $1,880s and is up over 4% in just one week.

However, it is silver that has really shined. Opening the week at $19.33, it moved a massive 17% to reach a high of $23.25 yesterday and has been trading around $22.60 as we write.
That 17% would put this week into the top 10 of weekly silver gains since 1968, and all of those top 10 occurred in the 1970s bull market.

ABC Bullion’s Global General Manager, and technical analysis wizard, Nick Frappell says that silver in US dollars has converged on the major upside target of $23 much faster than expected.

He says that he always expects prices to roll back after hitting major upside targets and positioning in Comex options also supports that view.

 
In the chart above note the highs of $21.36 in 2008 and $21.15 in 2016. With both of those at around the same level this was a significant resistance so once silver broke through them it would have hit a lot of stop loss triggers for anyone who was short. This additional buying was no doubt behind sending the market into a parabolic move.

In Aussie dollar terms the US price move puts gold back into the mid-2600s where it was trading a few months ago and silver at $32, a level it last saw in 2012 and one that Nick called in last week’s 360 Weekly Wrap.

After touching $23 it makes sense for the market to take a breather back to the mid $21s. In the long-term silver is clearly in a new bull market and the bottom at $11.50, as we mentioned back in April when we said that silver had a high probability of going exponential, will be looked back on as an epic buying opportunity.

Silver Stockpiles

The silver market, like gold, is secretive as a lot of trading occurs “over the counter” or off public exchanges. The US Comex futures market is one visible and significant source of activity that gives us some insight into the amount of buying that has been occurring.

The main measure of activity is “open interest”, which is the number of contracts being held or “open”. Traders are currently holding (or should we say betting on) 28,887 tonnes, or $28 billion, worth of silver.

Compared to the level of 23,328 tonnes held when silver peaked in 2011, that is not excessive and is down 25% on the number of contracts open just before COVID hit.

The group of traders known as “managed money” - futures accounts operated on behalf of individuals by professional money managers – have bought around 5,790 tonnes since the beginning of May, with short covering by that group also being a source of buying very recently.

As the chart below shows, their current net long position is not excessive historically.
 

 
What has increased dramatically is the amount of silver held in the warehouses that service Comex. For the five years following silver’s peak in 2011, Comex warehouse stocks averaged 5,500 tonnes but since mid-2016 they have been steadily climbing to 10,196 tonnes today.

Large stocks relative to open interest is often interpreted as a bearish sign as it may indicate surplus metal. However, that stock level may start reducing as the number of traders taking delivery of physical silver has increased by four times its normal rate.

Futures market traders, or should we say gamblers, usually close out their position before the contract moves into delivery. Normally only 2% of contracts stand for delivery but recently in silver that has moved to 8%, indicating that this move has some real physical demand behind it.

Another source of visible data on silver stocks are ETFs and other funds that report their balances. As of yesterday, there was 33,612 tonnes held globally in such vehicles, an increase of 3,135 tonnes in the last 4 weeks.

One final indicator of demand for silver comes from Zero Hedge who noted that Robinhood users have taken an interest in the big US silver ETF, making it the 16th most popular pick as of the past 24 hours.

At ABC Bullion, we were seeing a pick up in business in the previous few weeks but this week it has really ramped up, driven by both 2nd wave lockdown concerns as well as responding to the price rise.

Gold and Silver too Risky?

Silver’s dramatic rise speaks to the saying that silver is a leverage play on gold – when gold goes up often silver will go up more but the other side of the (silver) coin is that is can drop a lot more when gold goes down.

The recent moves in gold and silver will probably feed into the common perception that gold and silver are “risky” compared to blue chip stocks. For Australian investors this is not necessarily the case. The fact that the Australia dollar usually moves in the opposite direction to the US dollar helps smooth out volatility in US precious metal prices.

Below is a chart that Nick Frappell mentioned in his interview with Sky News Australia on Sunday but which got left on the cutting floor (if that saying makes any sense in this digital age).

It shows a measure of the volatility of some blue chip stock versus gold and silver in Australian dollars since the beginning of this year.
 

 
It is no surprise to see volatility increase as COVID hit but we think it will shock many to see that gold and silver were a lot less volatile both during COVID and after compared to stocks like Westpac or BHP.

The chart also shows that silver is more volatile than gold, both in normal times as well as in response to shocks like COVID.

Just another reason to allocate some of your portfolio to the shiny stuff to help diversify and protect your investments.
 
Until next time,

John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.
Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.