2023-12-28 14:45:37 ET
Summary
- Silver may be poised to embark on a long-awaited leg higher as gold consolidates above $2,000 and the industrial metals complex is breaking to the upside.
- The iShares Silver Trust ETF is the most popular ETF for silver investors and should continue to track the silver price closely, minus its 0.5% expense fee.
- Silver prices are depressed relative to gold, presenting an opportunity for silver to catch up as industrial demand recovers.
The bullish breakout in the industrial metals complex suggests that silver should mount a long-awaited recovery, and I remain bullish on the iShares Silver Trust ETF ( SLV ). Silver and the SLV have been locked in a large consolidation pattern for the past three years, and a bullish breakout seems like a matter of time. As I noted in my last article on the SLV in November, for silver to deliver strong returns we would need to see gold and industrial metals move higher, and this is now taking place. Silver has a long history of outperforming gold during periods of industrial metal strength as this tends to reflect increased industrial demand for the white metal, and this time is unlikely to be different.
The SLV ETF
The SLV is the most popular ETF for bullish silver investors, with $10.6bn in assets under management, even after experiencing sustained outflows since 2021. Despite fears of decoupling from the underlying silver prices, the ETF has tracked spot silver with very little tracking error since its inception. The main drawback of the ETF is its relatively high expense fee of 0.50%, which is higher than some competing ETFs, such as the abrdn Physical Silver Shares ETF ( SIVR ). However, this is offset by higher levels of liquidity, resulting in tighter spreads.
A Coiled Spring
The price action in the SLV over the past few years has reflected a large consolidation period following the surge higher from the Covid lows of 2020. From a long term perspective, SLV appears to be forming a large bull flag pattern, with an upside break looking increasingly likely. The December 1 high of $23.37 is the initial upside target, and above here would suggest a resumption of the larger bull market. As I have noted in previous articles on the SLV, silver bull markets tend to end with a bang and not a whimper, and I continue to expect a large spike higher over the coming years that draws in retail investors and speculators, as we saw most recently in 2021 and 2011.
SLV ETF Price Chart (Bloomberg)
Industrial Metals Rally Points To Recovering Industrial Demand For Silver
With gold consolidating its own gains above the $2,000 level on the back of the rapid reversal lower in US inflation-linked bond yields, there is significant room for silver to catch up, and the break higher in the industrial metals complex suggests now is the time.
The S&P GSCI Industrial Metals index has mounted a strong recovery after holding firm above the $400 level, as the global rally in risk assets has begun to feed through into economically sensitive resources. Strength in industrial metals over the past two decades has almost always occurred alongside strength in silver, and as silver tends to be much more volatile than gold, it has also occurred alongside a recovery in the ratio of silver to gold prices.
Industrial Metals Index Vs Silver and Silver/Gold Ratio (Bloomberg)
Silver prices are extremely depressed relative to gold, with the ratio sitting at its 8th percentile of readings over the past 20 years. Silver's underperformance is particularly noteworthy given that gold is near all-time highs, as silver tends to outperform during gold bull markets due to its higher level of volatility. If we adjust for the relative volatilities of the two metals, silver's underperformance over recent years is unprecedented.
Overly Aggressive Rate Cut Expectations Pose The Main Risk
As I argued in November, the main risk to the SLV comes from a prolonged pause in the Fed funds rate. Rate markets are now pricing in an aggressive easing cycle in 2024, with almost 160bps of rate cuts priced in. However, financial conditions easing amid the risk rally, with the Goldman Sachs US Financial Conditions Index now at its 'easiest' level since August 2022, which may make it difficult for the Fed to ease as aggressively as expected. Any prolonged rate pause would likely undermine silver's appeal as a store of value. That said, silver should still perform well relative to gold in such a scenario, particularly in risk-adjusted terms. As for the risks facing the SLV specifically, fears that the ETF will decouple from the silver price which proliferated in early 2021 appear unfounded as the SLV has continued to move in lockstep with the metal with near zero tracking error.
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Industrial Metal Breakout Points To Silver Rally