2023-10-24 14:28:14 ET
Summary
- ETFMG Prime Junior Silver Miners ETF has been moving lower, but patience and perseverance in silver could lead to long-term success.
- Gold is heading for a challenge of previous highs and higher gold prices are favored despite rising interest rates.
- Silver attracts more speculative interest, and its volatility is higher than gold's, but it has held the $20 level despite market challenges.
In a May 2, 2022, Seeking Alpha article, I suggested that ETFMG Prime Junior Silver Miners ETF (SILJ) was a “ high inflation play .” The ETFMG Prime Junior Silver Miners ETF was at the $12.29 level on April 29, 2022. On November 10, 2022 , I highlighted the silver-gold ratio that could push SILJ high from $10.53 per share.
SILJ has been moving lower over the past months, and while a scale-down buying approach has achieved a lower average cost, the average is still above the current exchange-traded fund ("ETF") price at the $9 per share level.
I continue to favor SILJ, as patience and perseverance in silver could be the most critical factors for long-term success.
Gold and silver have been hard currency for thousands of years. After a significant correction from the May 2023 high, gold has been rallying since the October 6 low. Silver reached its most recent bottom on October 4, when the trend turned higher. On October 4, SILJ traded under $8 per share and has made higher lows and higher highs over the past weeks.
SILJ remains in a bearish trend, but the recent price action suggests a significant rally could be underway. Now is the time to increase holdings in the ETF that owns a portfolio of the leading junior silver mining companies.
Gold heads for a challenge of the 2022 and 2023 highs
The continuous COMEX gold futures contract reached a record $2,072 per ounce high in March 2022. In May 2023, the precious yellow metal rose to the same price, where it ran out of upside steam, creating a bearish double-top formation.
The monthly chart shows the correction from the double-top that took gold to a $1,809.40 per ounce low in early October. Last week, gold probed over the $2,000 level on the active month December contract, with the continuous contract rising to nearly the $1,990 level. Meanwhile, a close above $1,950 at the end of October will create a bullish key reversal pattern on the monthly chart. The last monthly bullish reversal in November 2022 propelled gold futures to the $2,072 high in May 2023. The odds favor higher gold prices despite soaring interest rates and strength in the U.S. dollar as geopolitical tensions support higher gold prices. Moreover, since the turn of this century, all corrections in gold have led to higher highs.
Silver attracts more speculative interest- Silver volatility is higher than gold volatility
Silver’s low price compared with gold and its historical correlation with the leading precious metal causes silver to attract more investment and speculative interest when gold prices are trending higher.
Silver futures prices tend to be far more volatile than gold futures prices.
The chart shows that the monthly historical volatility in gold futures was 15.69% on October 24.
The same price variance metric in silver stood at 28.83%, nearly double gold’s monthly historical volatility. Historical price action tells us to expect elevated price variance in silver during bullish moves in gold.
Silver has held the $20 level despite the bond market carnage and recovery in the U.S. dollar index
In May 2022, when gold peaked at $2,072 per ounce, silver futures prices reached $26.20 per ounce. Gold corrected 12.7% to $1,809.40 in early October, while silver’s $20.76 low was a 20.8% decline.
While gold must close October above the $19.50 level to create a bullish reversal on the monthly chart, silver’s target to achieve the same technical formation is above the current $23.085 price at $24.84 per ounce, the September 2023 high.
Gold and silver corrected from the May peaks to the early October lows as interest rates soared and the dollar index corrected higher.
The monthly chart highlights that silver held the $20 level over the past months despite the bearish impact of rising rates and a stable-to-stronger U.S. dollar, two factors that tend to weigh on silver and gold prices. Meanwhile, silver’s 2023 low at $19.83 was in March, before the move to the 2023 $26.20 peak. Silver’s ability to hold $20 during the most recent correction was a testament to its underlying price strength.
Silver mining shares tend to provide leverage to the silver price- Junior mining shares can be more volatile than senior mining shares
Shares of precious metal producers provide leverage to the underlying metals prices by investing significant capital to extract them from the earth’s crust.
Individual mining companies have specific risks, including management, mine location, and other idiosyncratic factors. Mining ETF products can mitigate some of the specific risks as they own a portfolio of companies. The top holdings of the Global X Silver Miners ETF product (SIL) include:
At $24.82 per share on October 24, SIL had nearly $850 million in assets under management ("AUM"). SIL trades an average of over 380,000 shares daily and charges a 0.65% management fee. December COMEX silver futures recovered 10.7% from the early October $20.85 low to $23.085 on October 24.
SIL rose 10.3% from $22.57 to $24.82 per share over the same period. While SIL mostly kept pace with silver during the most recent rally, the ETF has outperformed the metal on a percentage basis during past rallies. SIL holds a portfolio of senior, established silver mining companies, while the ETFMG Prime Junior Silver Miners ETF owns junior silver mining companies:
While there is some overlap, SILJ’s holdings tend to be more volatile than SIL’s as junior mining companies are more speculative investments. At $8.74 on October 24, SILJ had $600 million in assets under management. The junior silver mining ETF trades an average of around 1.35 million shares daily and charges a 0.69% management fee.
Since early October, silver rose 10.7%, and SIL was 10.3% higher. SILJ moved 10% higher from $7.94 on October 4 to $8.74 on October 24. The junior and senior silver mostly kept pace with silver prices over the past weeks. However, if silver takes off on the upside, expect the leveraged mining shares and senior and junior ETF products to outperform the price action in silver futures as a herd of trend-following speculative and investment capital floods into SIL and SILJ.
Long-term volatility readings highlight the opportunity
Monthly historical volatility in the silver futures arena is at the 28.83% level. The metrics on SIL and SILJ are higher, as the ETFs displayed higher price variance over the past years.
SIL’s historical volatility reading stood at 30.83% on October 24.
Meanwhile, the SILJ ETF’s 33.50% monthly price variance implies that it will outperform silver and SIL on a percentage basis if the silver price breaks higher over the coming weeks and months.
SIL and SILJ have kept pace with silver since early October, which means they offer value based on historical price action. I am bullish on silver because the price held up well during the recent correction. Geopolitical factors are trumping interest rates and currency markets. ETFMG Prime Junior Silver Miners ETF could be the product of choice in the current environment.
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The Time Could Be Right For The SILJ ETF That Offers VALUE