Silver’s dazzling parabolic surge this summer was overwhelmingly driven by enormous silver ETF share buying. Led by momentum-chasing millennial traders, unprecedentedly huge amounts of stock market capital deluged into the dominant iShares Silver Trust ETF (SLV). But since silver’s resulting lofty peak, silver ETF share selling has been mounting. An acceleration is a major downside risk for silver prices.
Silver has certainly lived up to its wildly volatile reputation this year. Ahead of mid-March’s brutal stock panic driven by governments’ heavy-handed national lockdowns to slow the spread of COVID-19, silver was inconspicuously grinding higher. In late February, before pandemic fears flared in the US, silver was running $18.62. But it was then soon sucked into the epic maelstrom of fear as stock markets cratered.
Outsized stock market fear infecting silver is normal. Herd psychology has an unusually strong influence on silver price levels. Traders rush to buy silver when they grow bullish and excited, catapulting its price far higher. But when they get bearish or worried for any reason, they drop silver like a bad habit, forcing steep plunges. The global silver market is tiny, further amplifying the price impacts of material capital flows.
Over the next several weeks or so into mid-March, silver collapsed 35.8% to $11.96. That deep 10.9-year secular low utterly annihilated all bullish sentiment. And 4/9ths of that plummeting was compressed into just two trading days where silver collapsed 18.9%! That proved a near-crash, crowding the formal crash threshold of a 20%+ loss in two trading days or less. That stock panic totally rebooted silver psychology.
It left silver radically oversold, trading at just 0.704x its 200-day moving average. Anything under 0.90x is extremely oversold and unsustainable. Sub-$12 silver prices were fundamentally ridiculous as well. In Q1’20, hosting that rare stock panic, the world’s major silver miners reported average all-in sustaining costs of $13.45 per ounce. No commodity’s price can languish well below the world production cost for long.
Silver indeed started violently V-bouncing out of those crazy stock panic lows. Its initial gains were big and fast, with silver blasting 19.4% higher in the first four trading days out of that deep nadir! After that, silver’s post-stock panic upleg throttled back into something much more sustainable. By early June, silver had surged 52.8% over 2.5 months, hitting $18.27. Fully 95% of its stock panic losses had been regained.
Silver stalled from there, consolidating high over the next five weeks into early July. It wasn’t overbought at all at that initial post-panic interim high, trading at just 1.081x its 200-DMA. Historically, extreme levels of silver overboughtness warning of imminent selloffs start at 1.25x. Silver’s strong post-panic gains to that point were fueled by heavy differential SLV share buying. Understanding how silver ETFs work is essential.
The mission of silver exchange-traded funds is to track silver price action. But the supply and demand for ETF shares is independent from silver’s own, leading to constant imbalances that must be addressed. Excess ETF share supply or demand relative to silver’s own must be directly shunted into the underlying global physical silver market. If that didn’t happen, silver ETF share prices would soon decouple from silver’s.
The American fund SLV overwhelmingly dominates the silver ETF space. It pioneered silver ETFs, launching way back in April 2006. Its lead has grown insurmountable since. The world authority on silver’s fundamentals is the venerable Silver Institute. Once a year, it publishes comprehensive data on global silver supply and demand in World Silver Survey reports. The most recent was released in April.
That covered 2019, where SLV exited holding 362.6 million ounces of physical silver bullion in trust on behalf of its shareholders. The WSS declared that gave SLV a commanding 49.8% share of all the silver bullion held by all the world’s physically backed silver ETFs! SLV has gobbled up half of the global silver ETF market. The next-biggest competitor out of Switzerland only ranked at 11.4%. SLV is truly in a league of its own.
Silver ETF share buying and selling really moves silver prices at the margin because it is the most volatile source of silver demand by far. Most silver usage is relatively stable year after year, as evident in the Silver Institute’s annual data. But silver ETF silver demand is radically volatile. It swung from -22.3 million ounces in 2018 to +81.7 million in 2019, up to 8.2% of overall demand. The WSS forecast for 2020 is +120 million, or 12.5%.
And that pre-pandemic outlook for exploding silver ETF share demand is…
Read More: Silver ETF Selling Mounting (NYSEARCA:SLV)