- Prepare for Volatility
- Inflation + Organic Demand = Rally
- Multiple Ways to Trade Silver
- Wait and Watch or Establish a Toehold?
Interest in silver has exploded recently with metal rising to $30 per ounce for the first time since 2013. The spike may have been caused by speculation that the Reddit Army will train its retail swarm on silver next trying to engineer a short squeeze similar to GameStop. But there are valid fundamental and technical reasons to think that the move in silver is more than just a flash in the pan.
Prepare for Volatility
Over the past few days the inflows into the #SLV silver ETF has ballooned increasing by $1.6 Billion. A large part of the move is likely coming from Robin Hood accounts that understand that the ETF must stockpile the physical product as demand for shares rises. All of this jockeying will no doubt elevate the volatility of the asset which rose 9% only to fall back just as quickly – but this is very standard price action for an instrument that has been basing for a while – and may now be ready to break out.
Inflation + Organic Demand = Rally
Certainly the fundamental drivers for the silver look good. First and foremost silver is part of the commodity complex and as Jeff Currie of Goldman Sachs noted every single physical commodity except for oil is currently in deficit supply. The combination of production bottlenecks due to COVID and surprisingly robust demand from both consumers and manufacturers is clearly putting upward pressure on prices. China is strategically stockpiling supply which will likely push price levels even higher. So as the world begins to thaw out from the COVID economic freeze, the inflationary gauges are likely to rise as inflation is first and foremost a supply rather than a demand phenomenon.
Inflationary pressures are always a positive for silver, but the metal may benefit from organic demand as well. Silver is a key component in two major technologies of the future – solar and 5G. Experts estimate that photovoltaic demand for silver could exceed 3000 tones in 2021 while the 5G rollout – which is only just beginning – will be a major driver of demand for years to come.
Looking at the #SLV chart it is clear that the $28 level on the ETF which roughly corresponds with $30/oz. price is the key pivot point in the trade. A hold on the monthly chart above that level would confirm that a technical breakout is in place and could offer the prospect of a run to an all time high of $50 which was established when the Hunt brothers tried to corner the market.
Multiple Ways to Trade Silver
- Long #SLV
- Long #SLV/Short #GLD
- Long #SLVP
- Sell Puts on #SLV
There are multiple ways to trade silver with and outright buy of #SLV ETF being the simplest and easiest. For those investors who may want to remove some of the directional volatility a silver/gold spread may be another way to go. Historically the gold silver ratio has been around 15:1 but in recent years the ratio skyrocketed to a 5,000 year high reaching 125:1. It has receded from those nosebleed levels to now trade at 70:1 but if you believe in mean reversion then the ratio can compress much further. A long #SLV short #GLD spread would take out most of the directional risk from the trade and would be a bet on relative strength of the metal. Finally, if silver does stage a breakout rally the truly levered trade would be to get long silver miners. Mining stocks offer massive operational leverage if the base metal starts to run especially if they have not hedged a portion of the production going forward. The silver miners ETF #SLVP is trading in $14-$17 range and if it closes through the $18 level on a monthly level would signal the start of a big rally in miners
Wait and Watch or Establish a Toehold?
The net take away from the price action in silver is that it is beginning to look interesting but may not be a buy just yet. To truly prove that that the breakout is real, silver must hold above the $30/oz. level ideally for a month, but at least for a week. For those investors itching to participate two possible ideas for entry. You can open a partial position of no more than 25% of final allocation to simply establish a toehold in the asset. Or you could sell puts on the ETF at the $24/share strike price (but also at no more than 25% amount of final position). If the price declines you will achieve a better entry than current spot rates. If it rises you will collect the premium while waiting for the breakout in silver to confirm the rally.