Hi Ho Silver, Away!
Precious metals have registered a blistering start to the year. After more than four years of defeat, gold bulls once again have something to be excited about. The gold price is up 19% year to date and the mining stock ETF, the Market Vectors Gold Miners ETF (NYSEARCA:GDX), is up over 60% since the start of the year. Not bad for a barbarous relic!
But one thing that generated some caution for precious metals investors has been silver's underperformance. You see, silver typically leads gold higher and outperforms during major advances in the sector. But the silver price advance had been trailing that of gold for much of the year by a wide margin. In fact, during late February and early March, the gold price advance was more than DOUBLE that of silver. On March 1st, silver was up just 7.6% YTD versus 17.9% for gold.
The early year underperformance of silver led some investors to call into question the sustainability of the rally in precious metals. However, this gap has closed considerably in the past month, with gold up 18% vs. silver up 15% year to date. In the latest three months, their performance is tied. But over the past month, silver is up 5X the price gain in gold and today silver is up nearly 3X gold (3.6% vs. 1.3%). This means that the silver price is finally confirming the move higher in the gold price which is very bullish for investors of precious metals.
Here is the silver chart over the past week, which shows the magnitude of the recent breakout:
While the short-term silver chart is a beautiful thing to behold, the silver price still has some work to do. Going back a few months, we can see that the $16 price level has been resistance three times (triple top). This price level was also resistance back in September of 2015. So, we need to see a decisive break above $16 to confirm our bullish case on silver and project a move back towards $20 in the coming months.
On the fundamental side of things, it makes sense for silver to be underperforming given the impact of slowing global trade and manufacturing activity. Over 50% of silver's demand is industrial versus just 10% for gold. The big question for those looking closely at silver is whether surging investor demand would be enough to offset slowing industrial demand. Furthermore, would global supplies continue to drop as output was cut due to slumping prices and slashed profit margins at many miners?
All signs point to a continued surge in investment demand for silver in 2016, with Q1 Silver Eagles sales making a first-quarter record of 14,842,500 ounces. Australian Mint silver sales spiked over 50% in 2015, with the Perth Mint reporting March 2016 silver sales up 175% vs. March of 2015! In Canada, the latest quarterly report of Silver Maple Leafs had sales up 76% year on year. Indian silver imports were a record 8,506 tonnes (273,473,854 ounces) in 2015.
On the supply side, Mexico is the top producer of silver in the world and their production is set to drop by 6% in 2016. HSBC forecasts 2016 mine supply for silver of 855 million ounces, which would be down 12 million from 2015, and looks for this to ease further as the decade progresses.
The bottom line is that silver is in the early stage of confirming gold's bullish breakout in 2016. It now just needs to push above $16 and hold this level for a few consecutive days.
Silver mining stocks still remain very undervalued and oversold in our view, but they are finally catching fire. Several junior silver stocks are up 20% or more today alone. But it is not just the juniors having all of the fun. Many large-cap silver miners are also posting impressive results today, with Silver Standard Resources (NASDAQ:SSRI) and Silvercorp Metals (SVM) both up over 10%!