After hitting nearly $50 in late April 2011, silver has been in a cyclical sell-off in the context of secular long term bull market. While the price of silver has been trading below $20 for a lot longer than I thought possible, the low price has stimulated heavy demand both in the United States and globally. In addition, global mining supply has declined as mining companies have mothballed higher-cost silver mines. Because of these factors, I believe that silver has recently carved out a cyclical bear market bottom and is headed higher from here.
Silver closed at $15.46 (December futures basis) on Nov. 6, 2014. This was a level which, I must confess, I never thought we would see again when silver broke out and up (toward $50) from $18 in late August 2010. However, as you can see from graph below (I'm using SLV as a proxy for the price of silver for graphical purposes), silver appears to be carving an uptrend that, in my view, will turn out to be the resumption of silver's (and gold's) long-term secular bull market:
SLV moved from a $14.66 in early November to $17.61 on Jan. 20, 2015. This is a 20.5% move in a little over 10 weeks. In fact, as you can see from the chart above, the price of silver started to go parabolic. The pullback since Jan. 20, in my view, is just that: a natural profit-taking pullback. Just like the move higher occurred on increasing volume, the pullback has been accompanied my continuously declining volume. The latter is characteristic of a standard profit-taking pullback and is considered to be a bullish component of longer-lasting move higher. This view is supported by the movement of the RSI/MACD momentum indicators as I've noted on the graph.
Supporting my view that the bull market in silver has resumed and is underway is the increasing demand for physical silver both in the U.S. and globally in conjunction with a decline in mine supply. In terms of increasing demand, I see three key factors. First, India imported over 7,000 tonnes in 2014. This was up 15% from 2013 and is a record amount -- India imported 7,063 tonnes in 2014. Second, sales of U.S. mint silver eagles set a new record in sales volume in 2014 at just over 44 million ounces. This was up from the record set in 2013 of 42.7 million. And January 2015 has started of a pace even greater than that start of 2014, with silver eagle sales in January of 5.53 million ounces, up 16% over January 2014.
The third factor, withdrawals of silver from the Shanghai Futures Exchange vaults, is evidence of both rising demand and falling supply (source: Bullionstar.com, edits in blue are mine):
As you can see from the graph above, roughly 500 tonnes of silver -- about 70% of the inventory -- were withdrawn from the Shanghai Futures Exchange silver vaults during 2014. This is significant because the silver is removed by end-users (industrial, jewelry) and investors. It is evidence of the enormous demand for physical silver in China because the only portion of the silver removed that is permitted to leave China is the amount represented by the red-colored section. Furthermore, the amount that has been removed over the two year period shown is not being consistently replaced. In my opinion this is partially due to decreased mine supply as the fall in the price of silver has cause the closure of higher-cost silver mines.
Finally, in terms of overall global supply, HSBC recently released a report on its outlook for the global supply and demand of silver for 2015. HSBC is looking for the supply/demand equation to go from a three million ounce surplus in 2014 to an 11 million ounce deficit in 2015:
The deficit comes mainly from a reduction in mine production, lower scrap supplies as well as a halt to government sales. Consequently, the small but persistent deficit should limit further price declines.
As I mentioned above, HSBC attributes declining supply primarily to a reduction in global silver mine output, with a halt in official sector sales and lower scrap recycling as secondary factors. With supply falling and physical demand seemingly on the rise, the only conclusion I can draw is that the price of silver will be pushed higher by natural market forces until the supply and demand reach a higher equilibrium price.
On this basis, I believe that current pullback in the price of silver represents a good buying opportunity. In fact, I believe that silver will be the best performing asset class in 2015. There are several ways to play a bull market theme in silver. First and foremost I always recommend that every investor should own some physical silver. My favorite vehicle for this is the U.S. one-ounce silver eagles. If you want to index the price of silver as a shorter term trading play, I like to use either Pro Shares Ultra Silver 2x ETF (NYSEARCA:AGQ) or the VelocityShares 3x Long Silver ETN (NASDAQ:USLV). Options are available on AGQ. As for silver mining companies, I avoid the large cap companies in preference for junior exploration companies like Rye Patch Gold (OTCQX:RPMGF), which is 50% silver, or Silver Crest (NYSEMKT:SVLC), which is an emerging silver producer. (I have a research report on the latter available on my website.)
Disclosure: The author is long USLV, RPMGF, SVLC.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I manage a precious metals hedge fund which is long physical gold, silver and mining shares
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