Twist & Turn, John-Luke Ingleson (Saatchi Art)
Welcome to my Silver Weekly.
In this brief report, I wish to discuss my views about the silver market through the Aberdeen Standard Phys Silver Shares ETF (SIVR). SLV is directly impacted by the vagaries of silver spot prices because the fund physically holds silver in London.
To do so, I start by analysing the changes in speculative positions in Comex silver futures contracts (based on the CFTC statistics) and ETF holdings (based on FastMarkets' estimates) in order to draw some interpretations about investor and speculator behavior. Then I discuss my global macro view and the implication for monetary demand for spot silver prices and this SLV. I conclude the report by sharing my trading positioning.
Speculative positions on the Comex
The CFTC statistics are public and free. The CFTC publishes its Commitment of Traders report every Friday, which covers data from the week ending the previous Tuesday. In this COTR, I analyze the speculative positioning, that is, the positions held by the speculative community, called “non-commercials” in the legacy COTR (which tracks data since 1986).
It is important to note that speculative activity rarely involve physical flows. In fact, it is very uncommon for speculators who trade silver futures contracts to take delivery of the physical on the futures contracts they trade. Speculative activity can have a significant impact on spot silver prices due to the great use of leverage taken by speculators. The changes speculative positions in silver futures contracts tend to be much greater than the changes in other components of silver demand like industrial demand although the latter accounts for roughly 50% of total silver demand.
Accordingly, the impact of speculative flows on silver spot prices tends to be relatively more important and volatile, which in turn affect the value of SLV because the latter physically holds the metal in vaults in London and therefore, have a direct exposure to spot silver prices.
The data about silver ETF holdings are from FastMarkets, an independent metals agency which tracks ETF holdings across the precious metals complex. FastMarkets tracks on a daily basis a total of 15 silver ETFs, whose silver holdings represent the majority of total silver ETF holdings. The largest silver ETF tracked by Fastmarkets is the iShares Silver Trust ETF (SLV), whose holdings represents roughly 50% of total silver ETF holdings.
Based on the latest Commitment of Traders report provided by the CFTC, non-commercials extended slightly their net short position in Comex silver in the week to November 27.
Non-commercials lifted their net short position by 37 tonnes over November 20-27, exclusively driven by long liquidation (596 tonnes) but partly offset by short-covering (559 tonnes).
The net spec length moved from -1,768 tonnes on November 20 to -1,705 tonnes on November 27, representing around -5% of open interest.
Although shorts have covered sequentially their positions since November, longs have been reluctant to reassert exposure. As such, speculative activity has had, on net, a negative impact on Comex silver spot prices.
Interestingly, Comex silver spot prices have rebounded markedly since the start of December, up a little bit more than 3%, outperforming the precious metals group. The decrease in open interest so far this month suggests that short-covering has driven the silver rally.
However, longs need to take the baton and start building exposure to make sure the rebound in Comex silver spot prices becomes sustainable.
Bottom line: We are in the initial phase of the speculative normalization process whereby shorts cover their positions. To make the rise in Comex silver spot prices and thus SIVR sustainable, longs need to take the baton. A re-emergence of fresh buying in favour of Comex silver would signal that speculative sentiment is finally turning positive.
ETF investors slashed sharply their holdings over the latest reporting period of November 23-30, according to Fastmarkets’ iterations.
Over November 23-30, ETF investors sold 108 tonnes of silver, the largest weekly pace of selling since September. Outflows were significantly concentrated in SLV (104 tonnes).
Clearly, ETF investors, who liquidated their silver holdings in the last week of November, got their timing wrong because Comex silver spot prices jumped by 3% the following week.
If silver ETF outflows continue amid the rebound in silver prices, this will mean that investor sentiment remains fragile and ETF investors want to cut their losses at any rate. This sentiment of “frustration” is bullish from a contrarian point of view; indeed, it means that most investors are fed up with the silver price action and express no long interest in getting exposure to it. Interestingly, bottoming-out processes occur when everyone capitulates. The current situation in the silver market looks similar to a complete capitulation.
Bottom line: ETF investors have liquidated their holdings at an accelerating pace, which is reflective of a very negative sentiment. It seems that we are in a situation in which investors are fed up with silver and therefore compelled to capitulate. This could mark the final bottom in silver prices.
Silver tends to be highly correlated with the fluctuations in the dollar and US real rates. In this respect, silver has experienced a tough year on account of a sharp rally in the dollar and a steady appreciation in US real rates.
However, it is clear that the Fed has recently taken a dovish turn, prompting investors to mark down their expectations for additional Fed tightening in 2019. The dovish twist adopted by Jay Powell is striking, as I illustrated in this following Tweet.
This has produced notable downward pressure on the dollar and US real rates since the start of December, as can be seen below:
In turn, the monetary demand for silver has increased, pushing Comex silver spot prices. As market participants continue to revise lower the expected path of the Fed funds rate for 2019 and beyond, the dollar and US real rates could come under incremental downward pressure. This macro environment is conducive to a stronger silver price.
Long-term investors, looking to capture silver’s attractive value, may consider ETFS Physical Silver ETF - SIVR
Source: Seeking Alpha
SIVR’s technical indicators are bullish, with the trading momentum indicator rising in positive territory and the SIVR above its 20 daily moving average. This could suggest a positive swing in sentiment, pointing to further strength.
Bottom line: The macro environment is positive for the precious metals group, including silver. I therefore expect SIVR to continue to appreciate in the coming weeks.
The ETFS Physical Silver ETF - SIVR – Review
SLV is an ETF product using a physically backed methodology. This means that SLV holds physically silver bars in HSBC vaults.
The physically-backed methodology prevents investors from getting punished by the contango structure of the Comex silver forward curve (forward>spot), contrary to a futures contract-based methodology.
SIVR has $323 million in assets under management while the average daily volume is $1.7 million. Its average spread (over the past 60 days) is 0.08%, which allows financial markets to get in and out of their positions at a cheap cost. Its median tracking difference (over the past 12 months) is -0.28%, which is fairly accurate.
For long-term investors, SIVR seems better than its competitor SLV, principally because its expense ratio is lower (0.30% for SIVR vs 0.50% for SLV), which is key to make profit over the long term.
For the sake of transparency, I will update my trading activity on my Twitter account.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SIVR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.