Silver Weekly: Where Is The Fear?

Summary

• Silver comes under renewed downward pressure so far in February due to fading market fears.
• Spec positioning suggests that there is plenty of dry powder of the speculative community to extend their net long positions in Comex silver.
• ETF investors resume their buying, in line with my expectations.
• Expect some buy on the dips in silver sooner rather than later.

FEAR, Mike Twichell (Saatchi Art)

Introduction

In this brief report, I wish to discuss my views about the silver market through the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR). SIVR 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 will discuss my global macro view and the implication for monetary demand for spot silver prices and SLV. I will 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 (OTC:COTR) 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 involves 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 in 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.

Silver-ETF positions

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 represent roughly 50% of total silver ETF holdings.

Thesis

Silver spot prices have come under renewed downward pressure (-2%) since the start of February after enjoying a solid gain of 3.7% in January.

Because the risk rally has proven more “sustainable” than expected and macro investors are no longer fearful (evident in the low level of volatility in the SP500, purple line on the chart above), investors have revisited their overly dovish expectations about the future monetary policy in the US.

In turn, the dollar and US real rates have attempted a rebound, undermining monetary demand for silver.

Source: Fastmarkets

But I hold the view that there is more downside pressure for the dollar and US real rates in the short term due to a return to volatility in US risk assets.

I therefore expect silver to be supported by some buying on the dips sooner rather than later.

My analysis of spec/ETF positioning suggests that sentiment has shifted positively in favour of silver, which should therefore underpin the rally in silver spot prices.

Speculative positioning

The CFTC released earlier this week Commitment of Traders (COT) data for the last two weeks of 2018 after stopping temporarily the publication of it weekly report from December 21, 2018 following the US government shutdown.

Source: CFTC

Unsurprisingly, the net spec length in Comex silver increased significantly in the last two weeks of 2018. The net spec length moved from 3,084 tonnes on December 18 to 6,992 tonnes on December 31. The net spec length reached its highest level since June 2018.

While the net spec length is likely to have increased since then, it is likely to remain far below its historical high of 16,409 tonnes reached in April 2017.

This means that there is plenty of dry powder for the speculative community to extend its net long positioning in Comex silver in the course of 2019.

Investment positioning

Source: Fastmarkets

ETF investors boosted their silver buying last week, in the tune of 102 tonnes, according to Fastmarkets. This comes following a marginal increase of 7 tonnes in silver ETF holdings in the preceding week.

In line with my expectations, the continued strength in silver spot prices has eventually convinced ETF investors to resume their buying. In a previous report (Silver Weekly: This Is The Best Month To Be Bullish, January 17, 2019), I noted:

Similar to what happened in 2015-16, when the rebound in Comex silver spot prices in mid-December 2015 led to a subsequent rebound in ETF silver holdings in February 2016, I expect ETF investors to return to the silver market at the end of the month.

Source: Fastmarkets

On the year, ETF investors remain net sellers of 346 tonnes due to significant outflows in January.

Looking ahead, I expect ETF investors to continue to build positions in silver, which should underpin the uptrend in silver spot prices, similar to what happened in the first half of 2016.

The ETFS Physical Silver ETF - SIVR – Review

Long-term investors, looking to capture silver’s attractive value, may consider ETFS Physical Silver ETF - SIVR

Long-term investors, looking to capture silver’s attractive value, may consider ETFS Physical Silver ETF - SIVR

SIVR is an ETF product using a physically backed methodology. This means that SIVR 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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.