Silver Weekly: Speculators, ETF Investors, And Coin Collectors Are All Buyers Of Silver

|
About: Aberd Std Silvr Shs (SIVR)
by: Orchid Research
Summary

Silver is off to a quiet start to July after enjoying a rally of 5% in June.

Speculators, investors, and collectors boosted their silver demand last June.

But positioning remains too light, suggesting plenty of room on the long side.

Our July target for SIVR is at $15.90/share, reflecting a constructive outlook in line with a friendly seasonality for this month.

Introduction

Welcome to Orchid's Silver weekly report, in which we wish to deliver my regular thoughts on the silver market through the Aberdeen Standard Physical Silver Shares ETF (SIVR).

Although SIVR has consolidated a little in recent days, we remain constructive on our outlook for July (our target price is at $15.90/share) and for 2019 (our target price is at $17.00).

Our view is driven by the idea that the positive shift in sentiment toward silver has occurred later than for gold and as such, silver has a lot of catch-up to play in the near term.

Given our friendly view on gold due to the presence of late cycle dynamics, we think that silver will benefit from it too despite some possible weakness from the industrial sector.

Source: Trading View, Orchid Research

About SIVR

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

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 making profit over the long term.

Speculative positioning

Source: CFTC

The speculative community lifted substantially its net long position in Comex silver in the week of June 25, for a fourth uninterrupted week.

Over June 18-25, non-commercials lifted their net long position in Comex silver by 2,496 tonnes, the largest weekly increase since the December 24-31, 2018 period (+3,018 tonnes). The latest weekly increase in silver net long speculative positions represents 7% of open interest and 9% of annual physical silver consumption, which is significant.

However, at 4,753 tonnes as of June 25, the net spec length represents only 17% of its open interest, far below its historical high of 58% of OI established in September 2018. This is also relatively much lower than the current net spec length in gold, which is at 41% of OI.

We, therefore, believe that the wave of speculative buying in silver could continue further in the near term and could prove relatively larger than for gold. This would push Comex silver spot prices much higher.

Implications for SIVR: We believe that we are at the beginning rather than the end of the current wave of speculative buying in silver. As such, speculative buying for silver has the potential to lift silver spot prices much higher in the weeks and months ahead, which, in turn, will lift the value of SIVR.

Investment positioning

Source: Orchid Research

ETF investors bought 175 tonnes of silver last week, according to our estimates. This marks a fifth week of uninterrupted net inflows into silver ETF holdings and the largest weekly increase in silver ETF holdings since August 2018.

In June, ETF investors bought 443 tonnes of gold, a 2.3% increase in silver ETF holdings. This represents the largest monthly inflow since May 2017 when ETF investors bought a substantial 639 tonnes of silver, according to our estimates.

In the year to date, ETF investors are now marginally net sellers of silver to the tune of 14 tonnes.

Silver ETF holdings are now at their largest level since December 2018.

Source: Orchid Research

Implications for SIVR: The aggressive wave of ETF buying in silver suggests a notable swing in sentiment. We think that ETF investors become increasingly conscious that 1) silver is cheap (vs. gold and palladium) and 2) silver constitutes an alternative play to gold with more volatility. Stronger monetary demand for silver will push silver spot prices higher, which, in turn, will lift the value of SIVR.

Coin collectors equally bullish on silver

In the coin market, American Silver Eagle coin sales totaled 1.035 million oz in June, up 19.5% sequentially and up 138% from a year ago. In the first five months of 2019, sales were up 47% from the same period last year.

Source: Bloomberg, Orchid Research

Seasonality

The seasonality in the silver market is favorable for July.

Source: Bloomberg, Orchid Research

Over 1998-2018, silver spot prices recorded an average gain of 1.4%. This bodes well for silver spot prices this month, in our view.

Our closing thoughts

The positive shift in sentiment in favour of silver has emerged later than gold and as such, silver's positioning remains relatively lighter than gold.

As silver tends to amplify the movements in gold, we believe that a continuation of this positioning reversal could push silver prices much higher in the near term.

We are, therefore, inclined to revise higher our July target for SIVR from $15.33/share to $15.90/share.

In turn, we moved our 2019 target from $15.60 to $17.00 to reflect our increased bullish outlook for the precious metal.

Our July target for SIVR of $15.90/share represents a 7% appreciation from its current level.

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.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.