Silver: Ready For The Next Leg Up

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Includes: PSLV, SIVR, SLV
by: FI Fighter
Summary

After a few weeks spent consolidating, the spot price of silver closed the week back above $17/oz, rising 2.47% on the day and finishing strong at $17.47/oz.

A number of headlines: trade wars, new tariffs, a statement from the Fed Chairman, tweets from President Trump, and another inversion of the yield curve made the rounds on Friday.

SIL was up 4.05% on the day, along with many silver producers, while stocks sold off and were down over -2%.

Over the last 3 months, SIL is up 35.32%, while general equities are mostly trading flat. Further, some select silver stocks are now up in the triple digits over the same time horizon.

After consolidating below $17/oz over the past few weeks, the price of silver broke out in a meaningful way today, up 2.47% to close out the week at $17.43/oz.

Source: Silverprice.org

Macro News

A lot of the day's price action in silver arguably was contributed to a large degree by the most recent back-and-forth trade war dispute between the U.S. and China, which has led to more and more tariffs being imposed on imports (from both sides).

Most recently, President Trump made the announcement that he plans on raising tariffs from 10% to 15% on $300 billion worth of Chinese imports, starting on September 1. Moreover, there will be a hike from 25% to 30% on October 1 on another $250 billion worth of Chinese goods.

Source: Markets Insider

This latest move by President Trump came on the heels of China earlier hiking tariffs on $75 billion worth of U.S. imports; potentially, more than 5,000 U.S. products could be impacted by the tariffs.

However, the ongoing trade war wasn't the only thing making waves on Friday, as Federal Reserve Chairman Jerome Powell made mention that he would "act as appropriate" to sustain the economic growth/expansion in the U.S. economy, and that in a trade war, there is no "rulebook".

Source: CNBC

Apparently, though, the Fed Chairman's latest statement wasn't music to President Trump's ears, as he fired back on Twitter, proclaiming that, "We have a very strong dollar and a very weak Fed."

Source: Twitter

And perhaps the biggest headline delivered by President Trump on Friday was the following line, "Who is our bigger enemy, Jay Powell or Chairman Xi?"

Source: NBC News

While it won't be known for sure if it was the latest back-and-forth tariff hikes or President Trump's (many) poignant tweets that moved the market (perhaps both, to a degree), equities on the whole responded most unfavorably on the day.

  • SPDR Dow Jones Industrial Average ETF (DIA) was down -2.32%.
  • SPDR S&P 500 ETF (SPY) was down -2.46%.
  • Invesco QQQ Trust (QQQ) was down -2.89%.

Over a 3-month period, equities have been trading mostly flat, for the most part.

  • DIA is down -0.44%.
  • SPY is down -0.16%.
  • QQQ is down -0.87%.

Oh, and there was also a strong move made in bonds on Friday, as the yield curve inverted once again, as "the 2-year note yield closed above the 10-year note for the first time since 2007."

Source: MarketWatch

As highlighted above, the yield on the 2-year note reached 1.528%, while the 10-year note closed the week at 1.523%.

Silver's Response

How did all of Friday's "calamity" affect the precious metals mining stocks?

In the case of observing "primary" silver producers, along with the diversified Global X Silver Miners ETF (SIL), they had themselves a splendid day of trading.

  • SIL was up 4.05%.
  • Pan American Silver (PAAS) was up 4.79%.
  • Wheaton Precious Metals (WPM) was up 6.25%.
  • First Majestic Silver (AG) was up 7.37%.
  • SSR Mining (SSRM) was up 7.46%.
  • Coeur Mining (CDE) was up 3.42%.

It should be noted, a 4.05% move up for a precious metals ETF (SIL) over just a single day, is quite a pronounced one, and could be signaling to the market that the next move up for silver and silver stocks is near. As a reminder, the spot price of silver was "only" up 2.47%, in comparison to SIL. Although it doesn't necessarily ring true all of the time, as the saying goes, "In a bull market, the miners will lead the way."

At least for today, SIL did in fact lead the charge on a very strong day for both precious metals and the mining shares.

Zooming out over a longer 3-month time horizon, we can see that the underlying macro trend for silver has definitely reversed up, and some very big gains have already been put in by SIL, as well as by the aforementioned silver stocks (which all have an allocation within SIL).

  • SIL is up 35.32%.
  • PAAS is up 69.25%.
  • WPM is up 45.10%.
  • AG is up 100.2%.
  • SSRM is up 57.25%.
  • CDE is up 76.63%.

Interestingly enough, SIL has been the worst performer from the cherry-picked list, shown above.

Also worth mentioning, although the SIL ETF allocates a bulk of its weighing to large-cap silver producers, the fund also provides exposure to smaller mid-tier silver producers, and even development-stage companies, as well.

Shown below are some of the "smaller cap" mining stocks contained within SIL that in some cases had an even more explosive day up than their larger-cap peers.

  • MAG Silver (MAG) was up 5.32%.
  • Silvercorp Metals (NYSEMKT:SVM) was up 10.14%.
  • Fortuna Silver Mines (NYSE:FSM) was up 4.53%.
  • Alexco Resource (NYSEMKT:AXU) was up 6.15%.
  • America Silver Corporation (USAS) was up 9.09%.

And over a 3-month period, for the aforementioned "smaller cap" miners contained within SIL.

  • MAG is up 36.10%.
  • SVM is up 93.27%.
  • FSM is up 56.18%.
  • AXU is up 102.9%.
  • USAS is up 101.2%.

Because the spot price of silver is still ensnared comfortably below $20/oz, it might be surprising to learn that over a stretch of just 3 months, there are already a number of silver stocks that have been able to put up triple-digit returns (which from a macro trends perspective is really only something you would expect to observe within the context of a bull market).

SIL Holdings

From the examples above, it should be clear that going the ETF route via a product like SIL won't provide the highest returns of all, but from a risk vs. reward perspective, should help better protect speculators in the event of a downturn by reducing individual company risks.

The following spreadsheet shows the full holdings of mining stocks held within SIL, current as of August 23.

Source: Global X

Gold-to-Silver Ratio

So, just where are we now at this point in the bull market for precious metals?

If we turn our attention to the Gold-to-Silver Ratio (GSR), as shown below, it's still sitting at ~87, which is quite elevated, compared to historical levels.

Source: Kitco

For context, the following shows a 5-year chart, which will make apparent just how much further silver still has to outperform gold in order for the GSR to even approach 2016 levels (~60-70), which marked the last time precious metals had a nice run.

Source: Goldprice.org

As I've mentioned in the past, I'm personally watching the GSR closely, and more so the spot price of silver, which I feel like will need to re-test (and ultimately break through) the ~$20/oz range last seen in 2016 to really get going; we are nowhere near entering "blue skies" territory for silver yet.

Where things stand today, I still feel like silver stocks are well ahead of the price of silver, so presently, I prefer gold mining stocks from a risk vs. reward perspective.

Conclusion

Although the price of silver and the mining shares were stagnant for the most part over these past few weeks, it seems like things could be quickly changing as this week ended on an especially high note for precious metals (silver up 2.47% and SIL up 4.05%).

Further, as we enter into the fall season (which has been historically demonstrated it can be quite a choppy time for equity markets), it would appear at this time that interest in the "risk-off" trade should naturally be picking up the pace. Granted, at this time it's still very much "early days" as it would appear that interest from the masses still isn't quite there yet for precious metals (despite a developing trend of rising prices in recent months).

Also, as mentioned earlier, with things like ongoing trade wars, tariffs, the whispers of possible rate cuts looming, and even inverted yield curves, there are arguably a lot of different headwinds in place that could ignite the next leg up in this emerging new precious metals bull market.

Then, there's also the insanity of $15 trillion worth of government bonds worldwide now yielding at a negative rate.

Source: CNBC

For silver and silver mining stocks, the good times might only just be getting started.

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.