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Silver's Epic Mean Reversion

May 02, 2020 2:39 AM ETSLV, USLVF, PSLV, AGQ, SIVR, SLVO, ZSL, DSLVF, DBS, USV, PSLV:CA93 Comments
Adam Hamilton profile picture
Adam Hamilton


  • Silver is due for an epic mean reversion higher relative to gold in coming years. The stock panic obliterated silver prices to their lowest levels ever seen compared to gold!
  • Historically, similar but milder silver-low extremes were soon followed by massive mean-reversion-overshoot bulls. After the last stock panic in late 2008, silver more than quintupled over the next couple years.
  • Silver’s new-bull-market upside potential after this latest stock panic looks considerably bigger. Investment-capital inflows have already been strong and relentless in this panic’s wake. Silver should amplify gold’s own bull.

Silver is powering higher in a new bull market after getting clobbered in March’s stock panic. Investors have been flocking back to silver in the aftermath of that ultra-rare extreme-fear event. That brutal selloff also utterly wiped out speculators’ upside bets in silver futures, giving them massive room to buy back in. After being pummeled to record-low levels relative to gold, an epic silver mean reversion higher is underway.

A couple weeks ago, I wrote a popular essay “Big Silver Bull Running!”. It explained what happened to silver in this recent COVID-19 stock panic, and why silver soared in its wake. Sucked into that blinding fear maelstrom, silver was thrashed to a miserable 10.9-year low. This metal plummeted in a near-crash, fueled by speculators’ fastest long purge ever witnessed! That exhausted their selling, totally resetting longs.

That meant these super-leveraged traders’ capital firepower was fully available to buy back into silver. And much more bullish than that, strong and relentless silver investment demand emerged since that mid-March collapse. That’s evident in the soaring silver-bullion holdings of silver’s leading exchange-traded fund, the SLV iShares Silver Trust (SLV)! This dominant silver ETF is the best daily proxy for global investment demand.

The remarkable capital inflows pouring into silver through that major SLV conduit from American stock investors were explored in depth in that recent essay. But with surging investment demand as evident in SLV’s holdings its primary thesis, I only had room to tangentially touch on another very-important bullish silver factor. That’s silver’s relationship to its overwhelmingly-dominant primary driver, gold price trends.

This white metal has always tended to mirror and amplify whatever is happening in the yellow one. Silver effectively acts like a gold-sentiment gauge. Traders’ enthusiasm for silver mounts when gold is rallying on balance, leading them to bid silver higher well-outperforming

This article was written by

Adam Hamilton profile picture
A lifelong student of the markets, speculator, and investor, decades of experience have forged Adam into a hardcore contrarian. He believes in buying low when others are afraid, then later selling high when others are brave. He founded the financial-market research company Zeal LLC, and continues to write acclaimed weekly and monthly subscription newsletters.

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. I have no business relationship with any company whose stock is mentioned in this article.

I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (93)

a_partlow profile picture
Silver price will go up with oil.
Much more likely is for gold to go down instead.
Silver is going up @le_bluff .
So why is silver going down so much?
"So why is silver going down so much?"

The same reason it always goes down, heavy shorting of silver futures. The silver price is determined by the supply and demand dynamics of silver futures, not of actual silver. So actual silver can be quite scarce, and silver price can be quite low.
Ultimately the price will move according to speculative and commercial demand. If longs are selling and there are no more buyers then price can start to sell off. Silver is suffering from a deficit of demand right now due to seriously reduced production of everything that normally needs silver. Electric car batteries, circuit boards and solar panels are a few of examples.

The psychology in the market has turned negative too. So even speculators are selling as its become obvious there is no inflation in the pipe yet. I encourage you to look at a long term silver chart. You can easily see with no effort at all that silver still has some room to fall before it lets the last bit of steam out of its prior bubble that peaked in 2011.

I am being very serious here. Silver is still in a bear market from the 2011 top. And it cannot (and will not) begin a new bull market until it hits bottom first. Don't be fooled by the propaganda on this subject. You need to look at the charts for yourself as the information they convey makes my points self evident.
"I am being very serious here. Silver is still in a bear market from the 2011 top."

LOL! You could also say that silver has remained in a bear market on an inflation adjusted level since early 1980, as the $50 high in 1980 adjusted for in inflation to its $50 2011 high was around $143. The 1980 high adjusted for today's dollars is around $164. Of course you could say that silver has been a bear market for 543 years, after hitting a high equivalent to $843 in 1998 dollars in the year 1477, which adjusted for inflation is around $1,328 now. Imagine silver at the equivalent of $1,328 an ounce! Of course silver is much more prevalent in the western hemisphere than in the rest of the world, so as the western hemisphere became increasingly settled, the supply of silver increased substantially.


Silver's price has been pegged to primary silver mining cost, which is about $15 per ounce. And I like silver at $15. Just dont think the silver/gold is an important driver for silver. Investment demand for silver is good at $15 and will likely drive the price higher.
It is difficult to peg the mining cost of silver since so much of it is a by product. @Sam Glick
"It is difficult to peg the mining cost of silver since so much of it is a by product. @Sam Glick"

He did say primary silver mining cost, the cost per ounce for mines that get over half their revenue from silver. Primary silver mines do often get significant revenue from gold. The gold revenue is treated as a byproduct, reducing the per ounce cost of the silver mined. So the rise in the gold price did reduce the per ounce cost of primary silver mines. Some primary silver mines get significant revenue from copper and zinc, and the decrease in the prices of those means less of a decrease in the cost per ounce of silver mined than there was in the past. Overall silver production has been decreasing the past few years, with mines that become uneconomical being closed, and output being increased from mines that are economical. The higher gold price has also meant more gold being mined, and more byproduct silver from its mining. In 2019 just 28.7% of the silver mined came from a primary silver mine(one that gets over half its revenue from silver) compared to 33.5% in 2010.

See page 71.

Thanks Adam. Always informative and you always put a lot of work into each article.
Silver needs to go to $100 per ounce to catch up.
After looking at everything that's going on, the only thing I know is that if gold/silver don't skyrocket in the next couple of years, then they never ever will.
bengalesq profile picture
You are clearly smart and I hope u r right but I'm afraid this is a reflection of the change in perspective on silver from a precious metal and wealth store to a manufacturing necessity thereby destroying the paradigm as outmoded.
Adam's blessing for Ag could be it's kiss of death, at least temporarily. I don't buy silver just as an investment, I buy it because I would rather store my money in a chunk of metal I can hold, than in a financial system standing on wobbling legs based on a fiat currency ponzi. Plus its shiny and heavy.
Platinum is around 11% denser than gold. It is also much rarer than gold. Last year around 111.4 million ounces of gold were mined compared to only around 6.2 million ounces of platinum. Traditionally platinum has been called the rich man's gold. There is something like 7 billion ounces of gold available compared to probably less than 15 million ounces of platinum available. Gold is mined in almost every country, while platinum is probably mined in fewer than 10 countries, with over 75% of the platinum mined coming from South Africa. Platinum is also much more useful than gold, with major uses being catalytic converters, jewelry, and as a catalyst for chemical manufacture. It is also used to make some chemotherapy drugs.
And you think that makes them valuable and good investments.
Scarcity and usefulness are important factors for platinum. Already platinum jewelry is outselling gold jewelry in Japan. If that trend spreads to China and India, the rally in platinum would be huge. Platinum may also start replacing palladium in catalytic converters for gasoline powered vehicles. Platinum should be over double the gold price, not less than half as it is now.


I love this comment section where most of the contributors are shitting over silver. It makes my heart smile.
In normal times silver is just another commodity like iron ore or coffee.
This is no normal time though, everybody shall agree on that.
The problem with silver is polarization: as a regular commodity it is a sucky investment, but as monetary mean silver would be insanely valuable.
Gold has a partial monetary status, as it is held by most central banks in the world.
Now, for silver to get that monetary status A LOT has to happen, which is not given it would happen, it would take a book to explain it, but IF it gets there there is no ceiling.
So the question is: are you ready to invest in a commodity that will probably do badly but has a small chance of doing insanely well?
There is no "investing in silver".
It's all about a huge risk/reward play.
Just like a life insurance of some sort.
For most people the answer is no, and I respect that, everybody is free to do whatever they think is best for them.
System Trader profile picture
Quite a bit of silver production is a byproduct of gold mining. With gold prices up there may be an excess of silver production. An analysis of supply versus demand is needed.

The thesis of this article, that there should be a reversion to a particular ratio of silver to gold prices, is lacking any proof or justification.
Supply is short, both the US and Canadian mints have to close off and on as they can’t get the metals. Demand is high without question, the real issue is why? I think the fear factor is the answer, what’s your answer?
The reason the mint closed is not because "they can't get the metal"
"Quite a bit of silver production is a byproduct of gold mining. With gold prices up there may be an excess of silver production.'

Silver mined as a byproduct of gold mining was 15.8% of the silver mined in 2019, 132.1 million ounces, unchanged from 2018. The total amount of silver mined has dropped every year since 2015, and is expected to decline by a further 5% or so in 2020. See page 71.

They closed it up, it was not sold as it lost its value, too many shorts holding gold/silver down, we can expect others to do the same. There is no happy ending to the worlds economy, get ready. If you get caught holding paper, it better be toilet paper.
Short positions do not hold the market down. Don't forget that in order for a short to be closed that needs to be done by opening a long position. The metals market will come down when speculative money runs out and there are no more buyers.
Short will sell first and buy later as the price has gone down. Buy low, sell high is the same as sell high, buy low.
Why would you close a short position when price is still high. Think about it.
It’s a sign of a top or pushing on up. Try to find gold/silver to buy and tell me there is no shortage. A major billion bank market maker just shut down, what dies that mean to you?
Scotia Mocatta bailed out at the top. It's your signal to get out too, not a message to buy more heavily. Don't forget this is a business to them. They are not retail.
$15 an ounce is the top?
The Scotia Mocatta bailout is very weird at best.
Right now silver dealers are making a killing because not all products are available, so people are paranoid about shortages, thus dealers can charge hefty premiums on the spot.
The only reason I can think for Scotia to bail out is excessive paper speculative investment that hasn't paid out.
But physical silver is one of the few very healthy business right now.
At the top what we usually see is that companies sell their business at a profit and not shutter it completely. The article below provides one possible explanation of what may have transpired to force Scotia's hand into completely closing their PM desk.

Try to buy silver or gold right now. Notice the premium is $7-10 over paper silver. The mines are shut in as well. It’s hard to rate the fear factor that sends investors to the gold/silver window, currencies keep getting weaker, debt higher with no end in sight. The world is going to collapse under growing debt that we know can never be paid off. The question is when, not if.. get ready with gold/silver now.
Don't be fooled @Captain Oblivious. Premiums always get high when metals markets have peaked and start to roll over. That is how dealers compensate for potential losses on stock they bought at highs. They are businesses and cannot sell to you for less than they paid so there is premium to account of that.

In any case there is no real shortage of either silver or gold. The shortfalls are only for specific coin products and that is because minting, refining and distribution have largely stopped along with the rest of the economy. It will sort itself out as soon as we open again so do not panic.

Secondly, margin has been raised dramatically on gold futures contracts. That is also the sign of a top and its there to protect the CME and dealers/brokers from losses incurred by speculators by discouraging excess speculation at the top.
"Investors" can barely move the gold market, that's a Central Bankers game.
Physical markets are getting less clogged now
Trinta profile picture
My grandma loved silver. Poor lady -in more ways then one. She bought bags of junk silver at $38 an ounce back in the last days of disco. Those bags leaked silver dimes. I knew it was irredeemably stupid but she showed me an impressive hockey stick chart and arcane investing articles with bad grammar and lots of exclamation marks!!! Then, as now, there was a flavour of doomsday and revelations that appealed to the uneducated and greedy. I told her that my teacher said using exclamation marks was a sign of a bad writer with a foolish audience. I also told her that Methodists were simply Baptists who knew how to read. She never forgave me for both those comments but loved me anyway.
Yes, my uncle bought at the max and he got slaughtered.
No shit, really?
Who would have guessed.
And this anecdotal good-for-nothing comment is the most liked one of this page?
That's really something :-)
Silver ain t going nowhere, stable if we' re lucky ! I do have some SLV, CEF positions bought in 2013 somewhere, I don t even keep track of them no longer.....and what about fckn Platinum it used to be more expensive than gold....LOL.... PMs what a joke, the way things are, gold should be at 5000/oz by now ....DELUSION at its best !
I think most investors are tired of these typical "gsr" hype "toda moon" "way too undervalued" type of articles..brought them nothing but despair waiting on the undervalutation mean reversion mindset to kick in..nonetheless i enjoyed reading your article's premiss..fundamentals will eventually play a role when global economics balance out their supply demand issues bringing on fomo speculation in the aftermath..i concur. What we need on this platform more of.. are authors willing to write and post articles on the direct beneficiaries of these workings....the individual miners and their investing fundamentals..if now is truly a dawning of a new bullmarket in silver would it not be more prudent to capture the intetest of possible investors through a diverse write up campaign on all sorts of miners major/mids/juniors/micro/ and their underlying fundamentals/comparative valuations?..people are going to want to know where to invest in and capialize on.. that would be of greater service to the cause imo to few writeups going on here at the present time..i hope that will change in the near future..
jadejet profile picture
Excellent article Adam. The key takeaway I get is to load up levered to silver prices at the post-panic mean reversion low.
What is the best way to sell physical silver?
I've done quite well with just the local craigslist. Demand that any potential buyer meet you at your local bank or credit union lobby or police station. Somewhere safe obviously. If not the police station then at least the bank/credit union lobby will have lots of cameras around. Also, you can probably bum their counterfeit bill marker to check that the cash is real from the buyer. Anyways, Craigslist has been good to me. Any creeps aren't going to want to step foot in a police station or a bank full of cameras.
When the gold silver ratio was 80, there were umpteen articles written saying that 80 was such a rare event and that selling gold and buying silver was a no brainer. Anybody who did that, lost their shirt as the ratio went to 124. Of course the authors of that recommendation have never commented since or explained why the ratio went to a much higher level.
How do we therefore know that it won’t go to 150 before correcting?
Thomas Bayer profile picture
We don't. Nothing is guaranteed day by day or month by month. So every one need take responsibility for every decision and trade they make.
The gold/silver ratio chart has topped out. That means gold will fall faster than silver now. I expect both to fall together in any event. But the ratio is heading back towards 100 even as prices go flat.
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