Silver: Anticipating the Great Spike Ahead

Introduction:

Silver, often referred to as the ‘poor man’s gold,’ has garnered increased attention and investment interest in recent years. As a financial advisor and silver investing expert, I have maintained a bullish outlook on silver and the iShares Silver Trust ETF (SLV). The rationale behind this optimism lies in silver’s undervaluation compared to the price of gold and the broader commodity complex. In this blog post, I will discuss why silver still presents an excellent investment opportunity, potentially leading to a substantial price spike.

The SLV ETF:

The SLV ETF has been a reliable instrument for tracking the spot price of silver with minimal tracking error. It boasts an expense fee of 0.50%, which is notably lower than the spreads involved in buying physical silver. While there are competing ETFs like the abrdn Physical Silver Shares ETF (SIVR) with slightly lower expenses, SLV remains the largest and most liquid silver ETF with $11.4 billion in assets.

However, it’s essential to note that ounces under management in SLV experienced a peak during the Reddit-inspired silver short squeeze in January 2021 and have since fallen by over 30%.

Silver’s Undervaluation:

In a previous article from April 6, it was argued that silver’s undervaluation and strong price action suggested the potential for a parabolic spike in both the metal and the SLV ETF. Since then, silver has experienced a pullback, forming another higher low, setting the stage for a potential upward move.

The rally in silver’s price from its 2022 lows has reduced its undervaluation concerning gold and the Bloomberg commodity index. After trading around 40% below fair value in October, silver is now less than 10% undervalued based on its correlation with a 50:50 basket of gold and commodities.

Not Yet at a Bull Market Peak:

Silver’s recent gains have occurred despite a broader decline in the commodity complex. However, there’s a strong bullish outlook for silver, especially with the recovery in risk appetite. Factors like the weak CPI release and falling interest rate expectations have led to a decline in the dollar and a rise in real assets, which are expected to provide support to silver and the SLV.

Historical patterns indicate that silver bull markets tend to conclude when silver becomes overvalued relative to gold and the broader commodity complex. Several instances in the past, such as in 2004, 2006, 2008, 2011, 2016, and 2020, saw silver prices spiking into overvalued territory before bull markets ended. We can expect another such move before the current bull market concludes.

Options markets also play a role in this analysis. Low levels of implied volatility in options markets present an opportunity for silver bulls to take large bets on significant silver upside at relatively low cost.

Reconciling Silver and Gold Views:

Some readers may find it contradictory to have a bullish view on silver while holding bearish views on gold. Given the close correlation between the two metals, it’s unlikely for silver to rise while gold falls. Historically, silver has tended to weaken relative to gold when gold prices decline due to its higher volatility.

However, the key to understanding this apparent contradiction lies in the risk-reward trade-off. The aim is to achieve exposure to the outperformance of silver in risk-adjusted terms. The performance of gold relative to silver over the past 20 years, after adjusting for their respective volatilities, highlights that silver has had periods of outperformance.

Conclusion:

In conclusion, the iShares Silver Trust ETF (SLV) provides an attractive opportunity for investors looking to capitalize on the ongoing rise of silver from undervalued levels. The history of silver bull markets suggests that a spike higher is likely, during which silver outperforms both gold and the broader commodity complex.

Options market positioning indicates that investors may be underestimating the potential for such a move. As a financial advisor and silver expert, my outlook remains bullish, and I advise investors to consider silver as a valuable addition to their portfolios while keeping a watchful eye on potential spikes in the silver market.