Enormous Silver ETF Inflows - Is It About To Take Off?

(August 17, 2019 - Lawrence Williams)

Silver offers the big dilemma among the major precious metals.  Gold has been strong over the past month or so, seemingly now consolidating above the US$1,500 level, while platinum and palladium are behaving largely on basic industrial supply/demand fundamentals.  But silver, which is, in effect, some kind of hybrid monetary/industrial metal, has performed relatively poorly – at least as far as the out and out silver bulls are concerned.  But could this all be about to change with the silver bulls getting their day in the sun?

True, the gold:silver ratio (GSR) has come down from its peaks signifying a better percentage performance for silver over the volatile past month.  (The lower the GSR the better for the silver investor).  But the GSR is still at a high 88.6 level (admittedly down from 93 only a few weeks ago) and remains at historically elevated levels.  Certain moves in the silver markets do point to this perhaps changing – perhaps dramatically – in the days, weeks and months ahead provided that the gold price remains relatively strong.

Historically, silver has comfortably outperformed gold pricewise in a rising gold price scenario.  Things are probably changing in this respect with silver’s big industrial offtake making it more subject to the vagaries of industrial supply and demand factors, but despite this we do expect the GSR to come down some more – perhaps significantly so – in the relatively near future.  And it looks like the big money is anticipating such a move too!  And where the big money goes the markets tend to follow.

On what basis are we coming to this conclusion?  The answer is down to enormous inflows into silver ETFs, - and into the biggest of them all, SLV, in particular, and into mutual funds.  According to newsletter writer, Ed Steer (www.edsteergoldsilver.com) who follows these statistics closely,  17.6 million troy ounces (547 tonnes) of silver have been added to all the world's know depositories, mutual funds and ETFs in the past week.  In the past three business days SLV alone added 14.6 million ounces (454 tonnes) of silver.  These kinds of huge silver accumulations into SLV in particular, have been ongoing for the past 2-3 months.  With the big money exerting a major degree of control over the CME silver futures market, and thereby the price, these major silver flows suggest that there could be a major silver price coup in prospect. Steer notes that few commentators – apart from himself and silver guru Ted Butler – seem to have picked up on these massive silver accumulations which he sees as a major potential factor in likely short to medium term silver price movement.

We have been suggesting for some time now that the GSR is likely to move in favour of silver in the near future, yet so far it has only come down a relatively minor amount in this direction.  Silver’s spot price close at the end of the week was just over $17.  With gold at its current price level of around $1,512 even a fall to 80 in the GSR would put silver at a little under $19 an ounce (an 11% rise) and we see this as likely, while a fall in the GSR to 70 at say a $1,550 gold price – certainly not out of the question – would put silver at just over $22, a rise of almost 30%.  With some forecasters looking for $1,600 gold, silver, with its likely increased leverage from a falling GSR, looks increasingly worthy of a gamble.  We don’t see the downside from the current level as great.

Over the past 10 years the GSR has seen a low of around 31 and a high (recent) of 93 with an average of somewhere around 67.  While we see the ever-increasing recognition of silver as an industrial metal may well preclude it ever getting down to the 31 level again – let alone to the out and out silver bulls’ probably forlorn hope of a fall to the historic average of around 16 - a fall to 70, if gold continues to see strength, is certainly not out of the question.  Unlikely maybe, but certainly a not unreasonable target in the foreseeable future.  In a rising gold price scenario, silver has been likened to ‘gold on steroids’ as it tends to comfortably outperform its yellow sibling in percentage terms.

Of course a major manipulation of the silver futures markets by those who have been building up vast silver inventories while prices have been relatively low, could rapidly change the situation in silver’s favour.  The market is small enough to be moved by relatively small amounts of money in modern-day terms, and if this comes about silver could be a major beneficiary in a very short timescale.